Managerial Error Claims are on the Upswing
Executive and Asset Protection through D&O Insurance (ARA) - It is common for company directors and officials to face accusations of financial mismanagement, discrimination, or other wrongdoings from unhappy shareholders, employees, consumers, or competitors. Legal bills, settlements, and verdicts related to claims of managerial malpractice are on the rise.
What is the maximum amount that a claim against your business and its officials could cost? In 1999, the average shareholder claim reached an all-time high of $8.67 million, an increase of $1.51 million. Similarly, from $287,000 in 1998 to $306,000 in 2015, the average employee claim increased significantly.
"That fact is, the threat of lawsuits and litigation costs is a basic risk of corporate directorship," states Thomas W. Harvey, an expert in international risk management. "Because directors' and officers' services are considered fiduciary, requiring decision-makers to exercise their powers in good faith and with prudent judgment, directors and officers risk what essentially are managerial malpractice claims."
Directors and officers (D&O) claims usually stem from disagreements over accounting or financial irregularities or corporate decisions that are said to have negatively impacted shareholders' ROI, according to Harvey, president and CEO of Assurex International, the biggest privately held commercial insurance brokerage group in the world.
The majority of directors and officers (D&O) claims for publicly traded firms originate from shareholder concerns. Financial transparency, failure to uphold fiduciary duties, deceit, mergers, stock offerings, and spin-offs are common areas of shareholder dissatisfaction.
The most common types of employee complaints include discrimination, harassment, wrongful termination, and violation of contract. Customers most frequently report incidents of prejudice. At the top of the list of the rivals' accusations is business interference. Contract disputes are the second most common source of frustration for both clients and competitors.
"Directors and officers insurance can help mitigate losses when an organization and its directors or officers are slapped with a legal claim," Harvey pointed out. In this day and age of workplace lawsuits, D&O insurance is an absolute must for any ethical business. "
Why You Need D&O Insurance How It Works
Whether your company is public or private, for-profit or not-for-profit, D&O insurance is an option: Provides directors and officers with financial security by insuring them against risks not covered by the company's bylaws. Pays the group back once its directors and officers have been indemnified per the company's bylaws. Inspires the company to seek out qualified outsiders to fill top management and director positions. Assures management on the inside.
Should You Get Errors and Omissions Insurance?
The underwriter will utilize the D&O coverage application form that is most suitable for your organization's structure. For the purpose of preparing D&O quotations and policies, insurance firms that underwrite these types of coverage differentiate between for-profit and non-profit organizations, as well as publicly held and private enterprises.
The good news is that D&O insurance is affordable and provides extensive coverage for nonprofits. The bare minimum for a policy is less than $1,000. Directors and officers of nonprofit organizations have access to coverage extensions and characteristics that for-profit organization directors and officers do not. Coverage options for nonprofit organizations can include organization-wide protection, liability for employment practices, punitive damages affirmative coverage (unless legally banned), payment for defense costs beyond policy limits, and even the elimination of per-claim deductibles in some instances.
One key difference between D&O insurance for private companies and public companies is the extent to which the former can cover the latter. The majority of publicly traded companies can only get liability insurance that protects them against shareholder lawsuits related to SEC liability. Underwriters typically omit SEC exposure from D&O policies of private corporations because this type of risk does not affect private organizations, even those with shareholders. Many private organizations do in fact have shareholders, so it is crucial that their D&O coverage does not exclude shareholder claims.
A variety of coverage options are available from private company D&O insurance underwriters to match the level of protection offered to directors and officers by the organization. However, the coverage limit available to directors and officers is reduced when covered claims filed against the organization are paid out, because for-profit D&O policy limits are granted on an aggregate limit basis.
Coverage for Employment Practices Liability Should Be Considered
Aside from safeguarding the directors and officers, another perk of include private organizations as an entity on a D&O insurance is the easy access to Employment Practices Liability (EPL) coverage. When an employee sues their company for wrongful termination or discrimination on the basis of race, gender, age, or handicap, the employer's EPL insurance kicks in. In addition to defending businesses from internal and external threats, EPL insurance shields them from claims made by third parties.
The 15 Best Ways to Save Money on D&O Insurance
Negotiable D&O insurance coverages are common. Your insurance agent should go out of their way to tailor D&O coverage to your company's specific requirements and organizational structure. Additionally, current market conditions need to be considered.
Here are fifteen pointers from Assurex International to help you get the most out of your business's D&O insurance. Unless the premium is non-paid, the policy should not be cancelable. The insurer must provide at least 90 days' written notice before refusing to renew the policy. Aim for a punitive damages affirmative coverage statement. Settlements, judgments, and defense costs are all covered, but how much is covered depends on the organization. Alternatively, you can establish an allocation percentage (preferably 100%) for the entity in advance. In most cases, disputes involving the SEC are the sole available entity coverage for publicly held firms. There is more comprehensive entity coverage available, however D&O entity coverage is in the works. Will EPL claims be covered by the policy? If the company has express coverage for EPL claims, then this addition will be advantageous. Ask your agent to look at a provision in the exclusionary wording that addresses pollution-related claims, which might include shareholder lawsuits against company officials, if your business is publicly traded. It is common practice to use overly general wording when addressing professional services or errors and omissions. Ask for an exception to the exclusion for failing to supervise in the event that it cannot be eliminated completely. Find a way to get the insurer to agree to a price that stays the same for numerous years, or include language that says premium hikes can only happen due to big changes in the company's finances, a big acquisition, or a lot of claims. Get your newly formed or acquired companies covered automatically, with no extra premium to pay at renewal or anniversary. Verify that the insurer is required to advance the insured's defense costs. Make preparations for the insurer's preferred defense attorney to be pre-approved. Get protection for employees who aren't officers yet are named in a lawsuit involving directors and/or officers. Make sure the Extended Reporting period (discovery clause) is at least 12 months long. Before sending in the D&O policy applications, have an attorney look them over. Include directorships held by individuals outside of the company. To cover claims brought by bankruptcy trustees, federal or statutory receivers, debtors-in-possession, and others, have your insurance broker acquire a carve out from the typical insured vs insured exclusion. Important in the event that the insured organization declares bankruptcy.
If your company is the victim of fraud, theft, or willful violation of an employee's rights, D&O insurance may not cover the costs associated with legal action. Regardless of your organization's status, D&O insurance should be a part of your risk management program and insurance policies.
Private risk management and business insurance brokerages form Assurex, the biggest global grouping. The website for Assurex is www.assurex.com.
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