Ask these 15 Questions Before Buying Directors and Officers Insurance

A company’s decision-makers, that is, the directors, officers, and the ones at higher-ups, set the goals and strategies for the future. Many business owners believe that having a professional indemnity policy is enough, but that is not exactly the case. Directors and Officers Insurance is specifically designed for the company’s officers and directors against financial losses if there’s a lawsuit filed against them for a decision they made on the company’s behalf.

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What is Directors and Officers Insurance?

Directors and Officers insurance (D&O) offers liability coverage to company managers and directors to guard them against claims that arise from decisions or actions taken as part of their responsibilities. For example, a director may be accused of mismanagement of funds or a bad investment, which could lead to a lawsuit. By covering the management and directors, D&O insurance thus protects the company as well.

It usually covers the legal costs, settlement costs, and other related costs that arise from allegations of breach of duty, errors & omissions, or misrepresentation, by a company’s directors or officers. The main aim of this policy is to allow the company’s leaders to make confident decisions without fear of personal financial loss.

Who Needs a D&O Insurance?

Claims arising from D&O insurance are not only expensive but are also complicated, stressful, and can stretch for many years. This may cause a distraction to the leadership of the company, in turn, being ineffective in making sound decisions. All these factors not only affect established or huge business houses but can equally impact small businesses. Be it public, private, or non-profit organizations; every business is vulnerable to such claims.

Since we know the importance of D&O insurance, we list 15 questions that you, as an HR manager, should ask before buying D&O insurance.

15 Questions You Should Ask Before Buying D&O Insurance

  1. How are D&O policies typically structured?
  2. Is there any additional D&O coverage?
  3. What are the inclusions and exclusions to the policy?
  4. What are the settlement values and costs of defending by the insurance company in the past?
  5. What is the insurance company’s claim settlement ratio?
  6. Are there any deductibles? If yes, are they appropriate or too high?
  7. Is the coverage available in an event of a merger, acquisition or buyout?
  8. What are the key considerations when deciding the size of the retention?
  9. How is the “loss” defined in the policy?
  10. Is there any severability clause in the policy?
  11. What is the jurisdiction and governing law for the policy?
  12. Does the policy cover former directors and current and former board members?
  13. How much D&O insurance is enough?
  14. What is the premium charged?
  15. Does the insurance company provide a quick and easy claim settlement process?

Conclusion

In today’s highly complex legal environment, even a small error can damage the reputation whereas litigation expenses can cause a huge blow to the financial position of the company. Companies, big or small, thus purchase D&O insurance as they realize that lawsuits are expensive, and the costs associated with it are constantly rising. Additionally, if companies do not opt for director and officer insurance, the chances of them being able to attract talented top managerial employees becomes dim.

Written By: PolicyBazaar - Updated: 12 October 2022