Directors and officers insurance protects corporate leaders of privately owned businesses and not-for-profit organizations from financial losses resulting from legal costs, judgments or settlements related to actual or alleged wrongful acts. It is often bundled with employment practices liability, fiduciary and special crime policies.
Larger programs with limits over $30mn require multiple insurers to share the risk and settle claims. This is known as risk-sharing or quota share.
Coverages
While D&O insurance is often thought of as a must-have for public companies, directors and officers of private firms face their own set of risks. These risks may include lawsuits brought by disgruntled shareholders, employees, customers, vendors or even the government. A D&O policy can help to protect personal assets against these lawsuits.
A D&O policy typically covers allegations of misuse of company funds, misrepresentations of assets, breach of fiduciary duty, failure to comply with regulations, lack of corporate governance and more. It can also provide coverage for creditor claims, reporting errors and legal expenses.
EPLI is usually included in a D&O policy as well to cover employment practices claims such as wrongful termination, discrimination and harassment. It can also cover claims that are based on the selection of health and welfare benefits for company employees. In addition to D&O and EPLI, a management liability policy will usually offer Side C coverage, which covers the company entity itself visit kuv24-manager.de
Exclusions
A D&O policy is one of the best tools for protecting managers from personal exposures to securities class action settlements and shareholder derivative suits. However, there are several important exclusions that managers need to understand.
Insurance brokers can help companies and individuals purchase a D&O policy that will provide legal and defence costs for accidental breach of fiduciary duty, misuse of funds, poor governance and more. But it’s critical that CEOs, CFOs and HR managers take the time to review the policy thoroughly-especially during renewal-to avoid unanticipated holes in coverage.
Almost all D&O policies exclude claims related to criminal activities such as bribery, money laundering and other illegal actions performed at a business. These activities are typically deemed as too dangerous for insurers to cover, and they can have significant consequences for the directors and officers involved. Moreover, many D&O policies don’t cover fines and penalty costs related to the business’s legal violations. This is because covering such damages would promote shady business practices and unfairly penalize directors and officers.
Claims-Made & Reported Policy
The claims-made D&O policy offers lower premiums and coverage for claims notified to the insurer during the policy period, regardless of when the alleged wrongful act occurred. The policies are typically backed by tail coverage that extends to cover claims arising out of conduct that occurs after the policy’s term period ends or is cancelled.
The underwriting effect of D&O insurance can reduce the risk aversion of managers, allowing them to take more risks in investing and financing enterprises. This can lead to higher growth and more opportunities for enterprises, according to the efficiency wage theory (Jensen and Meckling, 1976).
For larger clients with international exposures, D&O manager liability insurance solutions may be arranged as global master policies backed by locally admitted policies, or through quota share coverage arrangements in which insurers will split an excess layer and settle claims equally. These arrangements can also help mitigate adverse selection and moral hazard risks. This can be especially beneficial for private equity backed companies with large investments in non-performing loans.
Side C Coverage
Whether you are a CEO, CFO or a senior member of the board of directors, you make decisions that affect everyone around you. These include fellow managers, shareholders, employees and vendors. Any mistake can have steep financial consequences for the company and its management. D&O insurance can help mitigate the impact of such claims.
A D&O policy includes Side A coverage that protects the personal assets of directors and officers in cases where the company cannot or will not indemnify them (either because they are sued for intentional fraud, federal laws precluding indemnification or bankruptcy). A policy also typically contains a Side B, also called entity securities coverage that provides coverage to the company itself.
The exact terms and limits of a D&O policy will depend on the company’s unique business model characteristics, needs, history and financial picture. A good D&O insurance broker will help you determine the right policy for your organization.
