Beyond Pricing Considerations for D&O Insurances

The governance professional will know that directors’ and officers’ (D&O) insurance is an important risk mitigation tool. The governance professional will also know that not all D&O coverage is the same and that there are exclusions and deductibles.

Besides the uncovered items, care needs to be exercised in the selection of D&O insurance. However, the governance professional might not be aware of some of the more pertinent issues that go beyond pricing, and the purpose of the guidance note attached is to highlight some of these not-so-readily apparent but practical issues.

As the operating environment becomes increasingly challenging, organisations’ risks will become more complex. Against the background of the heightened expectations of directors from shareholders and regulators, Boards should focus more on how these risks can be managed and mitigated. As indicated above, D&O insurance is one way of mitigating these associated risks for the directors.

The governance professional would no doubt run or contribute to a normal diligence process to select the appropriate D&O coverage with input from reputable brokers or other financial advisers. By understanding the pertinent issues under this guidance note, the governance professional should more effectively select which insurer to select over what D&O risk coverage by asking appropriate questions. However, there is no one-size-fits-all, and the governance professional might have other considerations specific to their organizations.

Risk Trend

The governance professionals should be aware of emerging risk trends that brokers and other insurance professionals are increasingly being asked about on D&O coverage.

Examples of those emerging risks include:

  • Cyber and data loss risk

  • ESG disclosure

  • Insolvency Risk

  • Geo-political Risk

Coverage Assessment

The governance professional should know the relevant issues to consider in coverage assessment.

  • Cyber. When a cybersecurity breach occurs, the actions of the board and senior management may be under scrutiny. Board members may breach their fiduciary duties to the company and its shareholders if they fail to oversee the cybersecurity and data protection controls. It is thus important to pay attention to the cyber coverage in your D&O policy.

  • Insolvency. Whether the D&O policy contains an insolvency exclusion provides that the insurer cannot pay under the policy ‘for loss directly caused by, arising out of, attributable to or in any way connected with any insolvency event’. The interpretation of such extensions will depend on the particular claim’s drafting and nature.

  • Investigation. Most D&O policies these days cover legal expenses relating to formal interviews or document production costs when a director or senior manager is brought into an official investigation in their capacity. some policies will only include cover for internal investigations carried out in response to a request from an official body. Policies that align with current practice should include costs incurred at the pre-investigation stage, costs associated with dawn raids and the costs involved with self-reporting to official bodies.

  • Order of Payment. D&O policies should contain an order of payment clause, also known as the priority of payment clause, favouring directors and officers over the company. An order of payment clause is important since a typical D&O policy covers non-indemnifiable loss of Insured Persons (Side A), indemnifiable loss of Insured Persons (Side B) and the Insured Entity where it is the defendant in securities litigation (Side C).

  • Insurer Selection. Is there a right to select the insurer and insurance panel for the D&O program? The following items will explain this further.

    • Financial Rating

    • Consistent Approach

    • Claims Reputation

For example, the governance professional might want to ask questions including whether the insurer has its own experienced claims staff or whether it uses outside law firms for its claims, whether the insurer has claims staff or service team in the countries or regions the insured operates, how many D&O claims the insurer handle and pay in the past five years, etc.

Questions to Ask Before Becoming Board Directors

Sophisticated and experienced directors and officers nowadays would not join a public company unless that company provides adequate protection, including D&O coverage. They may ask questions to the governance professional which also serves as a recommended checklist on D&O coverage that goes beyond the pricing decision:

  • Below are examples of this type of questions which the governance professional might be asked to help answer:

  • Is there an indemnification agreement to specify the indemnification to the maximum extent permitted by law and the procedures individuals must follow to obtain indemnification?

  • Whether D&O Insurance will step in when the company refuses or cannot indemnify the directors and senior managers?

  • Does the policy include an order of payment clause that expressly provides that insured persons seeking loss payment have priority of claims for coverage overpayment to the entity?

  • Is the D&O policy limit adequate? Should such an event occur, has the program designed a catastrophic event to maximize protection for the company and its directors and officers?

  • Does the D&O policy respond to emerging risks, such as cyber, ESG, bankruptcy, and if so, what are the exclusions?

  • Is lifetime run-off coverage in place for directors or officers resigning for reasons other than an M&A transaction?

  • Does the insurer have its own experienced claims staff, or does it use outside law firms for its claims?

  • Does the insurance company have an office in Hong Kong or the Chinese mainland for easy contact in urgent cases?

Read more on our Guidance Note on Guidance Note on Beyond Pricing Considerations for D&O Insurances.

Guidance Note on Beyond Pricing Considerations for D&O Insurances - D&) insurance - Greater China White paperDownload (opens a new window)

To learn more about any of the information above, or to find out how Lockton can help you mitigate these risks, please do not hesitate to get in touch with us.

Melody Qian, Head of Global Professional & Financial Risks (GPFR), Greater China | +852 2250 2672 | (opens a new window)