Buying the ‘right’ policy is a key to corporate risk management-here are top 5 things to keep in mind for a Directors and Officers (D&O) Liability Insurance Policy.
Directors and Officers liability insurance is a personal insurance which gives a liability cover for key personnel of the organisation. Corporate directors and officers are likely to get sued personally for the variety of reasons on the grounds of vital decisions they take in their managerial capacity. Complex environment of business operation often puts managers on a battlefield. Claims may arise from investors, competitors, customers, vendors and also from employees. Having a ‘right’ directors’ and officers’ insurance policy can provide them with a certain degree of financial security against these costly litigations.
Even though buying the D&O policy is a yearly exercise, it needs your complete attention and reasonable care each time. You need to keep certain things in mind before approaching a proposal process.
Understand the layers before you choose the cover
Directors and officers insurance is a multilayered product. Here is a quick rundown of different coverage layers of D&O policy
- Side A cover: It covers the directors and officers for the cost of litigations in the event of company’s insolvency or bankruptcy. It safeguards key employees when a company is financially unable to repay them.
- Side B cover: Under this, D&O policy reimburses the company for the third party claims already paid on behalf its directors and officers.
- Side C cover: It covers the entity itself for securities claims.
Understanding the ABC of coverage can help you structure your policy accordingly. You can decide whether to limit the coverage to only directors and officers or to include an entity as well. You can also work with the broker or agent to understand the policy and its coverage intricacies.
Set the policy limits as per your goals and exposures
To arrive at the ‘adequate limit’ while buying the D&O policy, you need to understand the degree of risk exposure involved. The best way is to go back to claims studies by economic consulting firms to get a rough idea of settlement values for various types of claims. Insurance buying company can also consider what limit of insurance its directors and officers want if they insist on value. Factoring in the cost of defending a lawsuit is also vital. Overall, your goals, exposure and affordability are all that matters to arrive at the ultimate figure.
Choose the right insurer
It’s very essential to choose the right insurer. Before you purchase, know insurer’s reputation in claim handling and settlement. Pay attention to insurer’s financial soundness and ratings. Newer insurers may offer you policies at lower prices, but they may not be able to offer you broader policy terms and conditions. Experienced players in the market can provide you with the policy with broader terms and conditions along with superior claim expertise.
Compare policy features and quotes
When it comes to buying insurance, don’t fall prey for lowest quotes. Now that it’s easy to compare the policy benefits as well as quotes online, make the most use of it. A decision of opting for directors and officers insurance with ultra-cheap quotes may turn out as ‘little to nothing’ in benefit wise. It’s always better to do a cost-benefit analysis before buying a policy.
Pay attention to exclusions
It’s important to know what is covered and what is not covered. Some of the policies may exclude bankruptcy claims, majority investors’ claims and many such claims. Hence, read the fine prints thoroughly to ensure you are getting coverage against the wide range of claims.
Conclusion
When you are buying a directors and officers insurance, striking a balance between best in benefits and cheaper in cost is quite challenging. Though your purchasing decision needs to be based on price, but never rest your decision on it solely. Along with affordability, understanding the intricacies of the coverage, going with the right limit and selecting the right insurer is all that helps you buy the right D&O policy.