What is D&O Insurance?
During these increasingly litigious and volatile times, your company’s officers and board of directors may be targets of financially damaging lawsuits. Decisions and judgments made by directors and officers are constantly scrutinized and from a broader range of parties than just shareholders, such as state and federal regulators and other governmental authorities. Directors’ and officers’ (D&O) insurance offers executives personal liability and financial loss protection from wrongful acts committed – or allegedly committed – as corporate officers. D&O insurance also offers balance sheet protection to the corporation.
What Does D&O Insurance Cover?
D&O insurance policies generally cover exposures relating to any actual or alleged error, misstatement, misleading statement, neglect, breach of duty, omission or act by the insured employee in their capacity as such. In other words, it can cover the cost of claims made against a company and its corporate decision-makers, including directors, officers, managers and board members, when sued (most traditionally by its shareholders) for failing to perform their duties.
A D&O insurance policy typically provides coverage under three different scenarios:
Side A or coverage for individual's personal liability:
The policy provides coverage for claims made against directors and officers for “wrongful acts” where indemnity from the insured company is not available.
Side B or company reimbursement coverage:
Where the insured company indemnifies the director or officer, the policy will reimburse the insured company for such amounts, subject to an excess limit.
Side C or entity coverage:
For public companies, the policy addresses claims against the company for violations of securities laws, and for private companies, the policy addresses non-securities claims against the company (subject to certain exclusions, for example, claims arising out of contracts).
By identifying your corporate and personal exposures to liability, Aon can help design and implement a D&O liability insurance policy that fits your business – creating a program that incorporates risk mitigation recommendations and industry-leading D&O insurance coverage.
What is the Difference Between E&O and D&O Insurance?
Errors and omissions (E&O) insurance policies cover exposures relating to the act, error, omission, neglect or breach of duty committed in rendering professional services. For companies providing professional advice or services, it offers protection towards the cost of claims against a business or its employees.
The primary difference is that E&O is focused on risks associated with products or services a business provides to its clients and customers, and D&O is focused on risks related to corporate decision-making. Many organizations require both policies to address the different risk exposures.
Why is D&O Insurance Important?
D&O insurance plays an important role for companies looking to attract and retain a top management team in an environment where heightened risk and increased oversight is a part of corporate life. Purchasing D&O insurance will not prevent claims from happening; however, D&O insurance should be viewed as one of the necessary components of corporate governance.
Additionally, D&O insurance is especially important for public companies and private companies preparing for a transformational event like an initial public offering (IPO). Publicly traded companies are often viewed as riskier than private companies due to the potential exposure to possible shareholder class action claims. Public companies have heightened financial and public disclosure reporting requirements, increasing exposure to shareholder claims.
What are the D&O Coverage Considerations Post-IPO?
Too often, in the rush of IPO preparation, insurance placements – including D&O liability insurance – take a backseat. However, liability risks are heightened in the first three years after an IPO. There can, for example, be a mistake or misrepresentation in the prospectus, instances of corporate mismanagement, or misinformation conveyed during the roadshows. In a worst case scenario, the resulting claims can jeopardize the continuity of your enterprise.
The marketplace for D&O insurance for companies 12 to 36 months post-IPO is increasingly competitive. As companies clear this period of increased risk, D&O insurers are more eager to offer coverage, often at a significant discount to existing premiums. These increasingly attractive terms reflect:
- The statistical likelihood that a lawsuit is filed in the first 24 months post listing
- High premiums and retentions paid at IPO
How Can Aon Help Address ESG Risks and Opportunities for D&O Liability?
Aon advises public companies and companies transitioning from a private to a public company by identifying best-in-class governance practices and helping to navigate evolving ESG risks. We can provide education for ESG governance and ESG-related best practices to the board and management; tailored peer benchmark assessments to inform appropriate practices, policies and disclosures; and demonstrate the maturity of ESG risk in the D&O placement.
What is the Average Cost of D&O Insurance?
While the cost of D&O insurance depends on many factors (i.e., industry, company size, financial condition, and stock performance), Aon has a proven track record of achieving competitive pricing and broad coverage. Aon places more than $4 billion in D&O liability premiums globally, demonstrating our significant experience in the marketplace. Our framework for analysis includes:
Insurer Selection
Clients have the opportunity to avail themselves of our proprietary Carrier Behavior Matrix and Carrier Market Share analytics to evaluate insurer claims and underwriting behavior. These tools help bring “fact, not feeling” to clients’ critical decisions on choices for insurer program selection.
Best-in-Class Coverage Terms
Aon takes a fully integrated approach to the insurance broking process. Our brokerage and claims team collaborate to translate what we see in claims to help inform our coverage negotiations.
Board-Ready Data and Analytics
Benchmarking provides the foundation for evaluating program metrics. Our analysis goes beyond benchmarking and includes our proprietary claims database and actuarially-based D&O insight loss modeling.
