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Types of D&O Coverage
The cost of D&O insurance is based on a variety of different factors, but smaller private companies are considered low-risk by underwriters and could pay as little as $500 per year per million in premiums, according to the Insurance Information Institute (III). (On the other hand, large publicly traded companies are usually considered high-risk and III says they can pay from $10,000 to $30,000 per million in annual premiums.)
For eligibility and rates, D&O insurers look at many different aspects of the business, including the type of business, the company's profit, whether they have had prior claims, and the amount of debt.
In addition, insurers want to see that you have communicated the company's policies to employees. "You should have a most up-to-date employee manual. Codes should be posted in the lunch room. And everyone should be disclosed. People need to sign an employee waiver, upon employment because it's hard to get someone to sign something after they've been employed," Cavallaro says. That employee statement should indicate that the person is employed at will and can, essentially, be fired at any time, he says.
There are a few different types of D&O coverage, although most often the coverage is rolled into a package that contains a portfolio of products designed to respond to a private company's management liability exposure, one of which is D&O. Insurance carriers have different packages, including varying levels of coverage and the ability to add additional coverage levels. Here is a rundown on the typical construction of a D&O policy designed for a privately held business:
- Side A covers directors, officers, and employees for defense costs, settlement fees, or judgments in the event that the company or non-profit cannot indemnify them, such as if the company has declared bankruptcy.
- Side B covers the company or organization for directors', officers', and employees' losses when it does indemnify them.
- Side C coverage is also known as "entity coverage" because it financially protects the corporation in its own right.
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Tips on Purchasing D&O Policies
As with any type of insurance coverage, small and mid-sized businesses should work with an agent or broker who understands D&O policies and the intricacies involved in coverage. D&O may be offered with a portfolio of other products, as well.
Some of the issues to consider when shopping for a policy include the following:
- Should you limit coverage to directors and officers or include coverage for the entity, as well?
- Make sure the policy will cover innocent directors if one member is found guilty of wrongdoing. Policies will cover allegations of criminal misconduct up to the point of adjudication.
- Do you need additional coverage, which is usually sold in increments of $1 million of coverage?
- Read the fine print to ensure that the policy covers a wide range of claims, from regulatory actions to criminal investigations to employee lawsuits.
Jones also advises businesses to have a separate coverage limit for D&O policies if that coverage is being bundled with an EPL policy. The reason is that you want to ensure coverage for personal liability of directors and officers in the event a claim against the company depletes the EPL policy limit.
Unfortunately, some business executives find out too late why they need D&O insurance. "Once they have had a claim, they understand why they need the insurance," says Jones. "It's really important to have that executive understand before they're sued where they're vulnerable and who might sue them."
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Recommended Resources:
D&O Market Overview
Insurance powerhouse Aon's quarterly look at the latest available information on pricing, limits, and deductibles/retentions. Registration is required.
Taking Risks with Risk
Highlights from the Chubb 2010 Private Company Risk Survey.
Directors and Officers Liability Insurance Trends
Survey of D&O purchasing trends by TowersPerrin.
Complete Guide to D&O Insurance
Directorship magazine's special report on D&O risk and liability.
