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D&O Insurance
The escalation in the number of lawsuits already has driven premiums on D&O insurance up, and the new SEC and exchange rules provide another reason for insurers to raise rates and even drop companies. This paper addresses some of the key issues and offers a doable plan of action with regards to acquiring adequate protection for your board. The escalation in the number of lawsuits already has driven premiums up, and the new SEC and exchange rules provide another reason for insurers to raise rates and even drop companies. New York-based National Union Fire Insurance Company of Pittsburgh is evaluating the audit committees it covers, meeting or speaking regularly with members to determine whether they are following the spirit of the rules. As of late March, about 5% of National Union’s clients, mostly smaller companies, were not in compliance and, consequently, at risk of being dropped. Insurers don’t like dealing with the companies that wait to the last minute If insurers think the audit committee is just OK, increases in premiums can range from 5% -10%. On the other hand, if insurers are impressed with an audit committee, it may lower its rates. To evaluate coverage, start by finding out which insurer or insurers are backing the policy. One of the first issues to raise is about the stability of the carrier and its track record on service and monitor the carrier’s financial health via their claims-paying ability which are rated by A.M. Best and Moody’s. After that, look at terms and conditions, limits, and how much companies are paying. In some cases, investigate the necessity of having what is known as A-side coverage, which pays the individual board member directly. Why? D&O insurance typically operates this way: When board members are sued, the company pays their defense and settlement costs out of company funds and then turns to the insurance company for reimbursement. However, there are circumstances when a company cannot reimburse its directors—“when it has no money.” Do not neglect the obvious question as to whether or not the maximum the policy would pay out is adequate. Investigate the limits that a policy or policies have. Attempt to find out if there has been benchmarking or peer analysis done. Work with brokers and insurers who can provide data that show the amount of protection other companies in our clients industry or of their size are buying—and what it’s costing them. Once you are comfortable with your company’s choice of insurers and limits, follow up on some policy specifics:
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