Buying D&O Insurance on Price Alone: Careless

Most reasonably sophisticated consumers understand that the cheapest running shoes may be no bargain, that the least expensive cellular plan may have big gaps, and that selecting legal counsel based on which attorney charges the least is fraught with peril. Yet when it comes to directors and officers (D&O) insurance, these same buyers are often only concerned with cost, without considering whether the cheapest coverage fully addresses their insurance needs.

The assumption behind many insurance purchasing decisions is that the alternatives are equivalent and that the only relevant variable is price. Whether this assumption is valid for personal insurance, for which there are standard forms, it definitely is not true for D&O. There is no standard D&O policy form; to the contrary, carriers’ base forms vary significantly, and many terms are negotiable, particularly for public companies.

When it comes to running shoes, cellular plans or attorneys, consumers fully expect to use these goods and services. When it comes to D&O insurance, however, buyers are unconsciously assuming that they will never actually need to use the product. The insurance acquisition is nothing more than a box-checking exercise. “D&O insurance? Yep, got that.”

The one subset of D&O insurance buyers who understand how important it is to consider all issues, and not just price, are company officials who have previously been involved in a claim. They appreciate how small policy differences can have a significant impact on coverage.

I have seen many serious claims. Highly regarded individuals have had everything they worked for their entire careers come crashing down. Formerly powerful executives have been taken away in handcuffs. I have seen grown men cry. I guarantee you that not one of them thought to themselves, “Boy, I sure am glad we got the cheapest D&O insurance we could find.”

The D&O insurance acquisition process cannot be built on the assumption that these things might happen, but “not to my company and certainly not to me.” The process must be built on the assumption that they “will happen to this company and to me.”

Not all D&O claims are catastrophic, but the quality of the D&O insurance available at the time of the claim is critically important. The time to analyze if the D&O insurance program is built to respond to the range of possible claims circumstances is not when the claim comes in, but when the insurance is purchased.

Cost is of course an indispensible consideration. In fact, I have many times recommended to clients that they select the lowest cost option. But when I make that recommendation, price alone is neither the sole nor the most important criterion.

I am often asked to review public companies’ D&O insurance. Many companies’ insurance programs are matched to their circumstances. Frequently, however, the programs lack important features that could affect the availability of coverage. Sometimes these underserved policyholders are also overpaying, which has its own implications. But more often, the company has an inadequate insurance program because the insurance was chosen based solely on price.