Author: Nancy Germond

What is D&O insurance?

International Risk Management Institute (IRMI) defines D&O insurance as a liability policy providing protection for an organization's directors and officers when claims arise from their board-related or managerial activities. In essence, DO insurance protects corporations and its officers against claims brought by third parties who allege they were economically damaged due to the governance decisions made or not made by the board or organization's leadership.

These policies are claims-made policies with “shrinking limits," meaning insurers pay defense costs that erode the policy limits, not in addition to them like the commercial general liability (CGL) policy. They do not include the typical CGL coverage agreement covering bodily injury and property damage.

These policies cover “wrongful acts," actual or alleged decisions, actions, or lack of actions that other parties may consider harmful. Financial consequences usually arise out of those decisions or failure to act. Wrongful acts can include the following.

• Errors, carelessness or mistakes made in reporting financial data, especially to investors or potential investors
  
• Misstatements
• Omissions such as leaving pertinent information out of key management reports
• The failure to provide oversight of corporate departments, such as allegations that employees mishandled confidential data.
• In some instances in some sectors, molestation or injury to a minor could come into play.

D&O is a complex coverage, yet one that many companies believe they do not need. In fact, they do, as D&O coverage is often a catch all coverage for management gaps that might exist.

Operational Exposures to Watch For

When evaluating your clients' risks, what are some of the exposures they have that may create the need for D&O protection? If your clients form a board of directors, they face threats from customers, employees, investors and others. Additionally, how they handle these issues can also create D&O exposures. Even without a board, management mistakes can generate D&O claim in these areas.

• Cyberrisk and cybersecurity
  
• Regulatory and corporate governance risks
• Employment actions such as gender pay gaps or social governance issues
• Mergers and acquisitions
• Creditor claims
• Customer claims
• Vendor claims

While many privately held business owners gloss over regulatory risks, the Securities and Exchange Commission (SEC) can pose significant threats to owners who may make statements regarding earnings and profitability. These statements can generate claims by those who may rely on those statements. The SEC has the authority to investigate privately held companies attempting to raise funds from U.S. investors.

Investor claims are on the rise, and a recent article in the Wall Street Journal illustrated an effort by the SEC to more closely monitor large private companies. While this article is behind their paywall, you can get the gist of it from the first few paragraphs.

Don't let your privately held companies overlook this important risk. Even if they don't purchase a D&O policy, you can check this off your coverage checklist showing that you've at least explored that option.

What Actions Generate D&O Claims?

Almost any decision made by your clients' officers or directors can generate a D&O action or even a class-action suit. However, D&O insurers are less concerned about class action suits against private companies, so rates are usually more affordable than for publicly traded companies.

If your client's organization has an advisory committee or a board of directors, discuss with them the importance of D&O coverage. They don't need to generate millions in revenue to face scrutiny by the SEC or become an attractive target of a class action or other claim.

Here are some corporate actions that can generate D&O claims.

• Claims alleging employment disputes such as employees who allege discrimination, a hostile work environment, or gender pay gaps.
  
• Claims alleging theft or misuse of intellectual property.
• Claims alleging the poaching of a competitor's clients or employees.
• Claims alleging breaches of fiduciary duties that result in financial loss or corporate insolvency.
• Claims alleging the mishandling of cyber breaches.
• Claims alleging incorrect or misleading investment information or any misrepresentation of company assets.
• Claims alleging your corporate board failed to practice good corporate governance.

D&O Options for Your Clients

If your client wants to proceed with a quote, here are three areas to discuss to ensure they choose the coverage that best suits their organization's needs.

1. The insurer
   
2. The policy limits
3. The deductible or self-insured retention

Review these choices with your clients.

The insurer – You will want to review the coverage options available from the insurers offering this specialized coverage. That insurer's underwriters should be well-versed in your client's industry and the exposures your clients face in running their business. If utilizing surplus lines carriers, your insureds should know those additional risks. Be sure to point out the financial ratings of any companies recommended.

The policy limits – Each company you work with differs in size and in risk appetite. What are your clients' “sleep well at night" levels? You may offer some marketing collateral that benchmarks typical limits companies in similar industries choose, but ultimately, leave the limits decision to your clients. Assessing those limits is beyond the scope of this article. However, Gallagher offers an in-depth review of methods organizations can use to evaluate the D&O coverage limits they may need.

The self-insured retention (SIR) – Another decision your clients must make involves the percentage or portion of loss they are willing to accept. As D&O premiums skyrocketed the last few years, many organizations elected to take higher SIRs to keep premiums manageable. Discussions with their accountants may help them determine appropriate risk retention levels. This may also be referred to as a deductible.

What Does the Future Hold for D&O Rates?

D&O rates have risen steeply in the past few years. While there were many high-profile D&O suits in the past few years, things are beginning to simmer down some, according to several experts in this specialty. New insurers have cropped up offshore; however, going into 2022, D&O “…pricing remains at distressed levels," according to Kevin LaCroix, author of The D&O Diary.

2024 renewals and new D&O business saw some recent rate reduction, according to Seth Pfalzer, National Practice Leader at Woodruff Sawyer, an insurance brokerage handling risk management for Fortune 100 companies. In their September 2022 D&O webinar, Pfalzer estimated the 8% increase in 2022 was a “far cry" from the rate increases of 31% in 2019, 38% in 2020, and 14% in 2021. There is more capacity in the D&O market, and this is easing D&O rate pressure. In fact, 69% of their clients saw rate decreases in the first half of 2022, according to Pfalzer. These trends continue. For more information, visit this link explaining D&O rating history from 2018 to 2024 from Woodruff Sawyer. 

If you are not familiar with D&O coverage but want to learn more, there are many experts in this space who can help.

First published: October 14, 2022

Updated: September 23, 2024

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