What drives the cost of a D & O policy?
A Directors and Officers Liability Insurance Policy covers the legal costs faced by the directors and officers of an organisation if they are faced with a lawsuit due to any errors committed by them. The policy also pays any settlements payable to third parties as compensation for the errors of directors and officers. Coverage under the D & O policy is quite comprehensive so that an organisation and its directors and officers do not face a financial loss in case of any errors.
Premiums of a D & O policy are calculated after considering a lot of factors. Some of the important factors which drive the cost of a D & O policy include the following –
- 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 claim. New and developing companies, on the other hand, are prone to claims since they have a limited history and their directors might not have extensive experience in making managerial decisions.
- Financial stability – the debt owned by the organisation is an important consideration at the time of underwriting a D & O policy. If the company has sufficient 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 the lawsuit which would increase the instance of claim. As financial instability increases the incidence of claims, it also increases the premiums charged under a D & O policy.
- Industry in which the company is operating – the industry also plays a role in premium determination. If the company is engaged in an industry which is risky by nature and involves frequent lawsuits, the premiums would be high. For instance, a company involved in investment banking or security trading would be risky compared to a small non-profit business.
- 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. The directors and officers of a listed company are, therefore, constantly under scrutiny which raises the incidence of claim under the D & O policy. Therefore, listed companies are charged a higher premium than non-listed ones.
- Size of the company – a large company is prone to facing a large lawsuit because it has a large number of third parties whose interests would suffer in case of any mistake committed by the company’s directors. Thus, the premium for D & O policies issued to large companies is higher.
- Trading pattern of the company – if the company has trading interests in the foreign markets, it faces a higher risk of D & O claims. This is because when the company is operating internationally, it has to follow international laws as well as 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. Organisations should understand these cost drivers so that they know how the premiums are calculated.
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