Structuring D&O policies is a tricky business, and not all companies would require the same amount of coverage. The amount of coverage is determined mostly from
1) Regulatory Environment, 2) Stakeholders, 3) The Growth of the Company, 4) The Exposure of its business undertakings.
1) Regulatory Environment
State requirements may impose conditions on the business to acquire D&O policies for its managers. Operating in a litigious environment would require the policy to fully cover the potential claims that may arise due to penalities/ fines by the governing agencies. The policy limit will need to cover defence cost and claims compensation throughout the period of the legal suit. Often, complex cases will drag on for years to conclude the legal battle, and any shortfall from policy claims payout will have to be substantiated by the company’s own cash reserves, potentially eroding the business’s ability to carry out its operations or fulfilling its trade liabilities.
Shareholders and investors all have a vested interest in the company they invested in, and wrongful actions by its directors will incur addtional liabilities, lowering the share price and value of a listed company. Shareholders prefer to invest in a company that has proper corporate governance to meet all future liabilities, including those that its Directors & officiers, and a comprehensive D&O policy can assure investors that their exposure is protected with an adequate policy coverage.
3) Company’s Growth
Activities such as M&A, expansion to overseas market, or even raising capital through debt/ equity market would require managers to undertake significant and important decisions to execute such activities. Such activities creates higher exposure to risk involving wrongful decisions made by their managers as these activities are complex and sophisicated, possibly leading to errors that may result in litigation
4) The nature & type of business also should be considered when choosing the right amount of coverage. In general, when businesses are dealing with larger business contracts, and/or if the project is not within the expertise of the insured, a higher coverage will definately required to mitigate any possible loss occurance due to wrongful acts by its directors