When talking with executives about Directors and Officers insurance, I often hear the same comment - "We already have a policy in place through a Broker that handles all of our insurance". What I have found however, is that even the most sophisticated insureds and those well versed in D&O are unaware of critical exclusions and conditions precedent to coverage contained in their policy. Numerous assumptions are common as well:
- all D&O policies are good ones
- all policies are similar
- all Brokers are knowledgeable on this type of insurance
Unfortunately, many seem to be lured into a false sense of security by the presence of a D&O policy without scrutiny.
Think of an alarm system that you pay for and install to protect you and your possessions. You would probably do some homework on the various brands and features and, not dismiss the installers before they instructed you on how to use the product. Directors and Officers insurance policies are similar to alarm systems in several respects:
If you don’t know how to work them, they may not protect you.
All D&O policies contain conditions precedent to coverage – meaning you have to do certain things according to stipulations in the policy in order to trigger coverage. Failure to do so can result in a denial of coverage by the insurance carrier.
25% of D&O claims are denied with no contest! - simply because the insured did not comply with one provision of the policy (they did not report in time).
Product specifications, operation, features and characteristics differ by brand.
D&O policies differ significantly from one another and are more sophisticated than other types of policies. Let me address some common myths.
Myth #1: Insurance is a commodity; all policies are the same or similar.
Many common insurance policies are derived from an ISO (Insurance Services
Office) standard. There is however, no ISO standard D&O policy; each insurance
carrier writes their own. Language, terms, conditions, clauses and exclusions all
differ from policy to policy. As such, specimen copies of each quoted policy
need to be requested, read and compared in order to truly understand what is
being quoted and what you are getting. It’s a challenging task which begs the
question – how often is it being done?
Myth #2: All Insurance Brokers are created equal and they all know everything you need them to know about D&O insurance.
You might be surprised to know that information on D&O insurance is not included in Broker training or common Continuing Education curriculum. Like doctors and attorneys, each Broker evolves expertise in certain areas. You would not ask a patent attorney to handle your divorce or a dermatologist to treat a vision problem. D&O insurance requires attention to details that are not readily apparent. Knowing what to look for and how to negotiate such policies is not a common skill set. Unfortunately, for insureds and Brokers alike,
“You don’t know what you don’t know!”
Understandably, insureds are reluctance to address the D&O policy in depth. In today’s environment bandwidths are stretched beyond capacity – no one has the time or inclination to take on another potential problem. Rules, regulations and standards by which companies are held however, keep increasing. Publicly we see these standards being difficult to meet even by large companies that have resources with which to comply. Small and mid-size companies with few resources are actually more at risk. Claim statistics show frequency and claim costs rising. Reliance on an existing D&O policy may be convenient but might not provide the protection that you are expecting.
Do not fall prey to a false sense of security
It’s not realistic or wise to assume protection just because you have a D&O policy.
You rely on the D&O policy to protect your personal assets: your home, savings and possessions. Find out what the professionals you are relying on really know about the coverage. Ask questions!
What do they look for in a policy?
What are the red flags in a policy?
How can they negotiate a policy to be more in your favor?
You may find that a generalist Broker is not appropriate.
Make sure that you know how to operate your policy by asking your Broker what the conditions are. Find out what is excluded – you will be alarmed at the sheer number of exclusions! Most importantly, when obtaining or renewing a D&O policy work with an Insurance Broker that specializes in D&O coverage and has attorney resources that specialize in insurance to refer to.
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