The Top 4 D&O Insurance Pitfalls Companies Should Avoid

My colleagues and I routinely uncover risk oversights (which I also refer to as "D&O Insurance FAILS") during discussions with CFOs, COOs, CAOs, CCOs and the General Counsel of both private and publicly-traded organizations. Here are 4 real-world examples of "D&O Insurance FAILS" impacting a company's Directors and Officers ("D&O") liability insurance program:

#1 - Failure to Consider a Manuscript Policy Form

D&O insurance policies are not an “off-the-shelf” product.

D&O policies have become highly bespoke proprietary contracts that dovetail to a company’s operations to enhance contract certainty during complex claims scenarios.

A buyer of D&O insurance with complex risk should likely opt for a manuscript policy form over "off-the-shelf" coverage. It offers superior technical language, narrower exclusions, broader definitions and coverage tailored specific to a company's own unique risk profile.

The greatest advantages of manuscript policy form are 1) Readability and 2) Shared Intent. You have predictability of result and a shared understanding during a claims scenario. This reduces the number of coverage disagreements between the Insured, the Insurer and Broker...the best possible scenario.

An “off-the-shelf” policy form contains very basic coverage provisions that may not provide adequate protection. A heavily endorsed "off-the-shelf" policy can sometimes have outdated and conflicting policy language that limits or even voids coverage.

#2 - Allowing Your Broker to Just “Roll Over” Your D&O Program Every Year

This is a surprising scenario that happens all too often...

Material coverage enhancements that are readily available from insurers in the marketplace which can potentially benefit a company's D&O program are not obtained or even contemplated because the broker is lazy, inattentive or lacking the expertise and specialty knowledge to even ask for improvements.

For example, one of the primary purposes of D&O insurance is to cover defense costs associated with litigation. Legal fees can easily reach hundreds of thousands, if not millions, of dollars, if the litigation persists for several years.?

An Insured's D&O policy may only reimburse for legal fees that are “reasonable and necessary” rather than “usual and customary” because the definition of Defense Costs was never favorably modified.?

An insurer may deem “reasonable and necessary” to be $500 per hour thereby making a company think twice about hiring their preferred outside counsel which charges an hourly rate of $2000.?

Bottom line...if your broker fails to communicate with you on a regular basis or neglects to arrange an annual renewal strategy meeting at least 120 days in advance of your renewal date, it’s definitely time to seek a review of your company’s insurance program by an alternative provider.

#3 - Failing to Meet with Underwriters

An in-person meeting between a company and underwriters is beneficial to all parties.

The more transparency that insurers have into a company's operations, the better they will price the risk and provide superior policy terms and conditions.?Otherwise, by nature insurers will simply price higher what they don't know.

A meeting also provides the opportunity for a company to assess the carriers by evaluating their underwriting prowess, claims paying ability, claims servicing expertise to maximize recoveries during loss scenarios, and overall commitment to the company's industry.

The interaction between a company and insurers can be likened to a courtship. The initial stage resembles a first date, taking place during the underwriting meeting where interested insurers and the company assess their willingness to collaborate. The culmination of this process is akin to marriage, marked by the selection of insurers on the tower and the binding of the insurance program.

A company and its underwriters form what's hopefully a long-term partnership and should continue to meet annually at least 120 days prior to the renewal date.

Claims resolutions also tend to get resolved more favorably if a positive relationship exists between an Insured and its underwriters.

#4 - Relying Solely on Benchmarking Data to Select Limits of Liability

While it’s informative to understand what your peers are purchasing from an insurance perspective, relying solely on benchmarking data to select D&O limits and retentions could simply mean a company and its peers are all making the same incorrect decisions. Each company is likely to have different risk tolerances, risk profiles and overall insurance buying habits.?

Most organizations have never quantified the financial impact of potential D&O-related loss events and are unable to determine how to efficiently prioritize and deploy its risk capital.?

It's important to partner with an insurance broker that has the ability to evaluate the frequency and severity of future loss events as well as the risk transfer options available at the lowest average cost.?The inability to metric potential D&O losses could mean that a company is retaining more risk than it realizes.

What other "D&O Insurance FAILS" should be on this list? Please share in the comments section below.

David Turner specializes in delivering comprehensive insurance and risk management solutions for financial institutions.?When not helping companies make better-informed insurance decisions, he can likely be found on a tennis court or enjoying the East Village of NYC where he lives with his wife and two children.