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)
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