As a business entrepreneur, you have to make decisions that will drive your company. However, for some business owners, certain decisions won’t always turn out well, which may result in lawsuits. These lawsuits can cripple you both financially and emotionally. Luckily, there are certain ways to protect yourself. One of the most cost-effective solutions is to have the appropriate Directors and Officers insurance. D and O insurance is liability coverage designed to protect company board members and executives from claims that are a result of their actions of making business decisions.
Directors and Officers insurance is a common type of liability insurance for large businesses, and not that popular among mid-sized and smaller businesses. Large businesses oftentimes provide protection for their executives and officers through insurance and indemnification. The indemnification part is commonly written into corporate documents, such as by-laws or the business’s articles of incorporation. While the articles of association can include provisions that ensure the directors and officers are free of guilt for their decisions, D and O insurance can significantly enhance their protection, enabling the business to be compensated when they indemnify its officers and executives.
So, for example, if a manager or an executive fails to perform their management role, resulting in people (external or internal claimants) suing them, the risk management and legal departments will provide a claim to the D&O liability insurance broker or insurer with the descriptions of the claims. The manager will contact the legal and risk management department and will be informed about the claim. If the claim is covered under the D&O liability insurance, the insurance company will pay for the defence costs. If the case is lost, the insurer will pay for the defence costs and the loss. If the manager or executive isn’t insured, they have to pay for all the defence costs, as well as for the financial losses that can impact their personal assets and career.
Some of the most common directors and officers risk scenarios include shareholder actions, HR issues and employment practices, inadequate or inaccurate disclosure, reporting errors, decisions that exceed the authority provided to the business manager or officer, misrepresentation in a prospectus, failure to comply with laws or regulations, insolvencies, corporate manslaughter, mergers and acquisitions, creditor claims, divestitures, claims made by the business itself and competitions. D&O insurance doesn’t include intentional non-compliance, fraud, property damage, legal actions are taken when the policy starts, bodily harm (besides corporate manslaughter), claims covered by other insurance, illegal remuneration, or personal profiting, penalties and fines.
ABC policies are the standard form of insurance policies for publicly listed businesses, wheres non-profit and private companies usually use AB policies. Side A of the cover protects the assets of officers and directors for claims where the company is not financially or legally able to fund indemnification. This covers individual officers and their personal assets. Side B of the cover reimburses private or public businesses to the extent that it grants advances and indemnification legal fees on behalf of the officers and directors. This covers the business and its corporate assets.
Officers and directors are faced with an increased risk that their company may not be capable of reimbursing them for losses, so having an extra layer of protection to their personal assets can be secured by purchasing Side A cover, which insures them when indemnification is not available. Oftentimes, there isn’t enough coverage bought for the involved risk, so there’s a trend of Side A covers being bought in order for individual officers and directors to protect their personal assets. That being said, D and O insurance have become a regular cover for large, multinational businesses, but any business regardless of size, whether it’s private, public, or non-profit has potential exposures.
That being said, there’s an increased demand for D&O covers, although not as much as you’d expect, due to the lack of education and awareness. D&O coverage is perceived as expensive, but it’s actually quite affordable. For instance, a small business with a $100M turnover can acquire no-extra D&O coverage with low limits for less than a thousand dollars a year. However, longer sized programs with higher limits are generally too big for one insurer to cover and will require a group of insurers to share the risks. If that’s the case, the lead insurer will typically be experienced and capable of handling wordings, advise you on international insurance programs, setup and take care of claims.
The lead insurer will cover the payments for claims up to a certain amount, and when that limit is reached, the next layer of protection will kick in, up to a specific point. The lead insurer will carry most of the claims, pay for defence costs and create policy wording, putting them at risk most, which is why their premiums are significantly higher. Alternatively, insurers can share risks through proportional coinsurance, where they split the premium based on their risk share. Claims are going to be settled likewise. More difficult situations with a combination of proportional and non-proportional factors also exist.