D&O Insurance Update for Businesses

Directors and officers liability insurance (or D&O insurance) provides important protection for board members and directors and the organizations they serve. Rates and capacity have improved, but risks remain high. Now is the time to make sure you’re covered.

Contents

How Does D&O Insurance Work?

According to IRMI, D&O liability insurance provides liability protection for directors and officers. You can think of it as a “management errors and omissions liability insurance” policy. If the directors or officers make managerial decisions that lead to financial loss, a D&O policy can provide coverage for resulting claims.

Directors may be held personally liable for their decisions. D&O insurance can provide protection when this happens. If the organization indemnifies the directors, D&O insurance can reimburse the organization for the costs. D&O insurance can also provide entity coverage when both the company and directors are named in a lawsuit.

Who Needs D&O Insurance?

Many D&O claims involve shareholder and securities lawsuits. For this reason, D&O insurance is important for public companies and companies in the process of going public, but private companies can also benefit from coverage. Coverage is also important for non-profit organizations and the board members who serve them.

A few situations where D&O coverage could apply include:

A company’s stock underperforms. The shareholders sue the directors, alleging mismanagement and misrepresentation.
A cyberattack causes a data breach. The company loses millions due to business interruption, compliance with data breach notification laws, and system recovery. In the aftermath of the attack, investors blame the company’s lax cybersecurity policies and file a lawsuit.
A company issues an official statement saying it is dedicated to diversity, equity, and inclusion (DEI), but a female worker claims she was sexually harassed and denied a promotion due to her gender. She sues the company for harassment and discrimination, putting the blame on the directors for creating a hostile work environment and failing to follow through on the company’s DEI policy.
A company advertises its products as environmentally friendly. When it is discovered that toxic pollution is part of the manufacturing process, the company and its board members are sued for greenwashing and misleading consumers and investors.

The D&O Market

In recent years, a combination of factors caused D&O rates to surge while markets shrank.

The Council of Insurance Agents & Brokers (CIAB) says D&O rates increased by 16.8% in the second quarter of 2020, 16.1% in the third quarter, and 14.7% in the fourth quarter. Additionally, 82% of survey respondents reported a decrease in underwriting capacity in the second quarter. Likewise, 2021 was a challenging year for the D&O market, with CIAB reporting a 13% rate increase in the fourth quarter.

The D&O market showed signs of improvement in 2022 – CIAB says rates increased by 7.3% in the third quarter. Lockton says the rate moderation trend should continue in 2023 but notes this is due to increased capacity and new players in the market. The underlying underwriting conditions that caused rates to spike have not changed.

Are You Protected?

Many current trends can lead to D&O exposures, including cyberattacks, DEI and ESG concerns, and the threat of a global recession. Directors and officers have to navigate all of these threats while keeping their companies profitable – it can be a thin line to walk.

The recent rate moderation and increased capacity should provide some relief. However, since risks are still high, you should see this as an opportunity to make sure you have the coverage you need.

Board members and directors should verify they are covered by determining when the organization would provide indemnification and what insurance coverage is in place. Individuals serving as directors and officers should keep in mind they can be held personally liable. Without sufficient D&O coverage in place, their personal assets may be at risk.
Organizations should also check their coverage. They need coverage if they guarantee indemnification or for the eventuality the organization is named along with the directors.
Consider raising your limits. Settlements and awards can be expensive – defense costs can add up fast. IRMI says D&O policies contain shrinking limits provisions that allow defense costs to reduce the policy’s limits.
Consider whether you need additional coverage. As capacity has been reduced in recent years, some organizations may have settled for coverage with undesirable exclusions. Now capacity has improved, it may be possible to obtain somewhat less-restrictive coverage.