Before purchasing D&O insurance, understanding the D&O insurance structure and policy terms is essential to directors’ and officers’ protection. However, premiums and retentions determine if they are getting the best value on the right policy. Typically, a company considers buying a primary D&O policy and some excess policies, but the key consideration here is whether the coverage is worth the deal.
To answer the question, we will first focus on understanding D&O insurance costs from the coverage structure. Standard D&O policies commonly provide three clauses, categorized as Side A, Side B, and Side C. Side A usually covers directors’ and officers’ individual losses when the company is not able to indemnify or refuses to do so. It is crucial and often has a 0 retention size. Side B covers the company’s loss when claims are against directors and officers but they are indemnified. Side C covers losses related to the company itself from securities claims, and it is also referred to as “corporate entities” coverage. These three types of losses basically describe the most necessary parts of a D&O insurance structure. In most cases, retention often applies only to Side B and C clauses.
It is no wonder that the key consideration when buying D&O insurance is the premium cost. Simply put, the size of the company’s balance sheet, time length of the business, policy terms, risk appetite and focus, and claim history can all affect insurance costs. Intuitively, company size, business time length, and claim history are easier to cope with, and these standard measures are not likely to drive much price change. So the question would also be, why is the rate of D&O insurance rising now? The market and climate of D&O insurance have changed drastically in recent years, with the increasing cost of regulatory investigations and growing D&O insurance popularity among smaller-sized companies. In addition, according to some online reports, it is apparent that the risk trends for directors and officers spread from traditional lawsuits to cyber risk concerns when online paperless systems may trigger litigation against directors’ and officers’ company and personal accounts. The collapse of FTX, one of the largest cryptocurrency exchanges, could be an example to see how important cyber risk management is nowadays. Other than that, Environmental, Social, And Governance (ESG) activities also play a notable role in the D&O insurance market. Company directors and officers are often exposed to the risk of litigation when these issues and events are formed. By all the factors, the costs of D&O insurance inevitably grew over the last several years, however, that does not mean purchasers have absolutely no choice.
With the right broker understanding the needs of coverage and reasonable price, First Cover provides an affordable premium matching plan for D&O insurance. We are happy to help and explain our D&O insurance program because we believe in potential savings with the right coverage for every client.