Directors & Officers Insurance, often referred to as D&O Insurance, is an insurance product that covers the anticipated legal liabilities of directors, board members and other company personnel in a management/supervisory position, if they are indicted for acts committed while running the business. D&O insurance protects the directors' and officers' personal assets and reimburses them for settlements and legal expenses resulting from such cases and litigations.
In this article, we will discuss one common query we have received regarding D&O insurance, that is, how D&O Insurance differs from professional indemnity insurance. We will also discuss other topics related to D&O Insurance.
Before proceeding to the main topic, let’s turn our attention to the basics-
What is indemnity?
Indemnity insurance is a broad category of insurance that covers damages or losses. In a legal context, indemnity can also refer to a transfer of liability for damages. An indemnity agreement is a legally binding contract between two parties. In this case, one party pledges to pay for another party's losses or damages. A typical example is an insurance contract, in which the insurer or indemnitee undertakes to reimburse the other (the insured or the indemnitee) for any losses or damages in exchange for premiums paid by the insured to the insurance provider. The policyholder is indemnified by the insurer, who promises to compensate the policyholder (individual or business) for any covered loss or damage.
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What is professional indemnity insurance?
Professional Indemnity Insurance is an insurance policy that protects professionals against any claims originating from their mistakes or omissions. Professional indemnity insurance protects professionals against liability if a third party suffers harm or damage to life or property as a result of their negligent or irresponsible professional practices.
Professional indemnity insurance is often sold on a claims-made basis. It indemnifies the insured's professional responsibility for only claims made within the policy period for covered malpractices, errors and omissions, negligence, breach of good faith, or misrepresentations committed during the policy term. Any claims filed for an act that occurred prior to the policy's activation may be denied by the insurance provider.
Yet, few professional liability insurance policies may provide coverage retroactively. In such instances, once the professional indemnity cover is triggered, claims can be brought for incidents that occurred during the retroactive period. As a result, it is advantageous to get professional liability insurance with a retroactive date as far back as feasible.
How do Directors & Officers Insurance and professional indemnity insurance differ?
D&O insurance and Professional Indemnity (PI) insurance are both types of liability insurance that cover businesses and people from financial losses resulting from claims of negligence, errors, or omissions. There are, however, certain distinctions between these two types of insurance coverage. We will discuss them in brief below-
- Insured parties: Directors Liability Insurance protects a company's directors and officers and the company in case they get indicted over the decisions taken by them to manage the business. On the other hand, professional liability insurance protects businesses and individuals that provide professional services. (such as doctors, lawyers, architects, engineers, and accountants).
- Policy Limits: Because they cover larger financial losses, D&O insurance plans often have higher policy limits than PI insurance products. PI insurance policies, on the other hand, are usually less expensive and also have lower policy limits because they cover smaller claims.
- Nature of Claims: Directors’ and officers’ liability insurance plans are meant to cover the claims originating from management actions, decisions, or omissions that result in financial losses for the business or its shareholders. Professional liability insurance plans, on the other hand, are intended to protect against claims originating from negligence, errors, or omissions in delivering professional services to clients.
- Legal Proceedings: Typically, a D&O Insurance Policy covers legal proceedings involving claims of any type of misconduct by the insured that are related to managing the business. On the other hand, covered claims in PI insurance policies are limited to legal proceedings involving professional negligence or errors in the services provided by the insured.
- Coverage- D&O insurance coverage protects the directors' and officers' personal assets, whereas PI insurance covers the insured's professional liabilities.
What does a D&O Insurance coverage include?
A typical coverage of a Directors Liabilities Insurance includes (but is not limited to)-
- The costs related to the defence, negotiation, investigation, and settlement of a covered claim ( inclusive of attorneys’ fees, court attendance costs, bail and bond costs etc)
- Subsidiary coverage
- Pecuniary Penalties
- Employer - Employee Disputes
- Coverage for outside directors
- Kidnap & Response Costs
- Cover for alleged failure/negligence to monitor claims originating from professional indemnity
- Public Relations Expenses
- Emergency Costs
- Cover for damage to reputation
- Crisis Communication Costs
- Coverage for Retired Directors and Non-Executive Directors
- Severability coverage
How costly is a D&O insurance policy?
When you take into account the Directors Liabilities it covers, D&O insurance is not that expensive. A pricey lawsuit can have a significant influence on the directors' personal assets. We believe it makes little sense to expose your business, your director, or his personal fortunes to a lawsuit when you have the option of transferring the risk to an insurer.
If your company has a good financial condition and steady growth, as well as a solid debt management strategy, you may be able to consider a lower D&O Insurance Coverage (and vice-versa). To determine a reasonable price range for your Directors Liability Insurance, you can consider the total funding, annual income, number of paying clients and your risk appetite. If you are more risk-averse, you might choose a higher retention amount, lowering the premium you pay. The inverse is also true.
How important is D&O insurance for a small business?
While large businesses frequently adopt D&O Insurance as part of their risk management plan, small enterprises may not have this coverage as often. However, small businesses can gain from D&O Insurance Policy when they have a board of directors or executives in decision-making positions, who may risk personal liability for their conduct.
You would probably agree that functioning as a small business does not shield you from potential lawsuits. A pricey lawsuit can have a significant influence on the personal fortunes of the employees indicated above in your company. In the event of a small business, D&O insurance becomes even more important because the personal net wealth of the owner or any key workers may be linked to the financial fortunes of the business. When a potentially harmful litigation emerges, a small business may lack the financial strength of larger corporations to cope with it.
If your small business is registered as a limited liability company (LLC), you should consider D&O insurance to safeguard your directors and officers. Some sectors, such as finance and healthcare, are more strictly regulated than others and may face increased legal action, necessitating the purchase of D&O insurance. D&O insurance may be an excellent choice if your small business operates in a highly regulated field. Furthermore, if your small business is run by multiple persons, each owner may have their own interests and may sue each other or the directors and officers.
Finally, the decision to obtain D&O insurance for a small business is determined by the company's particular circumstances and risks. It is advisable to get the opinion of an insurance expert who can assess the risks and recommend adequate coverage.
The footnote:
Hope from the discussion above, you have got a fair idea of the difference between Directors and Officers Insurance and professional indemnity insurance. We have also discussed other important aspects of a Directors and Officers Insurance policy. For the best recommendation on D&O Liability Insurance, you may contact BimaKavach. Here, you can get the best recommendation for any insurance product in just 5 minutes.
