How Much Directors & Officers Liability Coverage To Buy?
Recently, I was asked to join the Board of Directors of a small LLC and my first question to the owner, a good friend of mine, involved her Directors & Officers Liability insurance. While I understand the need to balance cost, with the need to protect board members, I certainly didn’t want to put my own assets at risk in case of a loss. Nor was I interested in pursuing quotes for personal directors and officers liability. I already knew that my friend had purchased a $1 million policy and I set about to find out if that limit and her coverage was satisfactory.
• Since this Board was a privately held corporation, my benchmark was to look at the experience and types of claims filed against similar privately held companies. My concern, therefore, didn’t include any litigation that might be brought by shareholders, government organizations, or industry regulators. This board had no shareholders except for the members of the family that owned it. It wasn’t listed on the stock exchange and wasn’t highly regulated by the government or any other organization.
• I reviewed whether or not defense costs were included within the limit of liability as opposed to being unlimited. My concern was that I didn’t want the entire $1 million to be used for defense leaving nothing left in case of any award for damages against the LLC and/or against any of the board members. I knew only too well, from prior experience, that sometimes investigating claim facts and defending lawsuits could run into a lot of money. In fact, many businesses purchase this coverage mainly for the defense costs afforded by such a policy.
• I needed to ensure the policy provided protection for the individual directors and officers from claims in which the business was not legally or financially liable to indemnify a third party in case of a claim. In addition, I needed to confirm that the coverage provided for reimbursement to the business should it have to advance monies to compensate and provide legal fees on behalf of directors and officers. With D&O coverage, it is essential that there be coverage for the individual directors and officers as well as for the company, itself, known in D&O Liability jargon as the “entity.”
Actually there seemed to be little data available concerning the limits of liability chosen by companies with assets as limited as those of my friend’s business, but I was able to confer with underwriters and find out what types of losses similar companies had suffered and what the defense costs and the claim awards had been. Since the limit of liability did, in fact, include the defense costs, my friend was gracious enough to indicate that she’d be willing to increase the coverage limit from $1 million to $2 million just to be on the safe side. That decision was sufficient to allow me to say “yes.” However, we also discussed that on the next renewal she would consider a policy in which defense costs were outside the limit of liability and in that way she might consider going back to a $1 million limit.
It is strongly suggested that prior to joining a Board or purchasing this coverage, you speak to your agent about what you need to protect both your board members and your company in case of a loss.
– Karen Skoler, CPCU
