D&O insurance literally covers the Director and officers of the company, against possible liabilities (legal or assumed) that arises while performing their duties as stipulated under contractual terms of their employment. Key appointment holders are responsible for undertaking major decisions and assumed heavy responsibilities in driving the company’s growth. In the pursuit of growth, managers may be faced with actual of alleged “wrongful acts” by employees or the public, and may potentially be sued for wrongful conduct during their conduct of their employment. Director and Officer liability insurance compensates the insured agains the financial loss as a result of litigation defence cost associated with such wrongful conduct, which may encompass situations of 1) breach of fiduciary duty resuliting in financial losses, 2) failure to adhere to statutory laws and regulation, 3) employment practices issues, 4) poor corporate governance and so on…
The implementation of D&O policies will give the employees (officer & managers) the assurance that their welfare is well taken care of, and able to perform their contractual duties without the fear of wrongful accusation.
It is important to understand what the policy can do for you, and what it can’t. Understanding exclusions allows you as the insured to take preventive measures such as claims will not be thrown out should you fall into these catagories:
– Prior & Pending litigation cannot be admitted as claims in the policy
– Bodily injury or damage to property is not covered under D&O policies, but is insured under a Public Liability policy
– Breach of contract terms is not covered. Parties to the contract has to file their claims through court hearing or through arbitration centres
– Product liability related claims as a result of non performace, defect or deficiency of the said item is not covered
– Insured vs Insured scenarios could not be indemnified. i.e. the director sueing the company under D&O policy
There are other salient exclusions which the policyholder needs to refer to the insurance policy to fully protect yourself against non-admittance of claims
D&O policies will benefit both private and public organisations, giving greater confidence to the public, investors, regulatory bodies, employees that proper corporate governance is observed within the company.
Investors and shareholders gets assurance and security knowing that litigation suits against alleged wrongdoings by its managers will not result in catastrophic financial losses due to defence cost, court hearings, compensation losses, etc… An average litigation suit will easily cost in the range of hundreds of thousands, if left uninsured, the legal cost could potentially put a strain on the company’s operating cashflow and creates a negative impact on the solvency of its operations.
Companies whom have adopted D&O polices for their staffs creates a secured framework and environment, allowing employees to better perform their duties without the fear of being sued. Companies will indirectly benefit from a lower staff turnover rate, improving HR efficiency to focus on providing staffs trainings, negotiating better employee benefits, rather than bottled down with recruitment issues.
A breach of statutory laws and regulations may incur severe costs (penalties, legal suits), especially if the industry the business is operting in is heavily regulated. Companies can be slapped with heavy fines due to non-compliance/ breach of state laws, leaving behind huge financial liabilities that could othewise be mitigated with a D&O policy coverage.
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
The cost of insurance would vary from industry to profession. The more complex the business is, the more costly it is to insure against such job practise. Other factors that are considered by insurers would often include the followings:
– Past claims experience (industry)
– Nature of the profession/ discipline
– Project Type/ Duration: the longer the project, the higher possibility of mistakes/ errors occuring
– Cost of the professional service… the higher the cost, the more expensive it is to defend against pressed charges by the customer
– Prudent risk management such as installation of adequate safety measures, peer reviews, project selection process and certificates of insurance from the sub-consultants.