Struggling to figure out D&O insurance?
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D&O insurance is one of the most misunderstood insurance policies.
We are often asked questions about D&O insurance, including: what is D&O insurance, or why do I need D&O insurance? Or what does D&O insurance cover? and most often, how much does D&O insurance cost?
Without further delay let’s get those questions answered.
What is D&O Insurance?
Directors & officer’s insurance is a claims made insurance policy. Designed to protect the directors and officers as well as the company from the wrongful acts or alleged wrongful acts of the directors and officers. Think of it as the protection for the company and your fellow board members and officers in the event someone screws up. However, intentional illegal acts are not typically covered.
Protecting the individual acts of the director or officer is the most important coverage part of D&O insurance. Because the directors and officers are responsible for managing and operating the company, they can be held personally liable for their actions.
If you are on the board and the company doesn’t have a D&O policy get one asap.
Something to keep in mind, D&O insurance is not just for publicly traded companies and non-profits. Any company with multiple officers or a board of directors should consider purchasing coverage. The reason is anyone with an interest in your company can sue; this includes shareholders, investors and other board members or third parties.
D&O can sometimes be bundled in with other management liability insurance. Defending a claim without the proper coverage can be very costly as these claims are almost never easy to resolve.
How much does D&O Insurance Cost in New York?
D&O policies typically start at $500.00 per year for small non-profits, but increases slightly with for-profit companies.
But, insurance companies look at a variety of factors when pricing a D&O policy. In New York the key rating factors are, industry, company revenue and profits, location and prior claims. Unless your company is very small expect to pay more than $500 per year.
Why do I need D&O coverage?
There are two main reasons why your company needs D&O Insurance. First to protect the company and other board members from the wrongful acts of another.
The second to attract and retain quality board members. Any experienced board member is going to want to see proof of D&O before agreeing to join the board. Additionally, most investors will require your company to purchase d&o insurance prior to completing the investment.
What does D&O insurance cover?
D&O Insurance policies are made up of three main coverage parts, Side A, and Side B, and Side C. The easiest way to think of each side is A is for Me as the board member, side B is for the Company and side C is for securities related claims.
A deeper dive into each side below.
Side A coverage is direct coverage for the Directors and Officers for acts that the organization is not legally required to pay to indemnify the individual D&O’s.
Side B or Corporate Reimbursement covers the organization’s obligation to pay back the D&O’s. This obligation is usually stated in either the corporate charter or the corporate bylaws and in some cases is mandated by state statute
Side C or Entity coverage extends when claims arise in conjunction with securities the entity has issued. Claims covered by this section of the policy usually result from a specific corporate action that causes a drop in the market price of the firm’s securities.
The good news is D&O policies typically have a broad definition of what is a claim, which allows the policy to cover the defense costs, settlements and judgments associated with many types of incidents. This protects not only the business but also the personal assets of the directors and officers.
D&O policies are claims-made policies which is different from a typical GL policy which is occurrence based. The main difference being with a claims made, is that coverage that is triggered when a claim is made against the insured during the policy period, regardless of when the wrongful act that gave rise to the claim took place. The policy needs to be in force with a retroactive date to your original policy purchase and if you close the business be sure to purchase tail coverage or extended reporting.
Something to keep in mind for tech, and financial firms the professional liability portion of a D&O policy is not designed to include errors and omissions from your Tech or Financial services, that risk should be insured with a separate policy.
D&O insurance can be a complicated policy with varying forms and coverage add ons. Because of the complexity a very detailed review is in order before purchasing or switching D&O coverage.
For example, direct reimbursement coverage could be the difference maker for your next board member. Imagine your company in unable to pay an attorney for the defense of a board member, without direct reimbursement for that board member, he could be left without any financial assistance for defense costs. Or worse if the company becomes insolvent, if the only reimbursement is available directly to the company that reimbursement could be lumped with other debt repayments and not directly to the board member who suffered the financial loss.
Despite the confusion associated with D&O polices, choosing to not purchase coverage is a very bad idea.
What types of New York businesses need D&O Insurance?
Both public and private companies should consider D&O insurance. Most technology companies with investors are required to purchase D&O insurance in New York. But any company with directors or officers can end up in a situation needing coverage. Even small private companies can be held individually liable for the choices they make on behalf of their company.
Who is the best Insurance Company for D&O Insurance in New York?
Chubb Group is one of the leaders in directors and officer’s insurance in New York. The provide a comprehensive package with additional coverage as needed. They are also one of the largest commercial insurers in the world by both a financial surplus and a written premium standpoint. So, you can be confident Chubb will be there when you need them.
D&O insurance while somewhat complicated is extremely valuable to both board members and company officers. It can be the difference maker for an individual to join, or an investor.
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