A business owner has more than just profits to make. What’s even more difficult to navigate at times is the complex legal scenario. Every business’ market reputation is hanging by a thread at any given time. One small (careless) mistake can cost an enterprise time, money, and credibility.
A primary reason why business insurance exists is to protect companies against unforeseen losses. These may take the form of burglary or thefts, natural disasters, etc. In 2023, storms and earthquakes led to losses amounting to $95 billion.
Without a relevant insurance policy, companies become vulnerable to being swept out of the market. Even in insurance, there is a wide number of policies available for different reasons. While general liability and property & casualty insurance are commonplace, one product many businesses overlook is directors & officers insurance (D&O).
In this article, we will discuss six reasons why this insurance is a fundamental safeguard for all companies (even the small and mid-sized ones).
1. Financial Stability
Generally, the D&O insurance coverage comprises three different parts – Side A, B, and C. Side A covers the losses incurred by individual directors and officers. Side B provides coverage against losses incurred by an organization indemnifying its D&O.
Finally, Side C covers losses incurred by an enterprise sued alongside D&O. Of these, Side B coverage benefits the organization in question. There may be cases where consumers, stakeholders, or government regulators suffer a loss due to the Board’s poor decision-making.
The claims brought against the organization by third parties can be taken care of under Side B coverage. The costs associated with defending directors and officers may amount to thousands of dollars (thereby draining a company’s funds).
They may very well shake the financial stability of an enterprise. Thankfully, reimbursement assures that all defense costs and damages are handled without disturbing financial standing.
2. Protection for Directors’ and Officers’ Personal Assets
The directors and officers of any company are vulnerable to being sued (at any given time) due to what a stakeholder or third party may deem to be a poor decision. According to Oakwood D&O Insurance Brokers, this is true across diverse industries, including financial services, construction, manufacturing, biopharma, and more.
When a claim is brought against the managerial team, their assets are at risk. The D&O policy will safeguard the individuals in leadership roles from having their personal assets taken over. However, it is important to remember that this plan does not cover any wrongful acts committed by the managerial team (or breaking of the law).
3. Cyber Breaches and D&O Coverage
Businesses of all sizes and operations are perpetually at risk of cyber data breaches. It is a security violation in which any sensitive and confidential business information falls into the hands of a suspicious third party.
Some common types of cybersecurity threats include ransomware, malware, spyware, viruses, adware, etc. The monetary impact of a cyber data breach can be significant. The recent (2023) Cost of Data Breach report by IBM found that the average data breach cost has reached an all-time high ($4.45 million).
This amount is a 15% increase over the previous three years. As for individual businesses, the cost of a data breach depends upon regulatory standards, company size, and location. In any case, the burden of responsibility is always a complex answer.
One thing is certain – investors and customers expect a company to have robust cybersecurity measures in place. In case of any breaches, they may hold the management responsible (directors and officers).
In other words, the management will be personally liable to compensate for the losses. A D&O policy can provide coverage for such unforeseen situations, thereby protecting the directors’ and officers’ personal funds.
4. Bankruptcy Protection
If an organization files for bankruptcy, then a D&O policy becomes crucial to have. Filing for bankruptcy indeed protects the company against any litigation risks. However, its leadership team is still vulnerable.
Third parties may hold the directors and officers responsible for their losses and demand that they repay the company’s debts from their resources. When this happens, the managerial team will find itself in a tough spot as the company is no longer able to indemnify. A good D&O policy will step in and protect the directors and executives in such a situation.
5. Attracting and Retaining Talent
Suppose an organization is hiring new officers to join its existing board of directors. Those without relevant D&O coverage will not be seen as a good fit because of the risk involved. Given how their decisions can affect third parties associated with the enterprise, directors and officers are always at risk of legal suits.
Despite careful measures, the truth is that not all decisions will provide favorable outcomes. Unless no malicious intent is involved, the managerial team needs a safety net to rely on (in the form of a D&O policy).
Companies that already have a solid plan in place will find an edge in terms of attracting and retaining talent. Many directors and officers may enquire about the enterprise’s D&O coverage before agreeing to join.
6. Attracting Potential Investors
Another major benefit of having a D&O policy is the possibility of attracting top-class investors. Every business wants to take advantage of relevant growth opportunities, but private equity and venture capital companies wish to have some assurance first.
They want to know how much an organization values their leaders. With D&O coverage, a company communicates to its potential investors that it deeply values its directors and officers and has taken necessary steps to protect them (and mitigate legal risks). This increases the chances of securing funding.
As of the current scenario, directors and officers must be prepared for headwinds like inflation, geopolitical issues, and electoral uncertainty. Meanwhile, the worldwide insurance market is expected to have a value of $8.4 trillion by 2026.
Directors and officers need a strategy in place to cut the headcount and face the challenges ahead. A D&O policy is the first step towards supporting the C-suite. After all, it doesn’t get any more complex than a tough legal battle waged by stakeholders, customers, or competitors.
