The Cost Drivers of Directors and Officers Liability: Part 1 - Exposures
Directors and Officers Liability (D&O) insurance is a fundamental component of any construction company’s risk management program. A lack of D&O insurance may dissuade talented individuals from seeking an executive position at your company, as they don’t want to put their personal assets at risk in the event of a lawsuit.
As a savvy business owner looking to protect your bottom line, how do you weigh the cost of insurance to protect your senior leadership with the potential risk of a lawsuit?
As regulatory investigations and defense expenses increase, prices for D&O insurance have gone up as well. Corporate indemnification provides the first line of liability protection; but certain circumstances—most notably, if your construction company goes bankrupt—necessitates that additional protection is offered to directors and officers.
A variety of factors determine the price of a company’s D&O insurance. Some low-risk companies pay pennies on the dollar; others pay a lot more, but they understand it’s a lot less than the expenses they’d incur in a lawsuit. Recognizing the cost drivers of D&O insurance—a company’s exposures, legislation and trends in D&O lawsuits—can help you decide what coverage your company needs to mitigate its unique exposures. Part one will run through your company’s exposures. Stay tuned for parts two and three, which will review legislation, trends and coverage.
Company Characteristics & Exposures
To determine the cost of premiums and the limits of coverage, insurers review several facets of the company’s structure and price D&O insurance accordingly. Some of these attributes include the following:
- Is the company mature or young and developing? Construction companies with less experience and a shorter history of proven effective management can be a riskier policy to underwrite than well-developed companies that have experienced directors and officers.
- Is the company financially stable? Insurers consider the amount of debt a company has. Corporate indemnification usually protects directors’ and officers’ personal assets. However, if the company’s finances are unstable, they have an increased chance of becoming insolvent during a lawsuit.
- Is the company planning on going public soon? Initial public offerings, the most common way to go public, increases the exposures for a private company. Issues, such as lack of disclosure or if the company’s performance fails to meet expectations, are significant risks for directors and officers during this process.
- Does your company have employees? Employment-related claims are the primary cause of lawsuits against an organization’s directors and officers.
- What’s the company’s history of past litigation? Insurers will analyze a company’s history of pervious lawsuits and any adverse business developments and executive management changes.
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