As a business owner or decision maker, you want the best for your company and those who work there. In addition to creating an engaging, enjoyable work environment, it’s important to have proper protections in place. And that often comes down to securing specialized coverage. Directors and officers insurance, also known as D&O insurance, is a prime example.
D&O insurance can help a company protect itself against the financial threats associated with lawsuits, settlements and the like.
Although a commercial general liability (CGL) policy goes a long way toward protecting a business against financial loss, it doesn’t always cover all the bases for companies with a board of directors or officers committee. In certain circumstances, D&O insurance can pick up where a traditional policy leaves off, offering better protection for a company’s assets, as well as those of its directors and officers. Here, BCH’s business insurance pros offer insights to help you understand what D&O insurance is, the various protections it offers — and how to gauge whether it makes sense for your business.
What is D&O Insurance Coverage?
D&O insurance coverage protects the personal assets of a company’s directors, officers, their spouses — and sometimes the company itself — in the event that they are sued for wrongful acts associated with managing the organization. This specialized commercial insurance typically covers the costs associated with lawsuits, settlements and legal fees.
Common scenarios where D&O insurance coverage comes into play include breaches of fiduciary duty, failure to comply with regulations, lack of corporate governance, creditor claims and reporting errors. It does NOT offer protection for claims concerning outright fraud, criminal activity or lawsuits between managers within the same company. There are five general types of D&O insurance policies available:
- Side A Insurance: protection of directors’ and officers’ assets
- Side B Insurance: reimbursement of a company’s indemnification obligations
- Side C Insurance: protection of a company in the event of a lawsuit
- Employment Practices Liability: protection of directors and officers against wrongful termination, discrimination or sexual harassment suits
- Fiduciary Liability Insurance: protection of fiduciaries from Employee Retirement Income Security Act (ERISA) lawsuits
Should You Incorporate a D&O Insurance Policy into Your Coverage?
This approach to commercial coverage isn’t the right fit for every company. A D&O insurance policy can be expensive, for instance, and if expenses outweigh a company’s perceived needs, it might be best to seek a different approach. On the other hand, D&O lawsuits come with notoriously high price tags and have been known to bankrupt companies. For companies with valuable assets and higher perceived risks, this added protection might make sense. Here are some factors to consider regarding whether D&O insurance is right for you:
- Competition & Talent Acquisition: If a company is looking for top talent to promote growth or compete with high-grossing industries, it should consider insuring future directors and officers. Many talented executives won’t leave a current company for one that won’t protect their assets, or which leaves them vulnerable to financial loss.
- Personal Accountability Considerations: Businesses that focus on personal accountability or have active investors who influence corporate behavior should strongly consider a D&O policy to protect their executives. Public companies are often held responsible for shortcomings inside and outside the business, for instance, which can contribute to the company’s risk of litigation or lawsuit.
- Financial Standing: Companies with a substantial amount of debt, or which otherwise operate without a solid financial foundation, risk becoming insolvent when faced with a D&O lawsuit. In such instances, it’s important to weigh which protections make the most sense for operations — and whether the company can realistically afford specialized protections such as D&O insurance coverage.
- Legal History: If a company has faced litigation in the past, insurance underwriters may categorize it as a higher-risk policyholder. And that standing could equate to higher insurance rates. Of course, past litigation can be a one-off occurrence — especially for smaller private companies. It’s best to speak with a trusted risk management professional to understand your company’s unique risk areas and the likelihood of potential lawsuits.
Events and Trends Impacting the D&O Insurance Sphere
Every aspect of a business is vulnerable to the shifts and trends taking hold around it, and insurance coverage is no exception. Currently, experts anticipate premium increases as low market prices work to correct themselves. Meanwhile, changes associated with rising litigation costs and an increase in legal suits make D&O risks more complex — likely leading to additional changes. Here are some additional trends industry pros expect will impact D&O insurance:
- AI Exposures: Many companies now use artificial intelligence (AI) tools for tasks such as data analysis and business decision-making. If these tools are misused or based on flawed inputs, they can introduce bias, errors and privacy concerns. Leaders could be held liable for AI-related failures, especially if they are unaware of how AI is used internally or by vendors.
- Litigation Shifts: From 2018 to 2021, D&O claims surged due to SEC violations and IPO-related issues. While this trend has slowed in recent years, securities class action lawsuits are rising again0. These suits often target inaccurate financial disclosures made by company leaders.
- ESG Issues: Executives are facing increased scrutiny over their environmental and social commitments, especially regarding climate change. Many lawsuits allege poor disclosure of climate risks or failure to support sustainable practices.
- Macroeconomic Factors: Bankruptcy risks are growing, with Chapter 11 filings up due to inflation and rising interest rates. The struggling commercial real estate market and $1.7 trillion in maturing debt also pose challenges. Global instability adds further pressure on leaders to show strong risk management.
Consulting with a benefits advisor, implementing strategic risk management programs and investing in the right type of business insurance can help today’s company leaders avoid costly litigation fees while looking out for their organization’s future. If you’re considering D&O insurance or are interested in learning other ways BCH can help keep your people, property and operations protected, reach out at any time. We’re here to help when it matters.