What Exactly Is Directors and Officers Insurance?

 

An article about D&O insurance isn’t likely going to be the most exciting thing you read this week but it may be the most important.

The fact is that a number of company directors and officers in this country are under-insured and under-protected.

The problem largely arises from directors, officers, and the companies they represent incorrectly believing that they are covered by company liability policy or that this type of insurance is simply not necessary.

Let’s look at what directors and officers (D&O) insurance is and why it should be an important part of any business budget.

 

 

Protecting the Big Names

Directors and officers within a company are like sports referees. When everything is done right, the average person will never notice them.

However, as soon as something is perceived to have gone wrong, everyone takes notice.

Events like bankruptcy or downsizing are often what leads to lawsuits against directors and officers with the average loss coming in at over half a million dollars.

These suits can hurt any business, especially small and medium-sized businesses that simply do not have the funds to pay out expensive settlements.

D&O insurance is designed to protect managers from perceived or actual wrongdoing while working for the company.

As suits against directors and officers become more common, qualified directors and officers may begin demanding better protection as a part of their hiring package.

In fact, from 2016 to 2017, it was found that federal securities class-action filings increased more than 50%.

This is obviously a growing trend that should prompt businesses to consider the importance of directors and officers insurance.

Not Only for Big Businesses

When you read about an increase in class-action suits and losses at the amount mentioned above, you probably think this is a problem for big companies with deep pockets.

Unfortunately, that couldn’t be further from the truth.

The reality is that small cap companies make up two-thirds of securities lawsuits.

In many cases, these companies do not have the massive legal teams that large corporations do, and they are more vulnerable to legal action because of this.

While the payouts may not be the massive amounts that larger companies must be wary of, small cap businesses may be less able to weather a hit to their finances.

In essence, a major loss or settlement could spell ruin for many companies.

Protect Against Unknown Threats

The rapidly changing nature of technology and business has created new threats that may lead to claims against directors and officers.

With new cybersecurity threats being discovered every day, there are concerns that it may be almost impossible to stay ahead of hackers.

A serious financial loss due to hacking could cause a company to lose value quickly and prompt class-action lawsuits.

Of course, companies should take cybersecurity seriously but also prepare for an unforeseen event that may prompt legal action.

D&O insurance should be in place as a part of cybersecurity measures.

In an ideal world, all cybersecurity policies would prevent the need for D&O insurance, but no one has a crystal ball that can predict the future of the business or the threats posed to the technology that forms the backbone of many companies.

What Is Covered by D&O Insurance?

After finding out that the company liability policy doesn’t include D&O insurance, many people naturally wonder what is and is not covered by directors and officers insurance.

D&O insurance is quite broad in its coverage and is considered an “all risk” insurance plan. This means that all acts of wrongdoing are covered unless otherwise stated.

Some standard exclusions of D&O insurance include errors, omissions, breach of duty, and misleading statements.

Be sure to thoroughly review your policy to ensure that it meets your needs and ask any questions necessary so that you understand the inclusions and exclusions of your insurance.

Having an “all risk” coverage plan is incredibly valuable as it reduces areas where you may be exposed to risk.

Most of all, it allows you to rest easy knowing you will be covered should the worst happen.

Is D&O Insurance Mandatory?

in New York, D&O insurance is not mandatory but it is increasingly becoming a standard part of corporate insurance planning.

Obviously, protection is the main reason to choose D&O insurance but there are other reasons as well.

A great reason for D&O coverage is to ensure that only the best management is put in place.

Growing companies need the experience and connections of qualified management.

With protection in place, high-quality people being considered for a role will be more inclined to accept knowing that the company has put their financial security and protection top of mind.

D&O insurance can also make mergers or acquisitions go more smoothly as people facilitating these kinds of growth events will not have to fear the threat of litigation and the financial impact that may entail.

D&O insurance will already be budgeted for and the company will be protected.

How to Get D&O Insurance for your New York Corporation?

If you’re ready to protect your company, its directors, and its officers with D&O insurance, please contact us to help you with the process.

We work with a number of insurance providers to help you find the right coverage at the best price.

For small businesses with limited budgets, finding the coverage that fits within strict budgets is essential to get protection without disrupting operations.

Get protection now to prevent future losses that could destroy your company. Business and growth should not be hindered by a lack of insurance protection. Reach out today and learn more.