When looking at the annual budget, one of the least understood and often neglected line items is the “insurance”. Everyone knows that they have to have it, so they budget for it and buy it every year. Most executives, however, don’t have a really good understanding about what they are buying. Many of them have never had to use it, so they don’t take the time to understand it. They just cross their fingers and hope that they have what they need when they need it. That can be a recipe for disaster.
One of the aspects of the organization’s insurance program that can often suffer in the crunching and squeezing of the budget is the Directors & Officers Insurance plan. Consumers have been trained by the insurance industry to commoditize the products and buy based on price alone (“15 minutes can save you 15%”). Because of this, executives often think that they can squeeze a little more money out of the budget by getting quotes on their insurance programs. This strategy can often be effective with your basic lines of insurance like property or general liability where the policy forms are pretty much standard from one company to the next. D&O coverage and many types of professional liability insurance are the insurance equivalent of the “wild, wild west”. Anything goes. Insurance companies generally use proprietary forms for these lines of coverage that can vary greatly between carriers. Comparing these policies on price alone could get an organization into a lot of trouble. One policy that looks very attractive at $1,000 could be totally different than another one that has the same price tag.
Here are some common aspects of D&O policies to look for that may differ between carriers:
-Definition of insured – What is defined as the insured in the policy language? Is it the organization, directors, officers, trustees, board members, committee members, etc. (past, present, and future if people will rotate in and out of these positions)? Do they also cover the spouses of these individuals? Does it cover insured vs. insured?
-Defense costs – Are they within or outside of the policy limits? If they are within the policy limit, attorney fees could seriously eat into your coverage and you may want to consider a higher limit.
-Definition of loss – Are punitive damages included?
-Definition of a claim – What does the company consider to be a trigger that activates coverage? A written demand? Civil proceeding? Criminal proceeding? Administrative or regulatory proceeding? Arbitration or alternative dispute resolution?
-Coverage for prior acts – How far back?
This is just the tip of the iceberg. If you really dig down into the policy language, you could probably find thousands of differences between policies. The bottom line is, unless you do this for a living, it can be very difficult to make this decision. While price is a factor, it is most certainly not the only factor so consult with an insurance professional and your peers to help determine the best option for your organization. Don’t be afraid to ask questions. This is one area where you don’t want to unknowingly cut corners (and coverage) in the name of the budget.
About the guest blogger: Jarred Chappell, CIC, CWCA (jchappell AT business-insurers DOT com) is a Risk Management Consultant at Business Insurers of the Carolinas (919-537-7228) and a specialist in insurance coverage analysis for the non-profit sector.