To what extent can defence costs be claimed under a D&O policy?
Directors and Officers liability insurance policies cover the financial liabilities that directors face if they commit mistakes in discharging their duties. The third parties who suffer the financial consequences of such mistakes hold them responsible for the financial losses. Accordingly, the third parties might file a lawsuit against the directors and officers of an organisation. A D & O policy covers such lawsuits.
D&O policy and the defence costs
Directors and officers claims can arise if the company:
- Files for insolvency or bankruptcy and the directors pay the settlements to third parties or incur litigation costs.
- Pays the settlement and litigation costs on behalf of its directors and officers.
- Suffers claims against the securities issued by it
Additional Read: Why you need a D & O policy?
Thus, a D&O liability insurance policy covers the defence costs incurred in a lawsuit as well as the settlement payable to third parties. However, the amount of claims depends on some factors. These factors are as follows –
The sum insured that you choose
The sum insured is the maximum liability that the insurance company covers. The insurer calculates the premium amount on the basis of the sum insured. You can select the sum insured, which the insurance company then underwrites. Your risk level will decide the sum insured allowed. If the sum insured is high, the coverage for defence costs and legal settlements would be high and vice-versa. So, how much defence costs would be covered by your D&O policy would depend directly on your sum insured.
- The AoA to AoY ratio
This ratio refers to the amount of the total sum assured that will be paid out in any one incident. A ratio of 1:1 is best because the entire sum assured can be paid in even one incident. A ratio of 1:2 suggests that the insurance company would pay up to 50% of the total sum assured in one incident.
The limit of indemnity
There is a limit of indemnity under each coverage section of the D&O liability insurance policy. The chosen sum insured, the type of business, and the level of risks that the directors face altogether determine the limit of indemnity. This limit of indemnity defines the defence costs that the D&O policy would cover because the coverage cannot exceed the limit of indemnity under any situation.
Under the different coverage benefits, including the coverage for defence costs, the insurance company might impose sub-limits. Such limits restrict the coverage. Thus, even if the limit of indemnity is higher, the policy would not cover the defence costs more than the sub-limit.
There are deductibles applicable in directors and officers claims. Deductibles is the amount of the claim which the policyholder pays. Thus, in the case of directors and officers claims for defence costs, the deductibles that are applicable under the policy would reduce the claim.
Therefore, all these factors determine the extent of coverage of defence costs by the D&O liability insurance. However, you can customise the sum insured and the limit of indemnity. Moreover, by comparing different D&O plans available in the market, you can choose a policy where sub-limits and deductibles are negligible. This will allow you to enjoy higher coverage for defence costs.
Additional Read: How you can raise claims under a D & O plan?
How SecureNow can help?
To sum up, SecureNow can help you pick the right sum insured and the limit of indemnity for your organisation so that you get maximum coverage for defence costs. We typically place the insurance with an AoA:AoY ratio of 1:1 which is best from your perspective. You can also compare various D&O liability insurance plans on SecureNow’s platform and choose a policy that provides the most comprehensive coverage.
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