An Increase in the Number of Claims of Managerial Misconduct

D&O insurance, also known as ARA insurance, may help you safeguard both your assets and your executives. When unhappy shareholders, workers, customers, or rivals charge financial mismanagement, discrimination, or other unjust activities, the responsibility almost always falls at the feet of the company's directors and executives. Claims of unethical or negligent management practices are on the rise, and with them comes an increase in the related expenditures, including legal fees, settlements, and judgements.

How much of a financial burden would it be to have a suit brought against your firm and its officers? In 1999, the average shareholder claim reached $8.67 million, a record high that was $1.51 million more than the previous peak. The same time period saw an increase in the typical employee claim, which went from $287,000 in 1998 to the current figure of $306,000.

According to an authority on international risk management named Thomas W. Harvey, "the fact that the prospect of lawsuits and litigation expenses is a fundamental risk of corporate directorship" is an accurate statement. "Because the services provided by directors and officers are regarded as fiduciary, which requires decision-makers to utilize their responsibilities in good faith and with sound judgment, directors and officers run the danger of what are basically accusations of management malpractice,"

According to Harvey, president and CEO of Assurex International, the world's largest privately held commercial insurance brokerage group, disputes over financial or accounting irregularities or company decisions that are alleged to adversely affect shareholders' return on investment are typically the source of directors and officer (D&O) claims.

In the case of publicly traded corporations, shareholder objections are by far the most common source of D&O cases. Concerns with financial transparency, breaches of fiduciary responsibility, fraud, mergers and acquisitions, stock offerings, and spin-offs are among the most frequent types of shareholder complaints.

The most common complaint that employees have is that they were discriminated against, followed by wrongful termination, harassment, and violation of contract. Customers are more likely to complain about prejudice than about any other form of problem. Interference in business is at the top of the list of complaints made by rivals. On the list of common complaints, disagreements over contracts are tied for second place, and this holds true for both customers and rivals.

According to Harvey, who works in the insurance industry, "Directors and officers' insurance may assist in mitigating damages when an organization and its directors or officers are served with a legal claim." D&O insurance is an absolute necessity for all responsible businesses who want to continue functioning in this age of employee litigation.

The Reason Behind Purchasing D & O Insurance

D&O insurance is offered to both publicly traded firms and privately held businesses, as well as organizations that are both nonprofit and for-profit.

provides protection for directors and officials in the form of insurance covering potential liabilities for which they may not be reimbursed by the bylaws of the corporation.

The organization reimburses the organization after it has already acted in line with the bylaws of the corporation to indemnify its directors and officers.

encourages the company to pursue the appointment of high-caliber individuals from the outside to positions such as director or executive manager.

It provides internal directors and officers with reassurance.

What Kind of Directors and Officers' Liability Insurance Is Best for You?

The D&O coverage application form that the underwriter will use will be of a kind that is determined by the structure of your business. When it comes to producing D&O quotations and policies, insurance firms that underwrite D&O policies differentiate between organizations that are for profit and those that are not, as well as between publicly owned and private enterprises.

The good news for groups that do not profit from their work is that the D&O coverage they may get is both comprehensive and affordable. The minimum premiums begin considerably under $1,000. Directors and officers of organizations that are not-for-profit have the ability to get coverage elements and extensions that are not accessible to directors and officers of companies that are for-profit. The coverage provisions of non-profit organizations may include full coverage for the organization; employment practices liability; an affirmative coverage grant for punitive damages (unless prohibited by law); defense expenses payable beyond policy limits; and in some cases, there is no per-claim deductible. Other coverage provisions may include an affirmative coverage grant for punitive damages.

One of the most important differences between D&O insurance for private companies and that for public companies is the extent to which coverage may be obtained for the firm itself as an entity. The majority of publicly owned companies are only allowed to obtain coverage for their organization's responsibility for shareholder claims in connection with Securities and Exchange Commission (SEC) liabilities. This is because the SEC is the only regulatory body that may hold them liable. Underwriters often do not include the SEC exposure in private corporations' D&O policies since these organizations do not confront this risk (even if they do have shareholders). Due to the fact that many private companies do, in fact, have shareholders, it is essential that the directors and officers' liability coverage of a private organization does not preclude claims that may be made by shareholders.

Underwriters of directors and officers' liability insurance for private companies often provide a number of different coverage types, each of which is intended to cover the organization's liability to the same degree as the liability coverage that is made available to directors and officers. However, since the limits of a for-profit D&O policy are given on an aggregate limit basis, the payment of covered claims made against the organization reduces the coverage limit that is available for the organization's directors and officers.

Don't Forget to Get Coverage for Your Employment Practices Liability.

In addition to safeguarding the directors and officers of a company, one advantage of including private organizations as an entity on a D&O policy is that it makes Employment Practices Liability (EPL) coverage immediately available to the company. Employers that have EPL insurance are protected against claims made by employees alleging discrimination or wrongful termination based on factors such as race, gender, age, or handicap. EPL insurance also shields businesses against claims of negligence made by other parties, such as customers and other members of the public.

15 Purchasing Pointers That Will Help You Get the Most Out of Your D&O Coverage

The coverage for D & O insurance is quite up to negotiation. Your insurance agent should make every attempt to personalize D&O coverage so that it satisfies the specific requirements of your business and the management structure that it employs in order to best serve your interests. The state of the market is another factor that has to be considered.

Assurex International provides 15 pointers to help you get the most out of the D&O insurance coverage for your company.

Make sure that the insurance cannot be canceled under any circumstances, including failure to pay the premium. Demand that the insurance provider provide a written notice of cancellation at least ninety days in advance. Make it a goal to get a coverage declaration that explicitly acknowledges punitive damages. It is important to have a clear understanding of the amount to which the entity is covered for expenditures related to settlements, judgments, and legal defense. Alternately, you might predetermine an allocation percentage for the entity, preferably one that is equal to one hundred percent. In most cases, the only kind of entity coverage that is offered to publicly owned companies is protection against SEC-related lawsuits.

D&O entity coverage is continually being developed, despite the fact that larger entity coverage is available. Is there an endorsement for the insurance to cover EPL claims? This enhancement is useful only if the entity is expressly insured for EPL claims, since this is the only circumstance in which it will be of any use. If your company is publicly owned, you should have your insurance agent research whether or not there is a coverage carve out for pollution-related claims in the exclusionary wording. This would cover shareholder lawsuits against directors and officers. In general, exclusionary language pertaining to professional services, as well as language pertaining to errors or omissions, is too broad. If it is not possible to completely eliminate the exclusion, you should request a coverage carve out for failing to supervise.

Obtain a formal agreement from the insurer for multiple-year pricing or wording that confines prospective premium hikes to substantial financial changes, a large acquisition, or considerable claims activity. Both of these should be considered acceptable triggers for premium increases. Find a way to have newly acquired or founded companies automatically covered by your policy without having to pay an extra premium when your policy is renewed or comes up for its anniversary. Make sure there is a clause in the insurance policy that specifically allows the insurer to pay the defense expenses of the covered party. Make the necessary arrangements to have the insurer's choice of defense counsel pre-approved.

Ensure that non-officer personnel who are listed in a covered lawsuit together with officers and/or directors are protected by insurance. Make certain that the extended reporting period is allotted a minimum of a year's worth of time (discovery clause). It is important to have them reviewed by legal counsel before sending in the D & O insurance application forms. Include non-independent directorships in the scope of coverage. In order to cover claims made by bankruptcy trustees, federal or statutory receivers, and debtors-in-possession, have your insurance broker acquire a carve out from the typical insured vs. insured exclusion. This is helpful in scenarios in which the covered organization is experiencing financial difficulties.

Your company may not be protected against purposeful misconduct, such as fraud, theft, or flagrant contempt for workers' rights, even if it has directors and officers liability insurance (D&O). However, directors and officers' liability insurance should be included in the entire insurance and risk management program of your company, regardless of whether it is a private, public, or non-profit organization.

Assurex is the biggest gathering of risk management and commercial insurance brokerages that are privately owned anywhere on the globe.