Cyber Insurance Blog

D&O Insurance: What Is It, Who Needs It & What to Watch for in 2021

D&O Insurance: What Is It, Who Needs It & What to Watch for in 2021

While the past year was full of cyber-related challenges, such as COVID-19 related cyber attacks, and remote work vulnerabilities, it’s important that your clients remain vigilant against risks of all kinds. As the pandemic continues, the financial strain that many businesses are facing may leave company management and leaders exposed. Whether they’re facing an action for breach of fiduciary duty or a creditor is alleging misrepresentation, Directors and Officers (D&O) Insurance is necessary to protect against personal liabilities.

As we move into 2021, many businesses are still facing significant financial loss and corporate governance. A D&O Insurance policy will help your clients make sure they have the coverage they need, should any claims arise.

Directors And Officers Liability: What Your Clients Should Know

A young African American businessman wears a navy suit and smiles with his arms crossed. Many business owners incorrectly believe that as long as they have an Errors and Omissions (E&O) policy in place, they don’t need D&O Insurance. What, then, makes D&O Insurance different from Errors & Omissions Insurance?

While E&O coverage offers protections against professional services mistakes, oversights, errors, or negligent actions by a company and its workers, a D&O Insurance policy, which is professional liability insurance, specifically covers directors and officers.

While an E&O policy should come into effect to cover a wide range of businesses, such as healthcare organizations, engineering firms, financial institutions, or more, what happens if a lawsuit is brought against a specific company leader, personally? This is why a D&O policy is so important in order for the board of directors or officers of a company to cover liabilities and the potential defense costs of reported wrongful acts against them.

Risks for Directors & Officers to Watch in 2021

The COVID-19 pandemic remains at the forefront of many business owners’ minds today and for good reason.

As companies are forced into bankruptcy, restructures, and mergers, there will be an extensive amount of claims related to directors’ and officers’ fiduciary relationship and whether they always act in good faith or in the best interests of shareholders in these decisions.

The Securities and Exchange Commission (SEC) recently sought charges against The Cheesecake Factory Incorporated for making statements in March and April 2019, that they were “operating sustainably” which was misleading to investors. This was ultimately settled with The Cheesecake Factory Inc. agreeing to pay a civil money penalty of $125,000. While this settlement is fairly small, it’s clear that the SEC was seeking to set expectations of how companies disclose their financial standing to investors.

Rising Insurance Premiums

What’s the cause of the rise in premiums? Litigation and high-value settlements are driving up the cost of claims in general. In 2019, the median cash settlement was $13.6 million, while in 2020 we saw the record-breaking American Realty settlement of $286 million.

Close up of a desk where three business people are gathered, discussing documents.

In addition, the uncertainty surrounding the COVID-19 pandemic and heightened risks are only adding fuel to this fire.

Although D&O Insurance premiums are continuing to rise, carrier, Marsh, reported a 90% renewal rate. 2021 will be an expensive road for those looking to purchase this coverage. With such a high renewal rate, it’s clear business owners know they need the coverage, no matter the cost.

2020 D&O Claim Trends to Watch

This is a difficult market for everyone involved and the problems of 2020 are going nowhere fast in 2021:

  • COVID-19: Corporate directors will continue to update their investors and shareholders on the economic changes affecting their businesses as they attempt to reframe their plans to stay afloat and prosperous throughout the pandemic. However, they will not always get this right, leading to director and officer claims and litigation.
  • Bankruptcy: Due to the financial hardships of the pandemic, both corporations and individuals have been forced to file for bankruptcy. Directors and officers will have to make smart refinancing or liquidation plans to maintain the finances of the company.
  • ESG: Environmental, Social & Corporate Governance: 2020 put a major spotlight on social justice, forcing many corporations to re-examine their commitment to diversity. If boards fail to uphold these commitments, they could face potential lawsuits.

These claims and lawsuits can be a costly expenditure through an already financially challenging time period in which D&O exposure is increasing in general.

An African American businesswoman in a white blouse sits at the head of the conference table and speaks during a meeting.

Which Clients Need Directors & Officers Liability Insurance?

Clients who may face D&O-related claims can fall into a wide range of industries and categories for both publicly-traded and privately-owned companies.

Here are some examples of D&O coverages that ProWriters can offer:

  • Hospitality
  • Manufacturing
  • Lawyers
  • Auto Dealers
  • Insurance Agents
  • Healthcare
  • Technology
  • Construction
  • Restaurants
  • Gyms/Fitness Clubs
  • Professional Services

In addition, any business that has internal counsel may be requested to extend their D&O Liability coverage to protect both their lawyers and the company.

Additional coverages within the D&O space include:

  • Employment Practices Liability Insurance (EPLI): This coverage provides protection from claims such as:
  • Wrongful termination
  • Harassment
  • Discrimination
  • Failure to pay overtime wages due
  • Two women stand at the front of a meeting room and present to their coworkers, who are seated in office chairs.Fidelity Bond/Crime: This coverage can be purchased as part of your client’s Management Liability Insurance Program or as a stand-alone product to cover:
  • Employee theft
  • Theft of clients’ property
  • Computer and fund transfer fraud or social engineering events
  • Forgery of checks and credit cards
  • Fiduciary Liability: This coverage protects your clients from claims that may arise out of accusations of alleged improper investment or insufficient funding.

Address Your Clients’ Exposures With ProWriters

With over 20 years of experience in the insurance industry, ProWriters has optimized and streamlined the process of buying and selling insurance to save time for our agents and brokers.

If you have clients who are still struggling to understand their risk and take the necessary steps to protect themselves and their organization, download our FREE eBook, Creating a Comprehensive Cyber Risk Management Plan.

We’ll help you learn more about industry-specific exposures and the essentials needed for a cyber risk mitigation plan.

To speak with a ProWriters expert today, contact us or call us at 484-321-2335.

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