With increasing market volatility and threat for asset bubbles and inflation, the prospect of growing number of insolvencies, together with rising scrutiny around the environmental, social and governance (ESG) performance of companies and the urgency for robust cyber resilience are key risks for Directors and Officers (D&Os) to watch in 2022.
Board members and company executives can be held liable for an increasing range of scenarios, according to analysts at Allianz Global Corporate & Specialty (AGCS).
AGCS in explaining D&O insurance says it provides coverage for a company and its management, protecting them from claims arising from their decisions and actions.
Directors and Officers insurance (D&O insurance) policies offer liability coverage for company managers to protect them from claims which may arise from decisions and actions taken as part of their duties.
Today’s increasingly complex legal environment means businesses face a heightened prospect of liabilities and litigations, often driven by “adverse news events”.
Companies usually purchase D&O insurance because lawsuits are expensive, and the costs associated with them are rising. Moreover, if companies do not have a good D&O insurance program in place it is unlikely that they will be able to attract top managerial talent, given the potential risks involved.
D&O insurance reimburses the defence costs incurred by board members, managers, and employees in defending against claims made by shareholders or third parties for alleged wrongdoing.
D&O insurance also covers monetary damages, settlements, and awards resulting from such claims. If the company cannot indemnify its directors, officers, or employees for amounts resulting from these claims, D&O insurance will step in to directly pay those costs – protecting the individual’s personal assets. If the company indemnifies the individual for such costs, D&O insurance will reimburse the company for such indemnity. The D&O policy will also provide some coverage for the company itself if it is sued.
Coverage is usually for current, future, and past directors and officers of a company and its subsidiaries. D&O insurance covers the individual for acts performed or omitted while in that position with the company. This means that even if the individual is no longer a board member, if a claim is made during the policy period against them for alleged wrongdoing as a board member, they will still be covered under the policy in force while the claim is made.
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D&O insurance policies do not cover deliberately fraudulent or criminal actions.
D&O insurance raises many important questions for companies to consider: How much coverage is enough? What and who is covered – and what is not? Should small-to-medium sized enterprises (SMEs) buy D&O? What does a typical D&O insurance program look like? How can risk management protect officers from the many perils they face in today’s business environment?
Some of the risks covered by this policy the AGCS includes Breaches of fiduciary duties owed to the company and shareholders; Shareholder actions; Reporting errors; Inaccurate or inadequate disclosure; Misrepresentation in a prospectus; Failure to comply with regulations or laws; Corporate manslaughter; Creditor claims; Competitor claims; Employment practices and HR issues; Fraud; Intentional criminal acts; Illegal remuneration or personal profit; Claims made under a previous policy; and Uninsurable fines and penalties
The structure of a D&O insurance policy depends on which of three insuring agreements are purchased. ABC policies are generally chosen, as these are standard-form policies for publicly listed companies. In some jurisdictions, private or non-profit companies may consider only purchasing AB coverage as a cost-saving measure [see table].
D&O insurance coverage has become a regular cover for large multinational companies, but all sizes of organizations – public, private or non-profit – have potential exposures.
There is increasing demand for SME D&O cover, though penetration is still low due to lack of awareness and education. Smaller companies may not think they are ‘big enough’ for D&O insurance but this is not necessarily true.
Lawsuits are increasingly costly, and for a smaller or mid-size company, a single litigation can be a huge financial burden. D&O cover can be tailored to meet the needs of SMEs, with lower retentions and lower limits.