Directors and officers liability insurance (or D&O insurance) provides important protection for directors and officers and the organizations they serve. Prices and capacity have improved, but risks remain high. Now is the time to make sure you are covered.
How does D&O insurance work?
According to IRMI, D&O liability insurance provides liability protection for board members and officers. You can think of it as “mishandling and negligence liability insurance”. If the directors or officers make management decisions that result in financial loss, a D&O policy can provide coverage for resulting claims.
Board members can be held personally liable for their decisions. D&O insurance can provide protection when this happens. If the organization replaces the board members, the D&O insurance can reimburse the organization for the costs. D&O insurance can also provide entity protection when both the company and the directors are named in a lawsuit.
Who needs D&O insurance?
Many D&O claims involve shareholder and securities lawsuits. For this reason, D&O insurance is important for public companies and companies that are about to go public, but private companies can also benefit from the coverage. Coverage is also important for nonprofits and the board members who serve them.
Some situations where D&O coverage may apply include:
- A company’s stock is underperforming. The shareholders are suing the board members alleging mismanagement and misrepresentation.
- A cyber attack causes a data breach. The company is losing millions due to business interruption, compliance with data breach laws and system recovery. In the aftermath of the attack, investors blame the company’s lax cybersecurity policies and file a lawsuit.
- A company issues an official statement saying it is dedicated to diversity, equality and inclusion (DEI), but a female worker claims she was sexually harassed and denied a promotion because of her gender. She is suing the company for harassment and discrimination, blaming the directors for creating a hostile work environment and failing to follow the company’s DEI policy.
- A company markets its products as environmentally friendly. When it is discovered that toxic contaminants are part of the manufacturing process, the company and its directors are sued for greenwashing and misleading consumers and investors.
The D&O market
In recent years, a combination of factors has caused D&O rates to rise while markets contracted.
The Council of Insurance Agents & Brokers (CIAB) says D&O rates increased 16.8% in the second quarter of 2020, 16.1% in the third quarter and 14.7% in the fourth quarter. Additionally, 82% of survey respondents reported a reduction in warranty capacity in the second quarter. Likewise, 2021 was a challenging year for the D&O market, with CIAB reporting a 13% rate hike in the fourth quarter.
The D&O market showed signs of improvement in 2022 – CIAB says rates rose 7.3% in the third quarter. Lockton says the trend in interest rates should continue into 2023 but notes that this is due to increased capacity and new players in the market. The underlying insurance conditions that caused interest rates to rise have not changed.
Are you protected?
Many current trends can lead to D&O exposures, including cyber attacks, DEI and ESG concerns, and the threat of a global recession. Directors and officers must navigate all of these threats while keeping their businesses profitable—it can be a fine line to walk.
The recent moderate pace and increased capacity should provide some relief. But because the risks are still high, you should see this as an opportunity to make sure you have the coverage you need.
- Directors and officers should verify that they are covered by determining when the organization would provide compensation and what insurance coverage is in place. Individuals acting as directors and officers should remember that they may be held personally liable. Without adequate D&O coverage in place, their personal assets could be at risk.
- Organizations should also check their coverage. They need coverage if they guarantee indemnity or for the eventuality that the organization is mentioned along with the directors.
- Consider raising your limits. Settlements and awards can be expensive – defense costs can add up quickly. IRMI says D&O policies contain shrinking limit provisions that allow defense costs to reduce policy limits.
- Consider whether you need additional coverage. As capacity has decreased in recent years, some organizations may have settled for coverage with unwanted exclusions. Now that the capacity has improved, it may be possible to get somewhat less restrictive coverage.
BNC Insurance Agency can help you review your D&O insurance needs. Request a quote.