In this article, we will lay out how to find and select the best D&O insurance providers for your privately held company, and to be clear, this article is focused on private company Directors and Officers Liability Insurance. Our target client in the private sector is an employer with 25 to 1,000 employees.
Let’s start with a broad overview of what D&O Insurance is and why it’s important for almost all private companies.
Directors & Officers Liability Insurance as its name implies protects the leaders of a company from lawsuits that allege some form of wrongdoing in managing the affairs of the company. In policy language, the coverage trigger are claims alleging “wrongful acts”.
What is a “wrongful act”?
Broadly stated are misstatements, misleading statements, breach of duty, an error, or any action or decision made by company leaders in their capacity as a company leader, which another party may consider wrongful.
Why is D&O Important?
Simply put, most lawsuits or claims that allege a wrongful act in managing the affairs of the company name the individual director, officer, or company leader personally for their actions.
This means personal assets are at risk, and because these types of claims are extremely expensive to defend against and settle, insurance is a critical backstop to protect the company’s balance sheet and the leader’s personal assets.
What Does D&O Cover?
As mentioned above D&O Insurance covers claims which allege a wrongful act and usually demand money damages. The policy responds by paying for your legal defense costs as well as eventual settlement costs of claims. Many private company D&O policies are written on a portfolio form and can include coverage for Employment Practice Liability Insurance, commonly known as EPLI, and Fiduciary Liability Insurance.
How is D&O Insurance Sold or Procured by Buyers?
Most private company D&O Insurance in the U.S. is sold through insurance agents and brokers representing the insurance companies who issue the policy. In recent years there has been a new segment of sellers known as insur-tech, and digital brokers who sell directly to the public. We’ll discuss more about this later.
Current State of the D&O Insurance Marketplace
This article was written in August 2023 and the D&O marketplace is relatively stable and competitive and has been for the past 18 months or so. Prior to this, we were in an extremely hard market where D&O pricing and availability were very difficult. We think pricing will remain stable and possibly dip a bit more for the balance of this year and into 2024, but there are indications ahead that pricing volatility may arise again in late 2024.
Key Factors to Consider When Choosing a D&O Insurance Provider
a. There are several factors to consider when selecting an insurance provider for D&O Insurance, and the first decision a buyer needs to make is whether they want to go directly to a seller online or to use a broker to buy D&O Insurance from.
Let’s look at the pros and cons here.
Going direct means buying insurance online from a digital broker or insurtech firm or from an insurance company. Both types of direct sellers are usually found at the top of Google search page results and in sponsored results. These sellers offer fast and easy quote options and typically indicate they can quote and bind a policy in 5 or 10 minutes.
Having worked with many private company owners who have tried to go this route, we’ve learned that while this experience seems fast and easy at the beginning, it often turns into a confusing and time-consuming experience, with the buyer not really sure of what they’re getting.
The second buying option is to work with an insurance broker who typically works with several insurance companies to get quotes for buyers and can make recommendations as to which policy options are the best. Brokers are paid a commission from the insurance companies for their work in selling policies.
Which is better? Direct or going through a broker?
As a broker, we do have a bias here but hear me out.
Buying direct means YOU need to be the expert since much of the transaction is online without much human contact. In our experience, this has been difficult for many clients who tried the direct route. They didn’t know exactly what they needed, or what options should be selected, and in the end didn’t know what they were getting.
Going direct is faster, there’s no doubt about it. But faster may not be better if you don’t get what you actually need, and remember what we’re insuring here is your leadership team’s personal assets so choosing wisely is critical.
Going direct often means you only get one quote from that website, so now you’ve got to replicate that effort over and over to make sure you’re getting a good deal, and at the end of the day when you’ve got 5 quotes in front of you, how do you figure out which one is the best?
Buying from a broker has its own challenges as well. Not all brokers are experts in the complexities of D&O Insurance, so you may end up with insufficient choices or incorrect coverages as well.
Finding a broker that specializes in D&O insurance and has access to the global D&O marketplace is the best choice in our opinion to ensure that you’re getting the right guidance, options, and service after the sale.
b. Financial Strength and claims-paying ability of the insurer you choose.
Choosing an insurer that has an excellent financial strength rating and size category is next on our list of criteria in choosing the right insurer. Claims paying ability is usually dictated by the insurer’s financial rating from a rating agency like A.M. Best & Co. and we recommend working with insurers rated “Excellent” by Best. This will indicate that the insurer is stable and won’t have financial issues relative to paying future claims.
c. Customization Options
D&O insurance policies are very complex and can be endorsed by the insurance company underwriters to carve up coverage and create dangerous exclusions. This is why it’s critical to have an expert broker help you through the process. Buying off the shelf can be dangerous.
But D&O policies can also be customized through the addition of options like adding coverage for Employment Practice Liability Insurance or EPLI as well as Fiduciary Liability, Employed Lawyers, Cyber, E&O coverage, Crime, and other options to fit your needs.
A skilled broker can help you determine if buying these coverage parts together inside one policy makes sense, or if it’s better to break them up into separate policies.
It’s all about tailoring coverage to fit your needs in the most effective manner possible.
Who are the top D&O Insurance Providers?
The answer to that question is going to depend on the segment of the marketplace we’re talking about. In my experience, there is not one list of “top” insurers across all industry verticals and segments. One insurer who may be very good at tech startups may be awful at larger industrial firms. Another insurer that excels at D&O for financial service firms may not be great at private construction companies.
This further illustrates why working with a skilled broker who knows D&O Insurance is your best bet for finding the best combination of price, policy features, options, and quality.
How do you find a skilled broker?
Good question. It’s not as simple as doing a Google search and picking the top three to consider. It’s going to take some research online and it may be helpful to ask around. Your peer group and your other professional advisors may have good suggestions on who to speak with as well.
1. Common Myths and Misconceptions about D&O Insurance
a. D&O is only for large corporations.
This is a common and prevalent myth and totally incorrect. In fact, many startups with no revenue purchase D&O at the urging of their investors to protect the company and their leaders. Businesses of all sizes face considerable legal risks, making this a critical protection.
b. D&O covers all wrongful acts.
Like all insurance policies, D&O insurance has exclusions that remove coverage for certain acts. The most notable are intentional or illegal acts, fraud, and personal profiting. Every policy is different making it crucial to read your policy and understand it.
c. It’s too expensive for small businesses.
False. Most small business D&O policies are affordable as are non-profit organization D&O insurance. Considering the costly consequences of a lawsuit, D&O coverage is valuable and budget-friendly.
d. It only protects the Directors and Officers of a company.
Also false. D&O insurance protects all employees or decision-makers in the company if they are sued for a wrongful act in their capacity as a leader in the company.
In this article, we’ve illustrated why D&O Insurance is an important coverage part for almost every privately held company large or small, and how D&O Insurance claims can arise in family businesses, middle market businesses, and small businesses.
We’ve also discussed why and how D&O coverage should be customized and tailored to fit the individual needs of a business. It’s not a one-size-fits-all-all type of policy due to its complexity and options.
If you’re on the journey of finding the right D&O protection for your firm, it may be clear by now that it’s not an easy task. Some direct writers and providers of D&O would like you to think that it is easy and by answering a few questions they can turn around a policy in less than 10 minutes. Yet, how do you know that policy is sufficient, competitive, or fulfills your needs?
Like a lot of challenging business decisions, having an expert by your side to help you makes sense, and we believe this is true of purchasing D&O as well.
And, in most cases, it’s not going to cost you more to deploy the skills of an expert broker to get you the right D&O policy. In fact, it may save you money by exposing your application for coverage to a broader number of underwriters than if you tried to do it yourself.
Does it make sense to engage multiple brokers at the same time?
Absolutely not. A good broker skilled at D&O insurance should have sufficient access to a wide range of insurers to work with to obtain multiple quotes to choose from for D&O insurance for your business. Engaging multiple brokers at the same time will only cause confusion and chaos in the market and lead to slowdowns in getting quotes and results.
Here’s the bottom line
If you’re looking for D&O insurance your best choice is to work with an experienced and skilled insurance broker who can deliver the right results for you. The Coyle Group has deep domain expertise in D&O insurance, a broad reach of the D&O marketplace, and the skill to assemble the right protection your company needs whether you’re a startup or an established firm with hundreds of employees.
Contact us today for more information and how we can help you through the D&O insurance buying process.