"Oh No! I Need D&O": A Quick Guide to Directors & Officers Liability Insurance
Whether you’re a seasoned veteran board member, raising capital, or just joined a board for the first time, you probably don’t know much about Directors and Officer’s (D&O) liability insurance. That’s okay. Most people don’t.
When Do You need D&O?
Typically, companies need Director's & Officer's Liability insurance when they are developing past the "Start-Up Phase" or when outside funding is brought into the company.
In the above graph, typically this is at the Seed or Series A stage when a more formal board of directors is put in place. Most board members are (and should be) reluctant to join a board if D&O coverage is not in place. So, having coverage my actually aid in raising capital.
What D&O covers
D&O provides three coverage, A, B, & C.
Side A is personal coverage for a director or officer against a suit if the company fails to provide indemnification.
Side B is company coverage for a director or officer where indemnification is provided via the company’s D&O policy.
Side C is direct company coverage for claims against the company.
Why Do You Need D&O?
Because you’ll get sued!
The most common D&O claims are employment related claims and shareholder disputes. Other issues like misrepresentation, theft of IP, failure to comply with workplace laws, and breach of fiduciary duty can also be covered.
How Do Underwriters Rate D&O?
D&O insurance is rated based primarily from financial stability. When you apply for coverage, underwriters review a D&O application, interim financials, and most recent year to date Balance sheet & Income Statement. They often look at the ownership structure via corporate entity flow charts and CAP tables. The size and number of employees also increase rating (i.e. the bigger the company, the more expensive the D&O policy). D&O underwriting changes greatly when considering a private company versus a public company as well.
Cost of coverage varies greatly when you consider limits, deductibles, and geography. More litigious areas like California, can be difficult to get decent terms.
Often start-up companies struggle to get D&O insurance because they don’t have a long history of customers or revenue. The aid of a specialist independent insurance broker can help. They have access to more markets and often work with excess & surplus lines/non-admitted markets.
Non Admitted Versus Admitted
When purchasing D&O a question you should ask is; “Is my D&O policy written on an admitted or non-admitted basis?”. Admitted insurance policies are insurance policies written by an admitted insurance company. An admitted insurance company pays the proper taxes, fees, and paper work to achieve admitted status, in exchange for being backed by a state guarantee fund. If the insurance company becomes insolvent and an insured has a claim, the claim will still be paid by the guarantee fund. A non-admitted carrier/policy has no such guarantee. It is wise to check the AM Best rating and admitted status of the insurance company writing your insurance policy here: http://www.ambest.com/ratings/guide.pdf
“Hardening” D&O Marketplace
D&O insurance rates are also increasing and projected to increase in the next few years.
1. Pricing is going up because the number of class action securities lawsuits are increasing.
2. Pricing is also going up due to events like Boeing plane crashes, the PG&E Corp. wildfires, the #MeToo movement and cyber breaches.
There is also potential D&O risks due to climate change litigation. More info here:
Crowdfunding creates challenges for D&O insurance. Not many insurance carriers “like” this risk. More info here: https://www.dandodiary.com/2015/11/articles/securities-laws/sec-adopts-final-crowdfunding-rules/
The Structure of a D&O policy.
Director’s and Officers liability falls into a section of “Management Liability” or “Executive Liability”. Often, larger companies purchase a Management Liability policy that includes
Director’s & Officer’s Liability
Employment practices Liability
Fiduciary Liability as one part.
And Crime coverage
Any combination can be selected, and standalone policies can also be purchased.
It’s technically incorrect to refer to just D&O as Management Liability, as it’s just a part of it. Here is a picture that makes it simple:
Have a question about D&O? Reach out below!