Setting the Limit for your D&O Insurance

• Side A
  responds when a company is unable to indemnify its directors and officers. This part would respond, for instance, when the company is insolvent. Side A has no self-insured retention or deductible.

• Side B
  reimburses a company for its indemnification obligation to its directors and officers. Side B generally has a self-insured retention or deductible that is paid first.

• Side C
  covers the corporation when it is sued alongside its directors and officers. Side C is typically subject to either a self-insured retention or deductible. Side C coverage is sometimes also referred to as “balance sheet protection”. Nowadays Side C has become much more difficult to obtain for new policies and even on renewals as some insurers are not offering the Side C component due to increasing class actions and claims.

➤ Percentage Owned by Insiders
Where directors and significant associated shareholders hold a large percentage of the issued share capital this may affect the decision on the limit. If directors hold a large proportion of the issued capital it may be argued that this reduces the scope and potential quantum of damages by claimants. Generally D&O insurers will include an endorsement aimed at excluding internal disputes between insiders for example the major shareholder exclusion (sometimes with a board seat). This excludes cover for the major shareholder suing the board or the company as they are expected to be helping direct the company and would be typically considered insiders.

➤ Peer Group
Where possible (because generally the policy information is confidential) it is useful to refer to the limits that companies in the peer group are purchasing for a guide to what limit is appropriate. KBI has access to peer group data that can benefit boards when picking a limit.

➤ Regulatory Framework
At any particular time, certain companies are in the spotlight, whether due to Royal Commissions, ASIC investigation or Parliamentary inquiries. This may influence the board’s decision as to the size of the limit. An example of this is companies involved in the Aged Care or the Banking Industry post Royal Commissions.

➤ Company’s Capacity to Retain Risk
The company’s particular risk appetite and attitude to risk management is relevant to the choice of limit. Retained risk can be considered with reference to the level of deductible applied or to the overall limit of cover.

➤ Merger & Acquisition Exposure
The company’s growth plans may affect the limit decision. If the company’s strategy includes growth by acquisition or places them in circumstances where they may be subject to merger or acquisition themselves, they may consider a higher limit as these are inherently riskier activities.

➤ Cost / Budget
This can be linked to the company’s capacity to retain risk and also the cost per $1mil of coverage. With insurers’ pricing fluctuating as we enter a harder insurance market, the limit chosen often becomes a commercial decision of what limit of risk transfer is viable for the board/company.

➤ High / Low Risk Industry or Jurisdiction
The industry the company is in plays an important part in the decision process. Some industries are inherently more subject to litigation or open to attack than others. Equally if the company operates in jurisdictions that are considered more risky or litigious, there may be a sound basis for a higher limit.

➤ Availability
The Australian D&O market has hardened considerably over the last 18-24 months. A number of insurers have withdrawn from the market, restricted capacity / limits they are willing to offer and reduced their appetite for certain risk sectors. This means that even if the company has decided on the limit it wishes to purchase or the limits it has historically carried, there may be a limited number of markets available with the capacity to assist. With the hard market likely to continue well into 2021 the availability of D&O will be a key factor in obtaining the limit the Board wants.