If your business faces any legal action, Directors and Officers (D&O) insurance may help cover defence costs against your business’s decision-makers for any personal liability related to their roles, subject to terms, conditions & exclusions. But while most businesses understand the value of D&O insurance, many may wonder just how much D&O insurance they need.
In this post we will explore some of the factors that can determine the level of D&O cover you need. We will also explore some of the risks you may face if you do not have the right level of cover in place.
What Does D&O Insurance Cover?
If anyone makes a claim against any of your directors and officers for alleged wrongful acts, D&O insurance may help cover defence costs and certain damages or settlements that may arise, subject to the policy’s terms & conditions.
D&O insurance can cover any costs associated with allegations of:
- Neglect
- Error
- Trading offences
- Misleading statements
- Breach of trust or duty
- Data breaches
How Much D&O Insurance Do I Need?
How much D&O insurance is enough? The amount of cover you need will depend on the size and nature of your business. You will need more cover if you have external investors, for example, or if you engage in regulated activity.
SMEs with an annual turnover of £10m or less will typically get a D&O cover limit between £1m and £3m.
But if you conduct any regulated activity – if you are an FCA authorised firm, for example – then you might need a cover limit as high as £10m.
Larger listed companies with external shareholders, complex operations or higher risk activities would generally look to get a higher limit of cover, which is likely to have a minimum of £10m indemnity.
Why You Need D&O Insurance
Claims alleging of wrongful acts by directors and officers can be costly. Without D&O cover in place, your business’s decision makers may be held personally liable for certain defence costs, settlements or damages arising from covered claims.
As well as having D&O cover in place, it is equally important to ensure you have sufficient cover for any potential legitimate claims you may face. If your policy’s cover limit does not meet the total cost of a claim this may leave the directors, officers or the business exposed if the total cost of the covered claim exceeds the available cover. Here are some examples of when directors and officers faced personal liability for allegations of wrongdoing:
- The CEO of the NYTimes faced a multimillion-dollar class action lawsuit for unfair dismissal.
- Investors sued the GoPro management for breach of trust, alleging that they had mislead them about sales figures.
- Enron’s directors and officers were accused of fraud. The subsequent lawsuits eventually bankrupted the whole company, as shareholders ultimately received over $7 billion in settlements.
But while your business is unlikely to face billions in settlements, you should never underestimate the potential cost of a claim, particularly if you have external shareholders, or if you operate in a heavily regulated industry.
How To Ensure You Have An Appropriate Level of D&O Cover
If you want to ensure you have an appropriate level of D&O cover, you could look to the typical levels of cover for businesses of your size and in your sector. As we mentioned above, some businesses will need more cover than others, therefore it will depend upon your individual circumstances.
But for every business, it is important to consider the potential cost of defending claims, as legal and professional expenses can be significant. A higher policy limit may provide greater financial protection . The best way to ensure you have the right level of D&O cover for your business is through working with an insurance broker. An experienced broker will help you understand the specific risks and liabilities your business’s directors and operators may face to allow you to make an informed decision. They can then help you access a policy that aligns with your needs and budget.
Directors & Officers Insurance Services From James Hallam
James Hallam is an independent Lloyd’s broker with a team of experienced insurance professionals who care about protecting your business.
We can advise you on your business insurance requirements and help you find a D&O insurance solution that aligns with your business needs and budget
Read our full guide to the many benefits of D&O insurance, and get in touch for a free quote today.