Why Do I Need Directors and Officers Liability Insurance?
Board directors and officers have a unique exposure to lawsuits as they make group managerial decisions. Employees, vendors, competitors, investors, customers or any third-party can sue for actual or alleged wrongful acts committed during management of the company. You need coverage to protect your personal assets from lawsuit costs such as legal fees and settlements.
Directors and officers can be sued for a variety of reasons, not all financial in nature. The misuse or mishandling of company funds and misrepresentation of company assets are common financial triggers for lawsuits. However, any kind of fraud, failure to comply with workplace laws or failure to provide corporate governance can also be grounds for lawsuits against directors and officers. Competitors can also sue for theft of intellectual property or unethical practices such as poaching customers.
A 2016 survey conducted by Chubb, the largest commercial insurer in the U.S., found that more than 25 percent of private companies reported D&O losses within the last three years. The average reported loss from these companies was $387,000; the largest loss reported was $17 million.
What Does Directors and Officers Liability Insurance Cost?
Premiums for directors and officers liability insurance policies vary depending on coverage included. As with other lines, D&O insurance can be bundled which greatly decreases rates and helps ensures your business is fully covered. Most commonly, D&O is bundled with employment practices liability insurance (EPLI) to help cover employee-related claims, such as harassment, discrimination and wrongful termination.
Rating factors for D&O can include:
- Business type.
- Annual revenue.
- Claim history.
- Business debt.
The best way to find out what D&O could cost you is to contact The Insurance Shop. Our knowledgeable experts will help you decide how much coverage your business needs and where to get the best rates.
What are Common Directors and Officers Liability Claims?
D&O liability insurance claims typically fall into one of four categories; breach of fiduciary duty, failure to comply with workplace laws, theft of intellectual property or misrepresentation. While details of D&O settlements are not always disclosed to the public, we do know that companies such as American International Group (AIG), Pfizer and Bank of America have all had large D&O settlements. Settlements in 2015 reached a high of $960 million.
According to Advisen, a third-party data collector and processor, D&O cases have been steadily decreasing since 2011. However, the severity of these losses has increased and the types of cases and companies affected have changed. According to 2016 data, there is a movement toward suing smaller companies and securities class action (SCA) cases filed in both state and federal courts are on the rise. Of the 224 cases recorded in 2016, over 150 of them included small to mid-sized companies. Over 200 companies had federal SCA cases filed against them in 2016, the highest since 2008, during the financial crisis. Industries with the most cases include manufacturing and services, as well as the finance, insurance and real estate industry. The top three types of cases filed have been merger objection, SCA and derivative shareholder action.
How Can I Reduce my Risk?
Since directors and officers liability insurance applies to the operators of a business, usually high-level management or board members, the risks lie mainly in their decision-making. However, even a clerical or procedural mistake could lead to a lawsuit. Some of the most common risks of lawsuits can easily be mitigated with proper checks and balances of regulations and procedures. Risks of this nature include:
- Property damage (as a result of management decisions).
- Failure to follow decision approval processes.
- Misrepresentation of assets.
- Failure to adhere to workplace safety or workers’ right laws.
- Improper removal of board members.
- Breach of fiduciary duty.
Obviously, following company guidelines and government regulations is the number one way to mitigate almost all of these risks. Some tips for reducing D&O claims include:
- Be as transparent as possible. Hiding financial or other mistakes will only increase risks of claims and high settlements.
- Maintain a comprehensive review and oversight policy. By creating a policy that monitors directors’ and officers’ actions you can reduce many governance and mishandling risks.
- Establish policies to assure laws and regulations are being followed. Depending on the size of your business this may include whole departments devoted to oversight and regulation adherence.
- Implement strict hiring and retention processes.Assuring your directors and officers are qualified and trustworthy is the best way to prevent risks such as individuals mishandling company assets.
Frequently Asked Questions
- Will directors and officers liability insurance cover illegal acts or profits?
No, insurance policies will never cover loss or legal fees for any illegal activity committed by the policyholder(s).
- My company is privately held, do I really need D&O?
It is common to think that only public companies get sued and therefore have the biggest risks. However, it has been proven over the last five years that public, private and non-profit companies all face D&O litigation risks. If your company has a board or advisory committee you should talk with an experienced insurance agent about your claims risks.
- Do I need D&O if we have good general liability and/or umbrella insurance?
Absolutely. According to the 2016 Chubb survey of privately own companies, 65 percent of executives mistakenly believe that their companies are protected under GL or umbrella policies. However, those lines of coverage are not designed to cover management errors and omissions and certainly do not provide the same protections as a D&O policy.
- What are some other benefits to having D&O liability insurance?
Aside from the protection and security a D&O policy provides your company, it also adds marketing value. A company with a good D&O policy will attract higher quality directors and officers as well as investors.