D&O Insurance is Personal Net Worth Insurance
D&O insurance, or more formally Directors and Officers Liability insurance in NY protects the personal assets of corporate directors, officers, managers, and other decision-makers as well as their spouses. We like to call it Personal Net Worth Insurance because that’s exactly what it does – D&O Insurance protects the net worth of a private firm’s owners and key decision-makers when they are sued for the actions, they take in managing and running the firm. D&O lawsuits will often name company decision-makers personally as defendants. This is why personal assets are at risk.
Don’t think private companies get sued for D&O type claims? Think again.
Claims can arise from employees, vendors, competitors, investors, customers or other parties alleging any number of wrongful acts in carrying out their duties as company leaders.
Now many business owners and decision-makers think: “I’ve got general liability and an umbrella policy, I’ve got to have coverage there for claims like this, right?”
Wrong. General liability and umbrella policies cover claims which arise from three main sources:
- Bodily injury
- Property damage, or
- Personal injury (things like wrongful arrest, libel, slander, defamation, etc.)
D&O Claims usually allege a financial harm was suffered by a third party caused by a wrongful act. Wrongful acts can be things like: breach of fiduciary duty, misrepresentation, misstatement, frauds, poaching of other company employees or customers, failure to comply with laws, misuse of company funds, errors, omissions, untruthful representations, etc.
It is important to know that D&O policies DO NOT cover illegal acts or illegal profits.
How does a D&O policy work during a claim?
Because the D&O policy is written on a “claims-made” basis, it’s important to report claims to your insurer as soon as “practical”. Failure to do so could limit or preclude coverage. Once the claim is reported, the insurer will either appoint a law firm or internal lawyer to your case if you have a “duty to defend” policy; if you have a reimbursement policy you have the right and duty to select your own counsel and work with them. Your insurer will either advance or reimburse you for payments to your attorney for your defense. This is one area that needs to be clearly spelled out before you purchase a D&O policy so you know in advance of a claim scenario how you will be defended.
Each policy has a retention or deductible which you must pay before your insurer starts to spend their dollars on your defense costs. Retentions are set by a variety of factors: the type of company being insured, the size of the company, the claims history and more. Retentions can range from $5,000 for a small firm to $250,000 or higher for larger firms.
Another key design of the D&O policy which is critically important to understand is that the costs expended on defense usually will be deducted from your limit of insurance; meaning that if your policy has a $1,000,000 limit of coverage and you spend $200,000 on defense costs, you’ll only have $800,000 left in your policy to pay for a settlement. Now some policies provide for “extra” defense costs but generally speaking most policies deduct defense costs from the limit of coverage.
You may think “that’s not a big deal a million dollars is a lot of coverage”. Unfortunately, D&O actions are expensive to defend against and can deplete the entire limit of $1,000,000 which is why we often recommend higher limits of coverage. Depending on the circumstances $2M, $5M or more may be an appropriate purchase.
You may ask yourself: Do I really need D&O coverage?
Private firms are big targets for D&O lawsuits and recent studies are showing that the frequency of suits and the severity of those claims are only increasing for private firms. This is compounded if you have investors, a corporate board of directors, or an advisory board. If you’re a non-profit organization, it may be difficult to recruit good board members to your board without D&O insurance since claims regularly do happen in the not-for-profit world.
As mentioned earlier, D&O type lawsuits are not covered by other business policies you may have, so without D&O insurance in place, you’re exposed to potentially devastating lawsuits that could bankrupt your company and its leaders, personally.
What does D&O Insurance in NY cost?
Good question, pricing is based on the type of business your company is in, number of employees, annual sales, and a number of other qualitative factors such as your financial statements. The application process is a thorough examination of these factors and often will include your financial statements, annual reports, company announcements, details on prior claims or pending litigation, and sometimes even the CVs of your senior managers.
The more detail, the more thorough your information, the better results you’ll achieve in obtaining competitive terms.
For small firms under $50 million a year in annual revenues, the cost per $1M of D&O coverage is around $5,000 to $10,000. That’s a very rough estimate and factors such as your industry and what terms you’re including will affect the final premiums.
Pricing, of course, will go up if you include Employment Practice Liability and Fiduciary Liability as part of a Management Liability policy which we often recommend for small and medium-sized firms. By combining these three coverage parts, and often others like Cyber, or Crime insurance, you broaden your coverages in the most competitive manner.
The bottom line is that D&O insurance in NY is a coverage form most businesses need. Obtaining the right coverage or the best protection requires the diligent expertise of a broker who is not only familiar with D&O and management liability in general, but fluently speaks the language, represents the vast majority of insurers in the space, and has the skill to negotiate the best terms and conditions for you.
For more information on D&O insurance, please contact me, Gordon Coyle at 845-474-2924 or email me at: [email protected]