KANSAS CITY, MO — In today’s increasingly complex legal environment, businesses face a heightened prospect of liabilities and litigations, often driven by adverse news events.

Directors and Officers (D&O) liability insurance is an essential policy designed to protect members of a leadership team against claims that may arise from decisions and actions taken as part of their duties that could potentially impact profitability and operations.

D&O insurance coverage has become a regular coverage for large multinational companies, but all sizes of organizations — public, private or non-profit — have potential exposures. There is increasing demand for small- and mid-size enterprise (SME) D&O coverage, though penetration is still low due to a lack of awareness and education. Smaller companies may not think they are big enough for D&O insurance, but this is not necessarily true. Lawsuits are increasingly costly, and for a small- or mid-size company, a single litigation can be a huge financial burden. D&O coverage can be tailored to meet the needs of SMEs, with lower retention and lower limits.

Companies usually purchase D&O insurance because lawsuits are expensive, and the costs associated with them are rising. Moreover, if companies do not have a good D&O insurance program in place, it is unlikely they will be able to attract top managerial talent given the potential risks involved.

D&O insurance reimburses the costs incurred by board members, managers and employees in defending against claims made by shareholders or third parties for alleged wrongdoing. D&O insurance also covers monetary damages, settlements and awards resulting from such claims.


If a company cannot indemnify its directors, officers or employees for amounts resulting from these claims, D&O insurance will pay those costs, which protects personal assets. If the company indemnifies the individual for such costs, D&O insurance will reimburse the company. The D&O policy will also provide some coverage for the company itself if it is sued.

Coverage is usually for current, future and past directors and officers of a company and its subsidiaries. This means that even if an individual is no longer employed with the company, if a claim is made against them for alleged wrongdoing during the policy period, they will still be covered under the policy in force when the claim is made.

The structure of a D&O insurance policy depends on which of three insuring agreements are purchased. These are referred to as ABC policies and are standard-form policies for publicly listed companies.

In some jurisdictions, private or non-profit companies may consider only purchasing AB coverage as a cost-saving measure.

Common D&O risk scenarios include breaches of fiduciary duties; legal actions brought by shareholders against directors and officers for various reasons, such as mismanagement or failure to act in the company’s best interests; inaccurate or misleading financial or operational reporting; misrepresentations or omissions in a prospectus; non-compliance with industry regulations or laws; deaths resulting from the company’s actions or negligence; and inability of a company to fulfill its financial obligations.

Common D&O exclusions include fraud; intentional criminal acts; illegal remuneration or personal profit; claims made under a previous policy; and uninsurable penalties.

The outlook for the D&O market in 2024 carries an expectation of continued hardening of the market; stricter scrutiny of potential risks; the expanding role of Environmental, Social and Governance (ESG) factors; regulatory changes; and cyber risks. Collectively, these signal a shifting landscape.

The hardening of the D&O insurance market means higher prices and potentially stricter terms and conditions, coupled with insurers becoming more selective about who they cover. Geopolitical tensions and increasing cyber threats pose substantial risks that have already resulted in heightened claim frequency. These trends show no signs of letting up in the future, likely necessitating further market hardness.

Additionally, insurers in the D&O market will continue to tighten their underwriting standards as they strive to balance profitability with risk. This focus implies that they will increasingly scrutinize factors such as corporate governance, the company’s risk management framework, and financial health during the underwriting process.

ESG factors are set to play an ever-increasing role in D&O coverage in 2024. The global shift towards sustainability and responsible business practices means directors and officers will be held accountable to a wider range of stakeholders. This shift will probably lead to a surge in ESG-related D&O claims, necessitating insurers to recalibrate their risk assessments and coverage policies accordingly.

Regulatory changes are continuously impacting the D&O insurance market, and that’s unlikely to change. Regulatory bodies worldwide are stepping up their requirements for corporate transparency and governance, and non-compliance can lead to significant penalties. This continued pressure is likely to result in additional D&O claims, adding to the overall risk.

Finally, advances in technology across industries will likely lead to a corresponding rise in cyber threats and digital vulnerabilities. This means directors and officers will carry increased responsibilities for managing cyber risks, leading to potential claims in the D&O space. Insurers will likely extend their risk assessments to include cyber-security readiness.

Increasing potential for liabilities and litigations combined with the trends noted above implies that companies and board members will need to adapt and bolster their risk management strategies for optimal D&O coverage.

This story has been adapted from the April | Q2 2024 issue of Commercial Baking. Read the full story in the digital edition here.



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