Even on the advice of a broker, how do you actually know you're paying a fair price for your Directors and Officers (D&O) coverage?
The answer lies in due diligence plus asking your insurance broker the right questions. Here’s some key advice to consider:
Know your average costs of D&O insurance
Advisen’s 2013 report on the state of D&O for the preceding 10 years claims that businesses making less than $50 million/year pay an average premium of $15,851 for up to $2.6 million in coverage.
The average annual cost of $1,000,000 worth of coverage falls between $5,000 and $10,000,
Advisen also reports that D&O insurance prices have not risen significantly since 2003. In general, small or medium-sized companies with comparable revenue pay
In higher revenue brackets, cost of coverage varies in part due to risks associated with certain industries, such as manufacturing, communications, and transportation, which pay more in premiums for higher coverage limits.
Cost can also depend on the firm you're negotiating with.
Consider the risk factors
Some risk factors are industry-specific, while others depend on your company's age, financial history, or
Younger companies create more liabilities for insurance providers, thanks to shorter financial histories, fresher management systems, and evolving policies. Expect higher premiums if you can't demonstrate that your business is solid and secure.
It’s a fact: Steady growth and effective debt management will lower your premiums. The converse is also true — volatile cash flow is a red flag. (Think of it like car insurance: the accidents you get into, the more you pay).
Number of employees
Employees are responsible for the filing of most D&O claims, so the more employees on your payroll, the higher your risk. Employees also raise the risk of legal fees than a business with just directors and officers.
Key terms in the policy
Every insurance carrier writes its policies differently, so pay close attention to what’s in the fine print. Some but not all of these terms are negotiable — find out which ones you can opt out of.
Now, speak with a broker
Only an insurance professional who understands the nuances of your business can give you a quote on D&O coverage.
Tip: If you already have a broker, don't consult them on D&O immediately — interview them first:
- How much do they know about D&O, in particular with businesses at my level and in my industry?
- Who are some of your current and former clients?
- How much coverage do I need, and how much can I afford with my revenue?
- What are the specific risks of my industry? Should I make any special considerations when choosing a policy?
- Should my policy protect the entire company from litigation fees, or just directors and officers?
- Should my policy protect me from anyone in particular, such as employees or investors?
Don’t hesitate to hire a second broker to handle your D&O — the peace of mind and potential cost savings are well worth the extra work.
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