Given that this is a policy that only a few will find a necessity for, it’s easy to see why directors and officers insurance policies are one of the least known insurance policies out there. However, that does not mean that you shouldn’t at least try to learn what it is. After all, who knows when you might find yourself running a business?
With that in mind, here are a few Frequently Asked Questions (FAQs) regarding D&O policies.
1. Who is It For?
Typically, D&O insurance policies are targeted towards businesses that often deal with liabilities, personal or corporate-wide. They are also fit for businesses that often attract executive-level leadership and those that have a board of directors. In fact, many executives should expect to get a D&O policy before they enter into any large company.
However, it is not the size and scope of the business’s operations that really determines whether or not you will need a D&O insurance. So as long as your business features any of these, you should really consider availing of a D&O policy.
- Your Business has Boards, Directors, and Executives – The problem with that many general liability insurance policies is that they don’t cover the work of directors and executives; at least not directly. There are two plausible reasons for this.
One, directors are often specifically named in many civil and criminal complaints which act as a loophole of sorts, barring your typical insurance plan from being used in these instances. Second, civil proceedings involving the work of executives and their decisions are often expensive affairs. The claim for damages in such suits can range from £10,000 to beyond £1,000,000 depending on how the plaintiff feels they were offended by the company’s actions.
Either way, you can expect for directors without D&O policies to use their own money to pay for the lawsuit’s expenses, lawyer’s fees and all else.
- If You are a Non-Profit
You might think that being a non-profit organisation renders you, your directors, and other executives immune to all kinds of lawsuits. This could not be further from the truth than it already is. More often than not, lawsuits can affect non-profits more than publicly traded companies for a number of companies.
Firstly, the negative public attention generated from lawsuits directed towards non-profits tends to hit the company’s operations more. Scandals and discrepancies are commonplace in corporate companies. In a non-profit, on the other hand? You can expect for the press to immediately start circling, especially with the so-called Outrage Culture nowadays.
Next, non-profits do not have that much when it comes to financially providing for lawsuits compared to publicly traded companies. As such, you’d rather have a policy that can provide coverage for as much as £1,000,000 when you’re faced with a lawsuit.
- You Have Large Liabilities
If your businesses tends to owe your creditors by the millions, you’d rather have a policy to help you cover for lawsuits arising from such just in case. It’s easy for companies to get sued by creditors for allegedly failing to tend to their obligations. After all, much of the director’s job lies in finding a balance between the interest of shareholders and creditors which means that (s)he may choose to tend to one to the detriment of the other.
Also, there is this tendency for creditors to personally hold directors liable for the company’s failure to meet it’s obligations. Again, this prevents many general liability insurance policies from activating and leaves the director to fend the allegations by his own.
If you haven’t noticed in these three instances, none of them deal with size. That simply means that any business is at risk of being slapped with a rather expensive lawsuit so as long as any of the three conditions are met.
2. How Much is It?
A common inquiry about D&O policies is if they are expensive. The short answer is that they are. Premiums for these policies can range from £130 to £20,000 depending on the coverage. So, how much are you going to pay for your insurance? There are a few factors to consider:
- Business Age – businesses that have been operating longer tend to be less exposed to risks of litigation. As such, they won’t require extremely expensive D&O policies.
- Industry Type and Size – some industries tend be riskier compared to others depending on what they are and their size. For instance, companies that operate in the fields of manufacturing and finance are at higher risk of lawsuits while a non-profit charity tends to face fewer problems arising from its operations.
- Financial Stability – For some D&O policy types, how financially secure a company is determines how much it is going to pay for coverage. Companies that have better financial performance will have lower risk of bankruptcy which can decrease the necessity for some insurance policies.
- Number of Employees – Directors often encounter the most lawsuits from their own employees. As such, the size of the workforce can determine what policy is best for the company. The rule of thumb is that the more employees you have, the more chances of lawsuits you are going to deal with. As such, you might want to pay for a policy with a higher premium but wider coverage.
- How Should I Buy D&O Insurance?
When you break it down, a D&O policy is just like any typical insurance plan. That means that securing one should be as straightforward as possible. However, given the nature and the price for directors liability insurance, you might want to exert extra effort and a bit of homework before buying one.
This is because the inclusions stipulated in each policy you might encounter would widely differ from each other. To get the best policy for your company, there are a few things to keep in mind.
- Prepare Your Documents
Applying for a directors liability insurance should be quick provided, however, that you have all the information that the insurance provider needs. Underwriters have to make sure that their policies can sufficiently assist your company in worst case scenarios and, as such, may require to be privy to some sensitive company information.
Several documents that the underwriter asks include capitalisation tables, organisational charts, a list of your current board members, current executives and directors, financial statements, and even the identity of your creditors and investors.
Of course, you’d have to consult with your own people before you submit such documents to third parties. Consider it like a corporate decision: everybody has to be in it before you can proceed.
- Mind the Greatest Risks
Since you are going to pay for a rather expensive insurance policy, you might as well make sure that such insurance would cover the greatest risks that your company faces on a regular basis. What you have to understand is that D&O insurance policies are never standardised products. This means that one policy provider might offer a different coverage compared to another.
For this reason, it’s best that you identify what kind of risks your company is exposed to. This can be from the industry you operate in, the type of jobs you employ, the products you have, the services you offer, and even how long the business has been in existence.
You have to ask what is going to be covered in that policy and what isn’t. Also, be mindful of the benefits that each policy provider offers. Every bit of advantage you can get in case you will face a lawsuit will count.
- Get the Prior Acts
For D&O policies, you want to make sure that their coverage is as far reaching as possible. This can be made possible with a prior acts clause which ensures that every decision that the business or the directors have made will be covered here, including the ones that were made prior to the insurance policy being secured.
If possible, look for an insurance policy where the extent of the prior acts coverage can go as far back to the company’s inception. After all, you’d rather want assistance in the instance that your directors are filed a complaint at court, even for acts prior to the policy’s purchase.
In a Nutshell
At a glance, you can see that the D&O Insurance policy has some elements that make it similar to your typical insurance policies and some that make it different. The point is that you’d rather know how they work and even consider purchasing one for your business. After all, there is no telling when you might want to avail of all the legal assistance that your business is going to need.
Have you tried purchasing a director’s liability insurance before? What other things do you think people should be on the lookout for when deciding to purchase a D&O insurance? Let us know in the comments section below.
