Choosing an adequate coverage limit for directors and officers insurance is essential, given the steep expenses that claims against directors and officers can generate. Still, considering the many other areas of risk that companies must address through insurance, overspending on unnecessary coverage is usually not an option. When evaluating coverage limits, decision-makers should consider the following two variables, which often contribute to higher defense and damage costs.
Mounting a defense against claims involving regulatory breaches can be a significant expense. If a company or its directors are found liable, the resulting damages may also be sizable. Companies that work in heavily regulated industries can often benefit from a strong directors and officers insurance policy, as can companies in industries that impose severe financial sanctions for regulatory violations.
Duties to Shareholders
Shareholder lawsuits, such as securities class action suits and derivative shareholder action suits, can also lead to sizable defense expenses or damages, especially if the claims allege serious misconduct, such as breach of fiduciary duty. Companies that are based in more volatile industries, in which decisions must be made rapidly and the financial standing of the company may change quickly, may especially be at risk for costly claims.
Quantifying the Risk
Companies that face heavy regulations or responsibility to shareholders should weigh these factors when choosing directors and officers insurance; however, this does not mean that other companies can safely choose low coverage limits for this insurance. For most companies, working with an insurance industry professional and evaluating the unique risks that the company faces before deciding on coverage limits is essential.