Directors and Officers Liability Insurance Cost Factors

Directors and officers liability (D&O) insurance is a fundamental component of any company’s risk management program. It protects senior leadership from potential lawsuits.

As regulatory investigations and defense expenses increase, prices for D&O insurance have also gone up. Some low-risk companies pay very little, while others pay more, understanding it's less than the expenses they’d incur in a lawsuit.

To determine the cost of premiums and the limits of coverage, insurers review several facets of the company’s structure and price D&O insurance accordingly. Public, private and nonprofit corporations with assets of all sizes purchase D&O liability insurance.

Key Factors Influencing D&O Insurance Costs

A variety of factors determine the price of a company’s D&O insurance. Here are some key considerations:

• Company Maturity: Is the company mature or young and developing?
• Industry: What industry is the company involved in?
• Financial Stability: Is the company financially stable? Insurers consider the amount of debt a company has.
• Going Public: Is the company planning on going public soon? Initial public offerings increase the exposures for a private company.
• Employees and International Operations: Does your company have employees? Does the company operate in foreign markets? Conducting business internationally can complicate the D&O insurance needed.
• Litigation History: What is the company’s history of past litigation?

It’s no surprise that as litigation increases, the price of D&O insurance increases as well. Even after a thorough assessment of a company’s risks, D&O insurance continues to be a high-severity product, as carriers are often hit unexpectedly with catastrophic claims.

Securities Exchange Commission (SEC) regulations continue to impact the cost of D&O insurance. Also, recent changes to the Dodd-Frank Wall Street Reform and Consumer Protection Act have caused a spike in whistleblower reporting, bringing to light many D&O claims and increasing the need for D&O insurance. The new whistleblower provision in the Act now gives whistleblowers a “bounty,” or monetary compensation, if the lawsuit results in more than $1 million in monetary sanctions.

Financial Health and Company Size

The most common factor in determining the price of D&O insurance is the size of the company. The size of a startup can be determined by annual revenue, the total amount of funding, the number of funding rounds, the number of paying customers, and many other factors.

Younger companies create more liabilities for insurance providers, thanks to less predictable revenue streams and shorter histories of proven effective management. Financial health, steady growth, and effective debt management will lower your premiums. The converse is also true-volatile cash flow is a red flag. A company with strong financials and operating in an industry with a positive economic outlook will have lower premiums.

While proof of a successful track record is ideal, underwriters will also consider recent significant changes affecting the business: mergers or acquisitions, shareholding agreements, and changes to the company’s financial strength.

Risk Tolerance and Past Claims

The price of D&O insurance may also depend on how willing you are to tolerate risk. Risk-averse businesses can elect a lower retention (the amount that must be paid by the insured before the insurance policy kicks in). This will cause the price to increase.

Any past claims will affect how the underwriter views your business.

Understanding Your Policy

While many companies usually focus on the cost of their D&O policy, understanding the scope of the policy is even more critical. Most D&O policies are renewed yearly, and the terms and conditions can change.

Read through your policy carefully. When considering adding or renewing coverage, be sure to consider the limits of your liability. Are they enough to cover your exposures? Companies with a lot of exposures usually find that they need more advanced coverage. Additionally, be aware of any exclusions in your policy; for instance, most D&O policies do not cover claims that arise misconduct or that you had previous knowledge of.

For some insurance carriers, Employment Practices Liability (EPL) insurance and Fiduciary Liability insurance are policies that are purchased separately from primary D&O insurance.

Mergers and Acquisitions (M&A) Lawsuits

Within the last few years, there has been an increase in M&A lawsuits. In 2014, there were more than 600 lawsuits regarding M&A.

Working with an Insurance Professional

Only an insurance professional who understands the nuances of your business can give you a quote on D&O insurance cost that will satisfy your needs. How much do they know about D&O, and how well do they understand your industry and your business? What are the specific risks of your industry?

The key to buying the right policy for the right price is doing proper due diligence, carefully considering cost drivers, and finding the right broker who is transparent about the underwriting process.

D&O Insurance Costs: An Overview

The average D&O insurance cost a company pays mainly depends on the coverage offered. The end goal is to find the best coverage for the best price. That is where a good broker can come in; they will find the best coverage available, highlight the coverage differences between insurance carriers, and negotiate a price on your behalf.

The average annual cost of $1,000,000 worth of coverage typically falls between $5,000 and $10,000 for companies with revenue below $50 million a year. In higher revenue brackets, D&O insurance costs vary in part due to risks associated with certain industries.

Startups have a unique need for D&O coverage. This is why most venture capital firms will insist that your company has a D&O policy before it agrees to provide you with funding.

No matter how big or small your company is, your corporate leaders are integral to your success. Until recently, many believed that directors & officers insurance was coverage only large corporations needed, but that has been proven untrue. In this increasingly litigious age we live in, small business executives need to be financially protected from possible claims filed against them as well.

The cost of directors & officers insurance provides coverage and pays for claims in such instances to ensure that your leadership’s personal assets are protected.

Wrongful acts: If the director or officer breached a legal obligation to the company, this can be considered a wrongful act.

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