Insurance is not everybody's cup of tea. It is an extensive topic but serves one great purpose, and that is PROTECTION FROM FINANCIAL LOSS. Like our lives and properties, which are commonly insured, our dear Board Members, Corporate Officers, and Directors must also be covered. Mainly because their job as governing arm of organizations involves making sound decisions that have a tremendous effect, leading to wrongful allegations and further legal actions. During the course of investigations and trials, they may incur overheads such as but not limited to defense costs and litigation expenses. These outlays are burdensome; thus, directors and officers insurance or also known as directors and officers liability insurance and d&o was born to protect senior management and/or their respective companies from this kind of loss.
The d&o coverage has essential features that are not usually discussed but must be clarified because, after all, it is an insurance policy at an individual cost. Its effectiveness may make and break officials' lives and the company's income.
Directors and officers liability insurance is a protection coverage for Directors, Officers, Board Members, and Managers (Past, Present, and Future) of a profit or nonprofit organization from personal financial losses brought by legal actions against them for suspected unlawful acts in their capacity as officials. It is a liability insurance as it aims to protect the owner from the potential risk of liabilities, which may arise from lawsuits given that the claims are within the coverage of the purchased policy.
A company may also indemnify itself with a d&o coverage since it is a legally separate entity that can be accused, sued, and incur financial losses as well. This is called corporate indemnification.
In this article, personal financial losses refer to the spending of personal cash or money and selling off assets to attend to proceedings resulting in a decrease in one's economic value. At the same time, corporate financial losses here refer to losses ensuing from lawsuits and a reduction in income.
Directors hold all the corporate powers that a company can exercise. They must be obedient to the law, loyal to the corporation, and always act in good faith. To be a director, one must be an owner of a company, be knowledgeable, and be of good moral character. All these attributes so the stakeholders can be rest assured that they can make the right business judgment and protect the majority's interest for a certain fee. However, directors are not perfect. They also make mistakes. Who shall protect them from corporate uncertainties? Who will spend in defending themselves from the decisions they made to make their company profitable? The answer is either themselves, their company or board of directors insurance or directors and officers insurance.
Officers are in charge of the overall day to day hustles of a company, including but not limited to corporate status, financial matters, corporate records, and employee relations. They, too, carry tough jobs of bringing in endless income to the company in exchange for a salary. However, they are not excused from corporate life uncertainties, too. Who will protect them? Are they going to use their personal money to defend themselves? The answer is the same, either themselves, their company, or their d and o Insurance.
Convincing a competent person to take a high-profile job with adequate compensation is one thing but offering a d&o coverage on top of that is far better. It only means the firm truly values them, encouraging them to work harder and bring the company to its next level. Domino effect!
Other reasons why company stakeholders need d&o liability insurance are as follows:
1. Legal costs and settlements due to employment-related claims such as racial discrimination and sexual harassment are high but can be covered under the d&o insurance policy.
2. D&o claims are unique and are not covered by other insurance liability policies.
3. Protection against bankruptcy, since creditors may pursue legal action against corporate officials and directors if they can prove that they have not acted in their finest welfare.
4. Investor related risks when share losses value due to company or officials' misconduct can be damaging since they can pursue compensation over courts
5. Good value for everyone's peace of mind because d&o policies can be tailor fit according to your needs and budget
Thus, acquiring a d&o policy for senior management is a win-win strategy for companies that are secured with director and officers' insurance.
The directors and officers liability insurance have three insuring clauses or the circumstances under which the insurer will pay. In details, the coverage clauses provided are as follows, to wit:
1. Side-A offers coverage to directors and officers as individuals when not insured by the corporation due to state law or the corporation's financial inability. Nevertheless, if a corporation merely refuses to pay the authorized defense/loss of a director or officer, or if a liquidation court issues a command preventing such indemnification, exclusions may be granted.
2. Side-B provides coverage for the corporation (organizations) when it indemnifies the directors and officers to protect them. The insurance provider reimburses the corporation for the expenses incurred.
3. Side-C offers protection coverage to listed stock corporations for securities claims brought against it for an unlawful act in trading their securities.
D&o policies may also include a Side D clause that covers investigative costs at a specific limit. The table below is a summarized comparison of the three insurance clauses of d&o.
|Side A||Side B||Side C|
|Indemnification?||Non indemnified||Indemnified||N/A: Entity Securities Coverage|
|Who is at risk?||Insured: Directors and officers||Insured: The Company||Insured/Defendant: Company securities claims|
|What is at risk?||Personal assets||Company assets||Company assets|
|Cover Description||D&O Insurance: Non indemnifiable liability of directors and officers||D&O Insurance: Company reimbursement of costs. Note: Retention applies||D&O Insurance: Company liability for securities claims.Note: Retention applies|
Due to the increasing number of claims and higher chances to attract such, large multinational companies have already integrated d&o insurance in their risk management strategies. They have already designed the coverage they need and justified their funding requirement. SMEs, on the other hand, is trying to put in place theirs according to their budget.
As its title dictates, d&o liability insurance coverage is for directors and officers, including the past and future, the non-executive directors, and the company itself, provided the policy is enforced when the incident or incidents being complained happened.
Coverage: What are Directors and Officers being indicted for in relation to their roles that may be covered by a d&o policy?
Both internal and external factors may bring complaints. Below are several possible standard charges or allegations that can be filed against directors and officials as they perform their duties and may be covered under d&o policy.
1. Internal Source
Employment practice makes most of the complaints made by previous personnel against companies.
a. Employee related cases
iii. Wrongful Dismissal
iv. Constructive Termination
vi. Failure to comply with workplace laws
vii. Lack of corporate governance
b. Shareholders Actions or Corporate Governance related cases
I. Misrepresentation of company assets
ii. Misuse of company funds
iii. Misleading disclosure of Financial Reports
iv. Breach of director's duties
v. Negligent management
2. External Source (Third party)
This usually arises when a company files for bankruptcy. Claimants will try to run after the directors and officers in an attempt to recover debts and investments on the grounds that they have not acted upon their best capacity as officials.
a. Customer or Consumer Group related issues
i. Misleading Demeanor such as fraudulent or dishonest acts
ii. Breach of Contract
iii. Breach of Fair-Trading Laws
b. Creditors related concerns
i. Breach of fiduciary responsibility ensuing in financial losses or bankruptcy
ii. Insolvent Trading
c. Competitor Claims
I. Theft of intellectual property
ii. Pilfering of competitor's customers
iii. Trade Secrets Misappropriation
d. Government Authorities such as local government, tax authorities etc.
Organizations are separate legal entities. They are covered with laws and may unknowingly breach regulations that govern them, such as corporate law, environmental law, securities law for publicly listed companies, taxation law, and occupation health & safety. Furthermore, corporate governance evolves as the company grows, which increases exposure to claims.
Disclaimer: Each director and officer's liability insurance is distinctively designed. Not all stated above may be covered in one d&o policy.
Prohibitions: As a matter of general rule, intentional illegal acts or profiteering are NOT covered under d&o liability insurance. Also, all claims covered by a different insurance policy or made under a former policy can no longer be covered.
The figure below shows the actual flow of how the d&o works in actual.
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D&O liability is a complicated risk to calculate considering various factors. The most common D&O insurance cost drivers are as follows:
Necessary or requested coverage (severity of possible claims)
Company financial status (assets, liabilities, and net worth)
Claims history, if there's any (including frequency)
Type of business activities
Industry sector (financial institutions pose a greater risk)
This shows that determining if you are getting the best valued d&o insurance rates is difficult. The most crucial thing here is due diligence, finding the financial advisor, and the insurance company, which can be done by comparing cheap D&O insurance quotes through this page. They can transparently walk you through their underwriting process and carefully examine their proposal against your business coverage requirements and the budget.
Startups have different protection needs, so their D&O coverage varies, affecting their premium rates. The table below shows the average costs according to their funding requirement, limits set, and retention.
|Funding Requirement||Limits Set||Retention||Estimated Premium|
|$0 – 10M||$1 – 2M||$10 – 25k||$3.5 – 6k|
|$10 – 25M||$2 – 3M||$10 – 50k||$5 – 10k|
|$25 – 50M||$3 – 5M||$25 – 50k||$7.5 – 15k|
|$50 – 100M||$5 – 8M||$25 – 75k||$10 – 15k|
|$100 – 250M||$8 – 10M||$25 – 75k||$20 – 40k|
The required D&O limits of a business vary individually and depend on the following factors:
There is no rule of thumb since appropriate limits will differ depending on the combination of factors we've outlined above. Below is an illustration of how possible D&O limits could be planned, as explained by FounderShield.
There are several D&O insurance providers in the market who has proven to keep up with their promises and stand out. Here are our top 3 D&O insurance companies.
First in the list is the American International Group or AIG. It is one of the leading non-life insurers around the globe. They are present in around 100 countries and were established in the early 1900s, giving them the edge on the number of years in experience and knowledge acquired in handling d&o claims. AIG D&O products promise to help directors conduct business with confidence. They have Corporate Guide Premier as Side B D&O insurance product. For a Side A D&O insurance, they call it Private Edge, which also offers directors insurance for nonprofit boards. Their products may easily be customized with additional coverage for a fee.
Here is a quick link to their site https://www.aig.com.ph/business/product-categories/financial-lines/directors-and-officers
Read more: AIG Insurance
Second is the 100-year-old leading specialist insurer, the Hiscox Group, or simply Hiscox. They are available in 14 countries worldwide. Hiscox specializes in management liability and have a strong preference for organizations with less than 1,000 employees. They branded it as Hiscox C-Suite, designed to save time by gathering minimum information from clients ang package it immediately. The C-Suite promises to give directors and officers benefits in their coverage without forgoing scope.
Read more: Hiscox Insurance
The third is Chubb, life and non-life insurance provider present in 54 countries worldwide. Chubb is one of the world's largest publicly listed property and casualty companies. They have D&O products for large companies and SMEs, both focusing on the different coverage needs of each type of business and promising large appetite to various risks. Chubb D&O products have options for Side D coverage.
Read more: Chubb Insurance
Each organization is uniquely designed. Each has different needs and funding requirements, so when getting a directors and officers insurance policy, always consider the cost, coverage, and insurance company abilities and dependability.
Understandably, directors and officers insurance cost always matters. However, any savings made from reduced premiums may affect the coverage and defeat its purpose of protection. Thus it is not advisable if only the premium is considered.
Furthermore, it is a must that the directors and officers insurance companies tapped can keep their promise stipulated in the acquired D&O policy.
They must have professionals who understand the shades of business and can give a D&O coverage quote that will satisfy various kinds of business owners' needs.
Here are some questions to ask when you compare directors and officers quotes, before selecting a directors and officers insurance company:
Knowledge: How much do they know about d&o insurance? How well do they understand the business and its industry? An advisor who has a meager understanding of your business will likely not carry the correct insurance, leaving you with inadequate coverage.
Reviews and feedbacks: Who are their former and current clients? How was their experience with them?
Cost and Budget: How much coverage do you and your company need, and how much can you afford?
Coverage: What are the specific risks in your industry? Will their products guard the entire company against lawsuit fees?
Added Considerations: Are there any particular deliberations when selecting a policy?
Hence, when you compare D&O insurance quotes online through this page and find cheap D&O insurance quotes, start from choosing the best companies, who has the right product and coverage for your business.
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Policy Type: Business Insurance
Company name: Embroker Insurance
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Policy Type: Business Insurance
Company name: Next Insurance
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