Why enterprise leaders need D&O insurance

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Why enterprise leaders need D&O insurance. A company’s directors and officers often make critical decisions - ITI1 90: Insurance Top Info 190

Side C

Also called entity coverage, Side C agreement provides direct coverage for a business when both the company and its directors and senior management are named in a lawsuit. However, the scope of coverage varies between policies for private and publicly traded companies, according to ITC.

“For publicly traded companies, this insuring agreement provides coverage for its own liability arising from securities claims,” the group explained. “For private companies, not-for-profits, or even homeowners’ associations (strata corporations), this is entity coverage and would cover lawsuits against the corporation itself.”

ITC added that coverage for private corporations can be extensive and may include claims beyond lawsuits such as government subpoena or investigation demands in a D&O policy.
What does D&O insurance cover?

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D&O liability insurance covers a wide range of claims targeted at a company’s leadership.

“Business leaders can be held responsible for a company’s failure to comply with regulations and to provide a safe and secure workplace,” the Insurance Information Institute (III) wrote in a guide on its website. “In addition, if a company is found liable for losses because of operational failures and mismanagement, directors and officers may be exposed to liability as well.”

Here are some other claims that directors and officers may be liable for, according to the institute.

  • Shareholder suits over company or stock performance
  • Creditor or investor suits over mismanagement or dereliction of fiduciary duties
  • Misrepresentation in a prospectus
  • Decisions exceeding the authority granted to a company officer
  • Failure to comply with regulations or laws
  • Employment practices and HR issues
  • Pollution and other regulatory claims
  • Cyber liability
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However, there are also exclusions. The III explained that D&O policies typically do not include:

  • Fraud and criminal offences
  • Personal profiting
  • Accounting of profits and other illegal compensation
  • Pending and prior litigation
  • Prior (late) claim notice
  • Bodily injury and property damage, which is covered by general liability policies
  • Insured versus insured claims, where one director or officer sues another
  • Employee Retirement Income Security Act (ERISA) claims, which may be covered by fiduciary liability insurance

How much does D&O insurance cost?

Premium prices of D&O insurance depend on a range of factors, including the company’s size, financial standing, and claims history, the industry it is in, years in business and management experience, and ownership structure.

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A recent study by insurance marketplace Insureon has found that most small businesses paid an average of $1,500 annually for D&O coverage.

Brokerage firm Embroker, meanwhile, pegged the cost of $1 million worth of yearly coverage to be between $5,000 and $10,000 for companies that generate below $50 million in annual revenue. Premiums decrease as businesses purchase higher coverage limits.