D&O Insurance Tips: Purchasing and Maximizing Coverage
Aside from insurance executives themselves, insurance is not a topic that raises excitement among directors and officers. In fact it may feel more like necessary torture. Applications with The same never-ending questions, sprinkled with overly technical sections that require completion by your GC or CSO (often resulting in mysterious disappearance of the application altogether). Hours of legwork that, half the time, may find you at the end of a dead end. However exhaustive, this annual exercise is one that still requires undivided attention and due diligence. A poor job placing your D&O insurance or cyber coverage can result in putting your entire company at risk – whether it be from a regulatory action, bankruptcy claim, shareholder suit or social engineering attack. When approaching the proposal process, companies often seek the difficult (if not impossible) task of achieving a proposal/program that meets 2 criteria: better and cheaper. Two words that are naturally rarely seen next to one another. Sure, sometimes luck wins, and those 2 goals align, however more often than not there is a trade off. You can have one at the cost of the other. There is no such thing as a cheap, all-risk, bulletproof program. In fact, when it comes to insurance, anything priced too low should set off immediate alarm bells. That said, we understand the boardroom is a demanding environment and executives constantly demand optimization. For those executives, this guide is for you.
- Choosing an insurer is a delicate balance. Insurers with strong reputations are known for their superior claim handling and expertise, which many insureds are willing to pay a premium for. On the other hand, less known carriers often provide broader terms/conditions (often at a lower premium) in order to compete with that reputation. Carriers with no experience/reputation at all however should likely be avoided entirely.
- Never base purchase decisions solely on premium. This is especially true for professional and management liability insurance. Obtaining a Directors and officers insurance quote for 5k may initially seem like a win-win, but if it excludes bankruptcy claims, claims from majority investors and/or crowdfunding or Regulation D securities, it may be ultimately providing little to no value - 5k for a policy that will likely never respond is 5k better invested elsewhere.
- Utilize one set of applications for any brokers with whom you may be working – it will both ensure consistency across proposals and save time.
- When seeking specialty insurance (such as cyber and/or e&o, d&o) always seek a specialty broker. You wouldn’t trust your general physician to perform a cardiac procedure, the same holds true here. To highlight the importance, many sophisticated companies will retain specialized counsel (in addition to specialized brokers), for secondary review and coverage opinion.
- Obtaining premium reductions are an opportune time to revisit your program for missing pieces. Instead of immediately recording any savings as a capital gain, consider the best usage of those funds and whether or not there are other insurance or legal pieces that should be in place but may have previously been considered too costly.
- Both cyber insurance and D&O insurance can be structured many different ways. Discuss the policy options with your broker electing only the components of interest and set limits according to your goals and exposures – there is no need in paying for high limits in areas when risk is minimal.
- For larger premium policies, ask your broker for a final assessment presentation, it both ensures they have done their comparison and will help you visualize the coverage differences.
- As tempting as it may be to re-market annually, strong programs can take time to build/develop. Build a relationship with a carrier/broker and consider re-marketing every 3rd or 4th year unless premiums begin to inflate disproportionately. The markets/rates often do not fluctuate enough over the period of 1 year to warrant a remarket.
- Timing is important - apply for coverage early. This means before approaching VC firms or investors, launching IPOs, or receiving financing compliance requirements. Aside from affording yourself coverage for representations made early in the process and appearing more appealing to investors, showing diligence can go a long way with carriers. Carriers dislike nothing more than a company that is just applying for coverage for the first time in order to comply with a financing requirement. Failing to have existing coverage may also call into question the competence of the existing board as most underwriters understand that seasoned directors will refuse to sit on uninsured boards. When you do start the process, start the process early as well, allowing your broker enough time for coverage negotiations. I would recommend 1-2 months in advance of any target effective date. Small language negotiations achieved by your broker can drastically improve coverage terms (often at no additional premium) – these improvements will otherwise be missed if rushed.
- Outline the board structure. Attach thorough director resumes. If using Linkedin, ensure profiles are updated and highlight any compliance qualifications, accounting degrees, etc....Anything that speaks “risk reduction”
- Most applications will require an investor deck anyway, however, if the company is closely held, ensure that the carriers are aware. Since d&o policies do not cover infighting, a company with 90% of their shares closely held poses less risk due to a decreased number of potential claimants.
- Mention any compliance software/professionals contracted, any benchmarks used to determine executive compensation, vendor compliance requirements, alternative dispute clauses, etc.
- Avoid frequent changes of independent auditors (if capable) as it can raise suspicion of accounting practices. If there were any such changes, explain them in depth in order to address/appease any underwriting concerns.
- Explain any past challenges and future/unrealized gains. If the company has any distressed financials or had any prior litigation against it, explain them proactively along with the reasons that led up those events and what has been done to rectify them. In line with that, if you are aware of future/unrealized gains, impending large contracts/orders or if the company is approaching financing be sure to mention that to the carrier along with any details.
- Implement loss prevention measures such as director training/induction programs, formal anti-fraud policies and strong internal accounting practices that require dual control. Begin with the easiest controls first, working your way out to those that require more legwork.
- Maintain a healthy balance of independent/outside directors – this separation both ensures efficiency and reduces the potential for a claim. Courts also appear more likely to assume that a board acted in good faith when it maintains a well-balanced board.
- Detail any misc loss prevention measures such as usage of IP counsel for any online or published media, product liability audits for any products, etc…Again, anything that speaks “risk reduction”. While this may or may not help achieve more competitive rates, it may be the difference in obtaining improved terms such as the removal of a “product defect” or “false advertising” exclusion.
- Because a large percentage of claims against directors and officers of private companies are asserted by employees, employee risk management controls are important. Organizations should implement strong hiring practices with background checks and drug tests (among others) and employment contracts/handbooks should include: “employment at will” clauses, FMLA/ADA policies, anti-harassment and discrimination policies among others.
In addition to the above, if there are any other unique factors or reasons to believe your company is at a lower risk for loss or litigation, explain why. Carriers want your business and will listen. When completing the application questions, if there are any risk management items not currently in place but soon to be implemented (such as an employee handbook or a formal anti-fraud policy), note that on the application. Underwriters will often allow 30-60 days to implement such controls. One careful note though, before you check “yes” to any questions, be certain of your answers. These applications/questions are almost always attached as warranties to the policy, which means they can be relied on later by carriers seeking to deny coverage post-claim.