InsuranceTopInfo.Com – Why enterprise leaders need D&O insurance.
A company’s directors and officers often make critical decisions that strongly influence how a business operates. But this great deal of power and responsibility also exposes them to a higher level of risk.
A survey conducted by insurance giant Chubb revealed that more than a quarter of private companies have experienced a directors’ and officers’ (D&O) loss in a span of three years and that 96% of these businesses were impacted financially. During that period, average losses reached nearly $400,000 – an amount that could have a potentially devastating effect on an organization’s balance sheet.
Despite this, only 57% of responding companies said they have purchased D&O insurance to help manage their risks due to the mistaken belief that coverage is unnecessary because their businesses are either privately held or family-run.
Although Chubb performed the study in 2016, the findings still demonstrate the serious financial impact D&O lawsuits have on businesses and a glaring coverage gap among companies.
How does directors’ and officers’ (D&O) insurance work?
D&O insurance, also referred to as D&O liability insurance, is designed to protect the directors and senior management of a corporate or non-profit organization against financial losses resulting from business-related lawsuits. This type of policy pays out for monetary losses from these legal actions, including defense costs, settlements, and fines.
D&O coverage comes in main three types, also referred to as insuring agreements or sides, each offering different levels of protection. These are:
This type of policy provides coverage for “non-indemnifiable loss” or those situations where the company or business cannot indemnify its directors or officers, either due to bankruptcy or because they are not legally allowed to do so.
“When this clause responds to a claim, the insurance policy indemnifies the directors and officers directly for the defense and settlement costs or judgments against them,” the Insurance Training Center (ITC), a global provider of online professional and management liability insurance courses, explained on its website. “These would be allegations, for example, for breach of duties, negligent acts, or business-related suits.”
Side A coverage, or insuring agreement A, does not have a policy deductible
The most commonly accessed insuring agreement, according to ITC, Side B coverage works by reimbursing a company after it has compensated a director or other senior management for a loss, including defense costs, settlements, or judgments.
“It is essential to note this coverage reimburses the corporation only to the extent of the indemnification provided to the directors as opposed to covering the liabilities of the corporation,” ITC noted. “This is why D&O insurance is often explained as balance sheet protection for the corporation.”
Unlike Side A cover, insuring agreement B is subject to a deductible.