Get the Idea of Directors and Officers Insurance
Running a business of any size is undoubtedly a highly rewarding yet challenging experience. Not only do you need to worry about managing the day-to-day operations and working with brokers to help your business grow, but you also have to consider the legal obligations and general reputational risk that comes with being a company owner.
To protect your company and those at its helm, directors and officers insurance is highly recommended. This type of policy is slightly different from a standard corporate liability insurance policy and provides coverage for legal costs incurred should the directors and officers of your company be accused of wrongful acts.
Who Needs Directors and Officers Insurance?
Generally speaking, setting a directors and officers insurance policy in place is a wise move for any company, whether it’s a fully established business or a start-up. It’s a vital form of protection that shields the directors and officers, as well as their personal assets, from any legal action, penalties or fines arising out of management decisions made on behalf of the company.
Part of the reason why the D&O insurance policy is such a vital asset for directors and officers is the fact that it covers a wide range of areas, including any employment-related claims, wrongful termination disputes, libel and slander accusations, contractual disputes, or breach of fiduciary duty cases.
What Does Director and Officer Insurance Cover?
The coverage of a directors and officers insurance policy can vary, depending on your specific needs. Generally speaking, there are five different types of plans available.
Full Entity Protection Policy
This is the broad-spectrum option that covers the company itself, any of its subsidiaries and the directors and officers. It’s entirely focused on the entity rather than individuals, with the main purpose of protecting the assets of the company.
Whenever a particular business is being sued or has to face allegations of wrongful acts, the policy will pay out for the legal costs associated with defending and settling those claims. If the company is found to be liable for any of those acts, the policy will also cover any financial loss it incurs.
Side A or Entity Excess Policy
Next up is the Side A policy, which offers coverage for any personal assets of the directors and officers. This plan kicks in after either a full entity protection policy or the primary insurance of a company. In other words, if the directors and officers are personally liable for any claims against them but their company’s insurance isn’t enough to cover the related costs, this policy will step in and help out.
Until the company’s insurance reaches its limits, Side A policy won’t come into play and the directors or officers will not have to worry about any personal or financial risks. If the claims exceed the primary insurance limits, however, they’ll be able to tap into the relevant coverage.
Side B or Individual Excess Liability Policy
Unlike a full entity protection policy or the Side A policy, Side B coverage is solely for the directors and officers. Since they’re seen as the main decision-makers at the company, they are usually at higher risk of being liable for wrongful acts.
The Side B policy helps protect these individuals from the financial and personal risks associated with such acts. Should any of them be sued in an individual capacity or as a group, this policy will cover the related legal costs and any potential liabilities.
Side C or Corporate Reimbursement Policy
Next, the Side C policy is a bit different from the others since it’s focused on reimbursing the company for any legal costs related to defending the directors and officers. These costs can quickly add up, with some companies needing to hire multiple attorneys and legal specialists to prepare for a lengthy court battle.
In certain cases, the company may end up covering the legal costs for its directors and officers out of pocket. While this may seem like the right thing to do, it obviously isn’t sustainable in the long run, nor does it guarantee any kind of financial protection. This is where the Side C policy comes in by reimbursing the company for any costs it incurs while defending the directors and officers.
Private Company Directors & Officers Liability Insurance
If your company is a private one with only a few directors and officers, you may not need to worry about the aforementioned policies. Sometimes, they’re not as comprehensive or coverage-heavy as the ones previously discussed, so they may not be suitable for your particular needs.
In this case, it would be best to go for the Private Company Directors & Officers Liability Insurance policy. This more streamlined option is specifically tailored for small businesses that don’t need the full coverage of a large, complex entity protection policy. Their main purpose is to protect those running the firm from any personal liabilities associated with wrongful acts.
What Factors Impact the Cost of a Directors and Officers Policy?
Even with the right policies in place, there may be some variation in terms of the cost, depending on the type of company you have and the kind of coverage you need.
Size of the Company
The overall size of your company will naturally play a role in how much you need to pay for your D&O insurance cover. Larger enterprises tend to have more complex corporate structures, so they may require a more comprehensive policy to cover all their bases. On the other hand, smaller businesses usually have limited exposure and can thus opt for lighter coverage.
Industry and Sector
Certain industries are seen as having a higher risk than others, with the corresponding policies costing more because of it. A company that operates in a sector perceived as highly dangerous may need to cough up a bigger amount for its D&O policy. But if it’s in a less risky industry, the premiums may be lower.
Corporate Structure
The way your company is structured can have a huge impact on the price of your policy too. For example, if it’s a public corporation with hundreds or even thousands of shareholders, it may require more coverage than if it were a private one with just a few directors and officers.
That being said, the type of corporate structure you have, whether it’s a public or private company, charity, or non-profit, will also be taken into account when determining the policy cost. Sometimes, this could mean that premiums are higher than expected, with buyers having to invest in additional coverage for extra protection.
