D&O Insurance: Cost Versus Value

Not Like Your Typical Running Shoes

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 appropriate consideration whether the cheapest coverage fully addresses their insurance needs.

The assumptions behind many insurance purchasing decisions is that the alternatives are equivalent and that the only relevant variable is price. Whether or not this assumption is valid for personal insurance like home or auto, for which the insurance is generally issued on standard forms, it definitely is not true with respect to D&O insurance.

There is no standard D&O insurance policy form; to the contrary, the various carriers’ base forms vary significantly, and many of the key terms are negotiable, particularly with respect to public company D&O insurance.

So the assessment of D&O insurance alternatives often involves — or should involve — careful comparison between a host of relative advantages and disadvantages, among which price is one factor to be considered.

Despite the important differences between D&O insurance alternatives, many insurance buyers, even those who are very sophisticated, ultimately make their selection based solely upon price.

When it comes to running shoes, cellular plans or attorneys, consumers both understand what these goods and services are for and fully expect to use these goods and services. When it comes to D&O insurance, however, the same buyers are unconsciously assuming that they will never actually need to use the product, and that 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. These individuals fully understand what D&O insurance is for, and they appreciate the way that small policy differences can have a significant impact on claim coverage.

After many years of involvement with D&O liability issues, 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. None of these individuals ever thought they would ever find themselves in these circumstances — but they did. I guarantee you that not one of them, finding themselves in this position, 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 those things might happen, but not to my company and certainly not to me. The entire acquisition process has to be built on the assumption that these things will happen to this company and to me.

Of course, not all D&O claims are catastrophic, but whether or not they are catastrophic, the quality of the D&O insurance available at the time of the claim is critically important. The time to analyze whether or not 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 and price considerations should always be taken into account. In fact, I have many times recommended to clients that they select an alternative that is 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 programs. 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 over-paying for their insurance, which has its own set of implications. But more often, the company itself has selected into an inadequate insurance program because they chose their insurance based solely on price.

Price considerations alone are not enough to allow a buyer to select the best running shoes, cellular plan or legal counsel. No one should overpay for something. But often the way to make the optimal purchase is to get assistance from someone with specialized knowledge about the products and services.

Insurance buyers may never have to use their D&O insurance, but policyholders don’t want to find out when a claim arises that the cheap insurance they bought was no bargain. That is why it is indispensible to have a skilled and experienced insurance advisor involved in the D&O insurance transaction — one that can explain the differences between the insurance alternatives and that can recommend the alterative that will best meets the company’s needs and finances.