Directors & officers insurance (D&O) will reimburse settlements or defense costs arising from covered claims. Both the executives and the company itself can benefit from the policy. But as a company's decision-maker, you may have two questions: "how much coverage is appropriate for my company" and "how much do I need to pay for it."

Once a company has identified its risks and exposures, it needs to consider how much coverage it needs. The answer depends on many factors, including the industry, average cash reserves, market cap, and legal philosophy. 

Companies with more cash may choose to purchase less insurance coverage, deeming high premiums an inefficient use of shareholder funds. Small companies may choose to purchase only a single layer of insurance. Large private or public companies, however, often need coverage that totals $50 million or more. Another critical factor is the company’s legal philosophy. It is possible that the company may experience fewer lawsuits, and lower overall costs, requiring less coverage if it takes a "porcupine" approach to lawsuits and never settles.

Fortunately, D&O claims and policy amounts are publicly accessible. It is possible to calculate the amount of insurance that is appropriate for a company based on this information. This analysis could include various pieces of information. A firm may start by examining the types of claims it is exposed to. Then a firm could create a risk profile that takes various pieces of information into account, such as market cap, previously filed claims in the industry, and the size of settlements. This information can help companies estimate a shareholder suit's potential size. By performing this type of analysis and comparing itself to relevant competitors, an organization can find a reasonable range of estimates for how much coverage it will need.

How Much Does D&O Insurance Cost?

D&O insurance costs vary widely depending on the size of the policy and the firm's attributes. Policies for public companies, large companies, and high-risk industries are more expensive. Policies for small businesses with minimal coverage are less expensive. Overall, every company is unique, and policies must be tailored to suit its budget and needs.

D&O insurance costs are higher for public companies because of their increased audience exposure; however, IPO companies have been hardest hit in terms of risk costs. The rising costs are the result of IPO companies being held strictly liable for everything they state in their documents before they go public. A lawsuit against a company can result from any misstatement or misrepresentation. In most cases, IPO companies will end up paying more for D&O insurance than both private and publicly traded companies.

D&O insurance costs have been rising consistently over the last few years. The Coronavirus pandemic also seems to have pushed costs up even further.

The self-insured retention of a D&O policy is also an important consideration when budgeting for it. There is usually a high self-insured retention attached to D&O policies that must be paid by the director, officer, or company before coverage kicks in. To cover these potential costs, companies should ensure they have cash on hand.

D&O insurance can save a company from potentially crippling legal fees even though it adds a new cost. In addition, senior management teams with D&O insurance policies generally succeed in attracting and retaining better talent. As a result, leadership transition costs, recruiting costs, and training costs will be reduced.

How much does D&O Liability Insurance cost for your company? Competent insurance brokers are well-placed to answer this question regarding benchmarking and data analytics. 

Ask First Cover insurance professionals to help you evaluate your needs.