C of the world, medium and small-sized businesses are also facing increased litigation as a result of the actions taken by management. While some claims may be frivolous, the cost to the business to defend both the company and the management team can be exorbitant.
D&O insurance protects board members and officers against legal expenses if they are sued for a decision, they made on behalf of the company that led to a financial loss. It covers directors and officers for damages and defence costs as well as other related costs incurred due to claims against them, demanding damages as a consequence of financial losses.
When does a small business need D&O Insurance?
No matter how big or small your company is, your corporate leaders are integral to your success. It’s also undeniable that business owners and leaders are often held to a higher standard of conduct, which puts them at the center of attention and opens them to an increased number of risks. Your company does not have to post revenues in the tens of millions of dollars for your directors and officers to be personally sued over their management of company affairs. In fact, smaller businesses with fewer assets may need the protection just as much as large, deep-pocketed corporations.
In this increasingly litigious age we live in, small business executives need to be financially protected from possible claims filed against them as well. D&O insurance protects board members from lawsuits over decisions they make while serving on your board. If they're sued, they could have to pay a hefty amount in legal costs.
Securing this insurance policy protects your board members and the officers they elect or appoint. It helps your small business attract and retain top talent since they know they'll be protected. Most board members will expect your business to carry this policy.
Why is D&O insurance important, especially in India?
The Companies Act of 2013 recognizes the right of companies to purchase D&O insurance, but one also needs to know that a D&O liability insurance policy is not mandatory in India. However, with the immense changes in the business world over time, its complexities and demands have also increased which has made D&O insurance very common now.
Amidst the rising number of Corporate Fraud and tightening regulatory framework, getting D&O insurance is more crucial than ever. The top management of a company is more exposed as they are involved in the Day-to-Day activities of a company, especially the Executive Directors (EDs) and Key Managerial Personnel (KMPs).
Whilst a company may indemnify its Directors for actions brought against them, the scope of protection is limited and may well be removed if –
o The company becomes insolvent
o The company has insufficient funds
o The company is the claimant
o The protection is withdrawn
o They are no longer directors of the company.
o Most importantly, indemnification by the Company is only permissible when a claim is defended.
Make the right move and protect your directors and officers against legal claims. While they are always in a vulnerable position, they don’t have to. With a fitting D&O insurance coverage, you can effectively mitigate risks and thereon ensure seamless business continuity.
Coverage
What does D&O Insurance cover?
D&O insurance covers or protects Directors & Officers of your company from claims which may arise from decisions and actions taken while serving their duty. It covers legal defense costs or other costs incurred by the company in defending such individuals against lawsuits. With D&O insurance, there are three clauses often included in the policy that provides coverage under particular parameters:
• Side A: Offers coverage for corporate leaders individually when the business is unable to or refuses to do so.
• Side B: Covers the company when the directors and officers are indemnified.
• Side C: Protects the company itself from securities claims and is usually needed by larger corporate entities.
A D&O policy commonly provides protection for the following types of claims, among others:
• Discrimination
If a director or the company is sued by anyone, most commonly a former employee, for workplace discrimination of any kind (gender, pregnancy, age, religion, etc.).
• Wrongful acts
If the director or officer has breached a legal obligation that they had to the company, this can be considered a wrongful act. Immoral and illegal acts are often included in this category and commonly lead to civil cases against the corporate leader.
• Misuse of funds
Every move that directors and officers make is scrutinized, which is why claims related to alleged mismanagement of company funds are so common.
• Employee mistreatment
Employee mistreatment claims can be anything from sexual harassment to wrongful termination or failure to promote.
• Libel and other advertising injuries
A competitor may accuse a company's board members of defamation or stealing intellectual property, which could result in a lawsuit covered by D&O insurance.
• Failure to comply with Regulations
A company's board of directors can be held liable if the organization fails to comply with industry standards or regulations. D&O insurance offers protection against such lawsuits.
What is not covered under D&O Insurance?
Some of the major exclusions under D&O insurance are:
• Intentional wrongdoing:
D&O insurance is unlikely to cover financial losses or lawsuits resulting from premeditated criminal acts by board members or executives, including embezzlement and fraud.
• Board member injuries
If a board member at your company hurts his back when lifting boxes for a holiday food drive, D&O won’t cover his medical treatment or lost wages while he can’t work.
• Client injuries or property damage
If a client trips at your business premises and breaks a wrist, or an employee drops a client's laptop, general liability insurance will help cover the resulting costs. Many landlords require this policy for businesses that rent a commercial space.
• Professional mistakes or oversight
D&O insurance does not protect your business against lawsuits over professional mistakes and oversights beyond those made by board members. Professional liability insurance, also called errors and omissions insurance, helps pay expenses related to missed deadlines, breach of contract, and other mistakes made by your business.
Costing
Directors and Officers liability is a complicated risk and it can be hard to determine if you’re getting the best value on the right coverage from your D&O insurance policy. The key to buying the right policy for the right price is doing proper due diligence, carefully considering the cost drivers, and finding the right insurer that will be transparent with the underwriting process.
Cost Drivers
Some D&O insurance cost drivers are industry-specific, while others depend on your company’s age, financial strength, or the number of employees. Let’s break down the most significant factors that could affect your premium for D&O Insurance:
• Length of time in the business:
Newer companies create more liabilities for insurance providers, due to less predictable revenue streams and shorter histories of proven effective management. While proof of a successful track record is ideal, underwriters will also consider recent significant changes affecting the business e.g. mergers or acquisitions, shareholding agreements, etc.
• Financial Background:
Financial health, steady growth, and effective debt management will lower your premiums. The converse is also true - volatile cash flow acts as a red flag. A company that has a strong financial background, and is operating in an industry with a positive economic outlook will have lower premiums.
• Size of the company:
The most common factor in determining the price of D&O insurance is the size of the company. The size of a startup can be determined by annual revenue, the total amount of funding, number of funding rounds, number of paying customers, and many more.
• Key terms in Policy:
Paying close attention to the fine print is crucial as every insurer writes the terms differently. Some but not all of these terms are negotiable. A good insurance advisor can help you get the right coverage for the best price, highlight the coverage differences, and negotiate a great price on your behalf.
• Risk Appetite:
The price of D&O insurance may also depend on how willing you are to tolerate risk. Risk-averse businesses can elect a lower retention (the amount that must be paid by the insured before the insurance policy kicks in). This will cause the price to increase. Alternatively, a company that is more inclined to take on risk may select a higher retention, decreasing its premium.
• Claims History:
Any previous claims in the past can influence how your underwriter views your business. Hence, if your company has had no D&O claims 5 years prior, or there’s currently no litigation or regulatory action threatened, the premiums may have lower costs.
Tips for saving money on D&O Insurance
• Pay your entire premium upfront:
You can typically pay your premium in monthly or annual installments. It might be tempting to go with a smaller monthly payment, but consider paying the full premium instead. Businesses can usually save money this way because many insurers offer discounts on annual premiums.
• Proactively manage your risks:
If your business has no claims history, expect to pay lower insurance rates. An effective way to do this is to create a comprehensive risk management plan. For example, you might:
o Form internal protocols for hiring and firing employees
o Respond promptly to claims of harassment
o Standardize the decision-making process to ensure board decisions are well-informed
Do you have the Right Insurance Advisor?
Only an insurance professional who understands the nuances of your business can give you a quote on D&O insurance that will satisfy your needs.
Here are a few key factors and questions to consider before choosing your insurance advisor:
- How much do they know about D&O, and how well do they understand your industry and your business? Someone who has a poor understanding of your business will likely not deliver the right insurance, leaving you with gaps in coverage or inadequate coverage
- Who are some of their current and former clients?
- How much coverage do you need, and how much can you afford with your revenue?
- What are the specific risks of your industry? Are there any special considerations when choosing a policy?
- Will your policy protect the entire company from litigation fees, or just directors and officers?
How can Raghnall help?
Having quality D&O coverage, an appropriate D&O insurance cost and a partner who can help you navigate the terms and conditions and the claims process can save you money and, more importantly, time which is priceless.
Raghnall helps you with customized coverage catering to your needs and obtains a range of Insurance and Reinsurance solutions as appropriate. Our teams specialize across various sectors to understand your needs and procure protection from the most appropriate source, wherever the best solution may be.
We, at Raghnall, build partnerships with your organization that go beyond pure risk transfer and offer a variety of support services, like crisis management support or help with preventative measures.
To know more about how Raghnall can help you get the right D&O Insurance cover for your business, contact us today at consult@raghnall.co.in.
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