What Every Insurance Agent Needs to Know
Posted in Brokerage
Author: Braden Black
Becoming a director or an officer of a company or organization can come with status and perks. In this role, one can make many decisions that ultimately affect the future and direction of the company or organization. The luxury of being a decision-maker can sometimes blind board of directors of the liability that they face from making those decisions. There is a way to protect board of directors outside of a company’s GL policy. Directors and Officers Insurance, or D&O (Not to be confused with Errors and Omissions Insurance (E&O), is a way to make sure that your client’s board of directors is fully covered from various industry exposures. Let’s take a look at some important questions and pieces of information that are crucial to understand when discussing Directors and Officers Insurance with your clients.
What Is Directors and Officer Insurance and What Can It Cover?
Before I dive into why I believe purchasing D&O insurance is a fantastic, and necessary, idea for any organization with a board of directors, let’s look at International Risk Management Institute’s definition of Directors and Officers Insurance:
“D&O is a form of management liability insurance that covers the directors and officers of an organization against claims made against them while serving on a board. Directors and officers insurance is always evolving, and the risks and exposures change from year-to-year. D&O insurance can be written to cover the directors and officers of for-profit businesses, private companies, not-for-profit organizations, churches, synagogues, and mosques, as well as, educational institutions.”
Why Should My Client Consider Purchasing It For Their Business or Organization?
Nowadays many directors and officers will refuse to sit on a board of directors without D&O Coverage in place from the organization. The directors and officers of these various organizations are personally liable for their actions and decisions made, or lack thereof, in these businesses. Personal assets, or even their freedom, can be at risk. When making these big decisions for your company as a director or officer, not everyone is going to be pleased by your decisions and actions.
D&O Insurance is not just a way to manage risks. It can be a way to attract talent for open positions, as well. If these potential directors and officers are aware that they are covered outside of their company’s GL policy, it may help retain these individuals because they have peace of mind.
Shouldn’t the Directors and Officers Be Covered By Their Organization or Company’s Policy?
Sort of. A company or organization will make sure directors and officers are secure under their by-laws. How well they cover directors and officers can vary depending on the terms of the organization. It is important to understand that personal liability insurance will not protect from actions and decisions made while serving on a board. An organization’s policy may often have a good amount of subjectivity.
After reading that last sentence, you may be thinking, “Awesome! My client has a wide scope of coverage due to this amount of subjectivity!” – Not Necessarily. Most of the claims that come against these directors and officers are a result of negligent and careless behavior from the officers, leading to tension or conflict between upper management and other board members. Such tension could result in the subjectivity of determining indemnity and work against the officer. The organization that the directors and officers work for may choose to not cover the board members after the organizations review of the claim. This is where D&O coverage can benefit the members of that board.
Do Private Companies Need D&O Insurance?
Of course! A lot of small private company directors and officers are under the impression that because they have a small number of shareholders, D&O insurance is irrelevant because the likelihood of a claim is slim to none. What companies fail to see is that the claims will not come from just the shareholders. Private companies should also be concerned about customers, competitors, suppliers and more. Private Companies need D&O coverage as much as any non-profit organization. D&O insurance is crucial to any company with a board of directors.
In Regards to D&O Insurance, What Are Some Of the Most Common Claims Examples?
What many people fail to realize is that D&O insurance does not just protect from various security measures. It will cover many different wrongful acts made by the board or a member of the board. It doesn’t matter if the organization is a for-profit or non-profit, both are going to experience similar claims scenarios when dealing with a board of directors. Common claims scenarios include:
- Mishandling of funds
- Negligence of standard operating procedures of an account
- Personal benefit by a director or officer
- Failing to file annual reports
- Disseminating false or misleading information
Because there are so many claims scenarios that can arise from a D&O claim, when purchasing a D&O policy, you must be sure that the wording of that policy fits your company’s exposures. Every exposure is different for every industry, and your D&O policy should be tailored for such.
Where Does JM Wilson Come Into Play with D&O Insurance?
As I mentioned earlier, JM Wilson has a ton of markets for for-profit, non-profit and private company risks. Our minimum premiums are low and most of our markets will package Employment Practices Liability Insurance (EPLI) with the D&O for little additional premium. For more information about Non-Profit D&O Insurance, check out our blog on who sues a nonprofit here and as always, for further questions contact our Brokerage Department today!