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Understanding the D&O insurance cost

Published On July 9, 2018 | By Carol Gilmore | Featured

Calculating D&O Insurance Cost and Its Importance  

The directors and officers liability insurance, commonly abbreviated as the D&O is money set aside to compensate or indemnify the top officers and directors of an organization. The officers are compensated for the money spent to hire legal experts to represent them in a court of law after they’ve been wrongly accused while serving as directors or top executives at their respective companies. The D&O Insurance cost is influenced by among other factors, the nature of the business or organization. The insurance also caters to any costs arising from criminal or regulatory trials targeting the same company executives. However, it doesn’t extend to cater to legal penalties arising from intentional or deliberate criminal and civil actions by the executives and directors.

Background

This form of corporate indemnification was coined in the early 1930’s to encourage company’s staff to want to move up the management and corporate ladder to finally take on the top roles and offices. In the past, many staff dreaded dealing with the added responsibilities that arose with being pushed up to executive positions. These employees knew that was anything to go awry and the investors and shareholders money disappeared then they would be held personally culpable for their actions, or rather inactions resulting in the massive investment losses.

Management Liability Insurance

Many people often get the D&O liability insurances confused with the management insurance. The two insurances are indeed very similar. In fact, there are several subtle differences between the two types of liability covers. The most pronounced difference is that the management liability insurance caters to costs meted against both the corporation and its topmost officers. The D&O insurance, however, only safeguards the directors and top officers against any legal defense costs. Consult your legal liaison to get help with calculating the D&O insurance cost to pay.

US Business Judgment Rule

The D&O liability insurance ties in with corporate governance and fiduciary law as expressed by the US business judgment rule. The business judgment rule is meant to assure the safety and discretion of company’s directors and officers while they serve out their tenures. Such business laws are often enforced at the state level as opposed to them being pushed by the national government. The pressure to adhere to these corporate and fiduciary laws is more on the publicly traded companies than it is for their private sector counterparts. The extra pressure on the publicly traded firms ensures that these firms comply fully with the Securities Exchange Acts of 1933 and 1934.

D&O Liability Insurance Clauses

All directors and top officers are mandated by the law to carefully read the fine print of the D&O liability cover before taking on their new powerful posts and positions in their companies. That serves to enlighten them about what actions they are legally protected against and vice-versa. Today, the D&O insurance exists in three main clauses. These are the Side-A or the non-indemnified, the Side-B or the indemnified or the Side-C or the entity securities insurance coverage.

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