The Graham Company’s 2015 Business Risk Survey, a national survey of 300 organizations, revealed what potential risks are keeping decision-makers up at night. When asked to rate their level of concern on a five-point scale about 10 potential risks, the top five included health-care costs, cyber security, employee safety, legal liability and employee errors and omissions.
Following behind in sixth place was the risk executives felt they faced as a leader of the organization. Forty-one percent reported being “very concerned” or “concerned” about potential risks confronting them and only a little more than half (52 percent) reported their organization had Directors and Officers liability insurance, “D&O” for short.
Misperceptions about D&O Insurance
The survey findings are evidence of the common misperceptions surrounding D&O insurance. Here are three of the most common myths:
Myth No. 1: Only large, publicly traded organizations need D&O insurance.
As the litigation trend continues to escalate in the United States, this couldn’t be further from the truth. The size and type of an organization doesn’t preclude its executives from being sued over the mismanagement of the company. A business doesn’t have to be a Fortune 500 company for its executives to be personally sued. Creditors, competitors, customers and even minority shareholders of a privately held company could potentially sue executives of a privately held or nonprofit organization, for that matter. These threats should not be underestimated. Even if the claims are groundless, the costs associated with defending these suits can add up quickly. D&O liability insurance can be written to cover the directors and officers of not only publicly traded companies, but also privately held companies, not-for-profit organizations and educational institutions.
Myth No. 2: A General Liability policy is all an organization needs to adequately protect its directors and officers.
Executives can find coverage under a General Liability Policy, but general liability coverage only pays for damages that arise out of bodily injury and property damage. A D&O policy is specifically designed to respond to financial damages claimed due to the wrongful acts of directors and officers and, therefore, necessary to properly protect directors and officers.
Myth No. 3: D&O insurance is expensive.
D&O insurance can be purchased as a stand-alone policy or as a component of a package of “Management Liability” coverages incorporating Employment Practices and Fiduciary Liability, as well. These coverages are typically a small percentage of an organization’s overall insurance budget. If D&O coverage is able to fund the defense of fighting a groundless lawsuit or pay for damages arising from mismanagement, the premium will be considered money well spent.
If you or your organization has mistakenly used one of these excuses for not adding D&O insurance to your program, continue reading to learn the basics about D&O insurance and then talk to your broker to make sure your organization has this important coverage. It will help your business attract qualified executives and help the executives you have sleep more soundly.
D&O Insurance 101
What is D&O Insurance?
Directors and Officers liability insurance is a product that protects the personal assets of the executives responsible for designing and executing corporate policy. These individuals act on behalf of their organizations and businesses and have a fiduciary responsibility. They can have personal liability if they do not live up to the acceptable “standards of conduct” based on and derived from common law. These standards of care are owed to a variety of parties, including the corporation itself, fellow directors, shareholders, customers, employees and the public at large (including the corporation’s competitors).
What is covered?
The policy covers liability arising from wrongful acts, errors or omissions committed by directors and officers in executing their duties in running their organizations. Liability could be associated with violations of the law, or negligence in the decision making of a director or officer.
What is not covered?
D&O insurance is designed to cover liability for financial damages and should not be confused with general liability that will cover third-party liability for bodily injury and property damage. Bodily injury and property damage to third parties during the course and scope of operations is covered under a General Liability policy.
Who is covered?
Directors and officers of the corporation are covered and, typically, the spouses of directors and officers. For privately held and nonprofit companies, insurance policies usually cover employees under their policy forms, as well. The D&O policy can also be designed to protect the corporate entity itself. This is typical for publicly traded corporations, which will buy “entity” coverage to protect the organization from securities-related claims that are often brought directly against the corporation itself. Private company D&O policy forms will also typically provide entity coverage, which is usually broader than the coverage available to public companies.
Any important considerations?
Policy limits, structure and exclusions are highly negotiable and, therefore, careful consideration needs to be applied to properly craft policy terms and conditions. Different corporate structures may require different policy forms. Specifically, companies set up with a partnership structure, such as law firms and real estate organizations, are better-suited on a General Partners’ policy form.
Another key consideration is determining if a specific excess “Side A” liability policy for the individual directors and officers should be purchased. This may be needed if the primary D&O policy limits are shared between individual directors and the corporate entity.
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