Navigating today’s complex legal landscape takes know-how and possibly a law degree. Not having adequate knowledge can sometimes increase the likelihood of liabilities and lawsuits for businesses.
As a business owner, you don’t want to be stuck in a situation that ends up making news headlines. Here’s where Directors and Officers insurance (D&O insurance) comes in.
These policies provide liability coverage for high-level officers against claims arising from their decisions and actions. The main reason for companies purchasing D&O insurance is to manage the rising costs of expensive lawsuits.
It shouldn’t be the only motivation why your company chooses this type of coverage. Below, we’ll discuss the benefits of executives taking D&O insurance.
Understanding D&O Insurance
When a company faces a lawsuit, it can suffer significant costs, not to mention the negative press. D&O liability cover takes the headache out of any financial losses the company might incur.
A comprehensive insurance policy protects against personal losses and can reimburse a business or nonprofit for legal fees while defending individuals against lawsuits.
In March last year, organic foods company United Natural Foods faced a securities lawsuit from investors, claiming the company disclosed a decline in profit despite increased sales.
Securities class action lawsuits pose the greatest risk for public company D&O insurers, according to a management liability attorney.
His warning underpins the need for companies to rely on the expertise of management liability consultants to help chart the way forward. If you want to learn more, read further…
Why You Need D&O Insurance
Every leader and executive starts with the best intentions – to see their company thrive. Sometimes a disgruntled employee or as in United Natural Foods’s case, investors want answers.
In a worst-case scenario, D&O insurance claims cover losses and defense costs for directors and officers if legal action is taken against them. Without robust D&O insurance, companies may find it difficult to attract top managerial talent due to the associated risks.
However, choosing the right service provider to oversee your D&O coverage takes some research. Oakwood Risk Insurance Solutions suggests enlisting a partner with an entrepreneurial background and allocating you a risk management department.
It makes financial sense as well. A study found that over 25% of private companies experienced a D&O loss in three years, and 96% faced financial impacts as a result.
Types of D&O Insurance
D&O insurance can be complex, but having a knowledgeable consultant explain the fine print does help.
There are varied covered terms that make policy provisions for defense access, and potential impacts of corporate changes on insured rights.
A D&O insurance policy consists of three types of coverage: Side A, Side B, and Side C.
Side A coverage protects directors and officers when the company cannot or refuses to indemnify them.
Side B coverage reimburses directors and officers for losses when the company provides indemnification.
Side C coverage, or “entity coverage,” protects the corporate entity itself.
Taking the above into consideration, an excellent D&O insurance policy includes the following:
- Shareholder action
- Inaccurate or insufficient disclosure
- Non-compliance with laws or regulations
Cost of D&O Insurance
D&O insurance costs vary significantly based on company size, industry, risk, financial position, revenue, and claims history. Established businesses also normally pay less than new companies or startups.
Typically, small businesses pay an average premium of $138 per month, or $1,653 annually, for D&O insurance.
What Does D&O Insurance Cover?
The insurance covers the cost of legal fees, settlements, and financial losses if the insured is found liable.
Covered allegations include breaches of fiduciary duty, regulatory non-compliance, poor corporate governance, creditor claims, and reporting errors.
Note that outright fraud, criminal activity, and lawsuits between managers of the same company are not covered. Insurance companies usually include a clause “insured vs. insured.” This ensures that no claims are paid if current or former executives sue the company.
Whether you’re a small or large business, you can’t take your chances without comprehensive D&O insurance.
Know what you’re signing up for and do your research. Consult a reputable risk management company with extensive experience. If the company is serious about doing business, they’ll offer a dedicated risk management department as a perk.
When purchasing D&O insurance, take your time to read through it and ask your legal office to take another look.
Companies without coverage face lawsuits and legal claims that cost millions of dollars, sometimes leading to them filing for bankruptcy. You don’t want your business to suffer the same end.
