Despite traditionally being developed for publicly listed companies, many private and non-profit organisation now choose to carry D&O insurance coverage. As commercial environments become increasingly litigious, the leaders of all organisations are exposed to directors and officers liability. The question has clearly shifted from ‘can we afford D&O?’ to ‘can we afford not to?’
Here are 11 reasons why every organisation should have D&O insurance coverage:
1. Attract quality directors & officers
Organisations actively seek the best management team to lead their business. However, the market for sourcing quality directors and officers is very competitive.
Even with formal corporate indemnification agreements in place, any experienced candidate will also insist that the organisation obtain D&O insurance cover prior to their commencement, to ensure that their personal assets are not at risk.
2. Satisfy the requirements of investors
Organisations planning future expansion often require financing assistance from venture capital and other forms of private equity. These external sources of funding take a significant risk in their investments, often taking substantial ownership and interest in the performance of the organisation.
Investors may require a degree of security over their investment in the form of D&O insurance, to provide them with a right of recourse against executives should they fail to manage its operations with the required care, skill and diligence.
3. Protect the balance sheet
When an organisation indemnifies its management according to its corporate indemnification provisions, it can incur significant financial losses. These losses are reflected on its balance sheet, and can have a lasting impact on the organisation’s performance long after a claim is settled.
Company reimbursement coverage, also known as Side-B, effectively refunds an organisation for costs incurred in defending its directors and officers, thereby shielding it from the potentially catastrophic effects of D&O claims.
4. Formalise the risk management process
Organisations who operate with D&O insurance coverage are much better prepared when problems arise. By comparison, organisations without a dedicated risk and compliance department are reactive to the legal exposures faced by management on a daily basis.
The ‘claims made and notified’ reporting conditions of D&O insurance formalises the risk management process, thereby developing a proactive approach to claims mitigation.
5. Protect the assets of directors & officers
Corporate indemnification agreements are intended to limit an executive’s personal liability from their performance as director or officer. Unfortunately, these agreements do not always respond as required, leaving management exposed in instances of non-indemnification.
Directors and officers coverage, also known as Side-A, protects the personal assets of executives when an organisation is unwilling, unable or legally prohibited from extending indemnity to its executives.
Enjoying the article?
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.Alright, let’s take a look.
6. Establish a relationship with insurers
As a private company matures into a successful business, management may see an opportunity to ‘go public’. In this case, listing the company on a stock exchange will require D&O insurance coverage for the risks associated with an initial public offering (IPO).
An organisation with an already existing relationship with insurers, and a history of purchasing D&O insurance, has a distinct advantage in sourcing the coverage required.
7. Access competent legal advice
For many firms, D&O related claims aren’t an everyday occurrence and the issues involved can be complex. If an organisation is not already seeking legal advice, they can request that an insurer appoint panel legal representation.
Legal counsel appointed by an insurer will typically have a deep understanding of D&O litigation, and have experience in guiding an organisation and its management through the process of defending a claim.
8. Allow management to perform at their best
With the welfare of so many stakeholders resting in the hands of company management, it’s not surprising that executives can become preoccupied with the potential consequences of their decisions.
Whilst remaining accountable for their actions, D&O insurance allows management to focus their attention on making the best possible decisions for a company, instead of being overwhelmed by the exposures of their role.
9. Other insurance classes won’t cover D&O exposures
Understanding the application of each policy can be challenging for management, especially for those organisationss maintaining insurance programs with multiple lines of coverage. To put it simply, the risk exposures covered by D&O insurance are not covered by any other policy classes.
An organisation’s general liability, professional indemnity, workers compensation and other classes of insurance certainly have their purpose. However, the only policy that is solely dedicated to protecting management is directors and officers liability insurance.
10. Mitigate exposure to financial losses
The severity of litigation bought against directors and officers can vary, from a small one off allegation by an employee to a large class action claim by an organisation’s shareholders. Without appropriate coverage in place, an organisation is at risk of suffering catastrophic financial losses.
D&O insurance provides an organisation with the ability to mitigate its management related exposures by electing a self-insured retention, which effectivly sets out the the maximum value of loss it will incur in the event of a claim.
11. Local coverage for local executives
Large organisations operating in multinational environments often arrange a master D&O insurance policy. A master policy is designed to provide worldwide coverage for the executives of an organisation’s international subsidiaries.
Despite its benefits, however, a master policy may not always provide adequate protection for local directors and officers, or comply with local regulations. In these situations, a locally admitted D&O policy can provide more robust protection for local subsidiaries who already enjoy some level of master policy coverage.