Directors and Officers Liability (D&O)

WHAT IS D&O INSURANCE?

In today’s complex operating environment, D&O claims brought by stakeholders such as shareholders, customers, vendors, competitors, suppliers, regulators, and creditors, present increased risk for companies across all industries.

D&O insurance is the last line of defense for a company’s directors and officers when they are accused of wrongdoing in the performance of their management duties. D&O insurance becomes especially critical when a company is unable or simply refuses to indemnify its directors and officers, which often happens in the context of derivative litigation or insolvency situations.  

D&O insurance protects the personal assets of those individual directors and officers when the company they serve is unwilling or unable to pay for their defense costs and any settlements or judgments for which they are responsible.

There are three types of traditional coverage under a D&O policy. 

• Side A, often referred to as “personal asset protection,” is insurance solely for the benefit of the individual directors and officers. This coverage is triggered if the company refuses or is legally unable to protect, or indemnify, its directors and officers. Directors and officers will typically require the company to buy Side-A coverage before agreeing to join the company.
• Side B, often referred to as “company reimbursement” coverage, reimburses the company for the costs it pays to indemnify its directors and officers. These are typically legal defense costs, settlements, or judgments. 
• Side C coverage protects the company itself if alleged to have committed a wrongful act. Side C coverage operates as balance sheet protection for the company. Additionally, for public companies, Side C coverage applies only under certain circumstances i.e., where there allegations under the securities laws.

WHY DO ORGANIZATIONS NEED D&O INSURANCE?

Presenting unprecedented risks to organizations across all industries, the ongoing COVID-19 pandemic continues to challenge companies and their directors and officers. Tasked with making difficult decisions on how to protect and promote their companies’ viability, directors and officers are increasingly exposed to litigation and financial loss during times of uncertainty and transition, such as what we are experiencing today.

While a priority issue, these challenges aren’t limited to the pandemic.  Ranging from cyber-related losses, to the #MeTooMovement, board diversity issues, and natural disasters, companies and their directors and officers are being confronted with corporate exposures like never before. Further intensified by the use of social media and the digital activist environment, companies and their boards are facing constant and increased scrutiny.

PROTECTIVE ACTION STEPS

In light of these challenges, directors and officers can help protect their personal assets through:

• Strong corporate governance.
• Broad corporate indemnification.
• A risk transfer program that includes a high-quality D&O liability insurance program.

While there is no single solution for protecting directors and officers from liability, D&O liability insurance serves as an effective tool in mitigating overall exposure. 

PREPARING FOR COVERAGE CONVERSATIONS

D&O coverage is typically underwritten on a one-year basis for a single aggregate limit of liability. Today, a typical D&O program includes both coverage for individual directors and officers and the entity itself. 

Comprehensive data and analytical tools are useful in helping clients better assess the level of their exposures.  Leveraging our marketing-leading analytics, Marsh’s financial and professional liability modeling provides key statistical and actuarial data points to inform data-driven risk management and insurance purchasing decisions. 

Our suite of D&O analytical tools include: 

D&O IDEAL Model: Provides predictive information to help analyze the frequency and severity of D&O settlement outcomes in securities litigation — typically the largest exposure for directors and officers. [note – the hyperlink is from 2012, currently working to update ideal model]

D&O and Cyber Risk Profile Analysis: Delivers a comprehensive and balanced assessment of selected management, industry, service, operational, and financial/risk mitigation characteristics that can affect insurance pricing and terms.

TO LEARN MORE

To keep pace with an increasingly complex risk landscape, Marsh’s D&O team delivers bespoke strategies and solutions to best fit our clients’ evolving needs. 

For more information on how Marsh can help protect your organization’s directors and officers, contact Matt McLellan.