D&O Coverage for Real Estate: Game of Thrones Edition
More than likely, if you’re in the real estate industry, you know how difficult it is to get insurance coverage for the decisions made by your management team. This coverage is commonly called Directors and Officers coverage, or D&O, since everyone loves acronyms.
D&O coverage, most basically, covers claims made against a company by a third party for alleged losses caused by management's acts, errors, omissions, misstatements or misleading statements. If you ask most insurance carriers why they don’t want to cover real estate companies for D&O, they’ll indicate that the number of entities is about as long and confusing as the cast list of Game of Thrones. That, my friends, is long.
Instead, here are three tips on how to overcome this objection and help the carrier keep track of who is a Stark and who is a Targaryen:
- Consolidate financials – In the simplest terms – D&O pays for decisions of the Management team and what better way to determine the soundness of judgement than if the company has profit. We know in practice, real estate companies keep separate financials for each investment/asset, but if you send 30 financial statements to an insurance underwriter, you’re going to get paralysis of analysis. This typically yields either expensive coverage, or worse, no coverage. If you have audited financials, that’s great. If not, pull your spreadsheets together and get an overview of what the company looks like. Some carriers will accept unaudited as long as there’s good detail and audited reports and notes supporting the information.
- Draw a photo – Much like the Game of Thrones opening sequence – it’s much easier to see how all the pieces work together when you see the map of all the kingdoms. To you, the structure of limited partners and general partners and everything in between is as plain as Hodor’s name, but insurance underwriters are trying to distill a lot of information to make a go or no go decision. Make their job easy – draw a diagram. A diagram is the quickest way to show who makes decisions, who’s related, and who belongs to what entity. If you have a common structure – you only need one diagram.
- Disclose, Disclose, Disclose. No need to be like Lord Varys, answer the questions and give the carrier a good sense of where the company is going. The information you provide to the carrier – including financials – serves as a warranty for a D&O policy. A warranty means if anything disclosed in the document is found to be false or specifically asked and omitted, the carrier has the ability to deny coverage based the misstatement.
Follow the steps above to get coverage for management decisions and you won’t find yourself walking the streets in disgrace with your investors yelling “Shame! Shame! Shame!”
- D&O Liability Webinar Replay
- Real Estate Flyer
- Owner vs. Tenant: Loss Responsibilities
- Liability E-Book
ABOUT THE AUTHOR