A Directors & Officers Liability Insurance Policy cover the legal cost faced by the directors and officers of an organization. The cost of a D&O policy protects them if they face a lawsuit because of any error committed by them. The policy also pays any settlements payable to third parties as compensation for the errors of directors and officers.
The D&O policy provides extensive coverage to prevent an organization. Its directors, and officers from facing financial losses in case of errors. We calculate premiums for a D&O policy by considering various factors.
Some of the important factors which drive the cost of D&O policy include:
Age of the company
If the company has been in existence for several years. And has performed well over the years, it faces a low risk of a claim. New and developing companies, on the other hand, are prone to claims since they have a limited history. Their directors might not have extensive experience in making executive decisions.
Financial stability in cost of D&O policy
The debt owed by the organization is an important consideration at the time of underwriting a D&O policy. If the company has high debts, it might face insolvency or bankruptcy in the course of fighting a lawsuit. As such, the D & O policy would have to cover the cost of a D&O policy of the lawsuit which would increase the instance of a claim.
Financially stable companies face fewer lawsuits. Whereas financial fluctuation increases the incidence of claims, and premiums charged under a D&O Liability policy.
Industry in which the company is operating
The industry also plays a role in premium determination. If the company works in a risky industry that involves frequent lawsuits, the premium would be high. For instance, premium would be higher for investment banking or security trading company than for small non-profit business. Ironically, D&O insurance considers legal firms as high risk.
Nature of the company
If the company is a listed company. It faces a higher risk of lawsuits from shareholders. Who feel that they don’t get their money’s worth from the company’s profits. Constantly monitor the leaders of a publicly traded company.
As a result, there is a higher number of claims made against their insurance policy.
In fact, it is mandatory for listed companies to own D&O insurance. Therefore, listed companies have to pay a higher premium than non-listed ones.
Size of the company
A large company is prone to facing a large lawsuit. It has number of third parties whose interests would suffer in case of mistake committed by company’s directors. Thus, the premium for D & O policies issued to large companies is higher.
The trading pattern of the company
If the company has trading interests in foreign markets, it faces a higher risk of D&O claims. This is because when the company operates internationally, it must adhere to both international and Indian laws.
This might create confusion and directors might make a mistake in abiding by all the applicable laws. This would result in a claim. Given the higher chances of claims, premiums are higher.
These are some of the driving factors for premium calculation under a D&O policy. Organizations should understand these cost drivers so that they know how insurance companies calculate premiums. You should analyze all these factors in detail (or you could take a shortcut and buy through SecureNow)
How SecureNow can help in cost of D&O policy
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About The Author
Rajesh
MBA Finance
With a wealth of expertise in the insurance realm, Rajesh is a distinguished writer specializing in articles focusing on directors and officers insurance for SecureNow. Boasting 9 years of experience in the industry, he profoundly understands the complexities surrounding directors and officers liability coverage. Their articles delve into the intricacies of D&O insurance, providing readers with invaluable insights into risk mitigation strategies and policy considerations. Renowned for their comprehensive knowledge and attention to detail, Rajesh is dedicated to delivering informative and engaging content that empowers individuals and businesses to navigate the complexities of insurance with confidence.
