Corporate counsel will tell you: The more money your firm pulls in, the more people will come out of the woodwork to claim a part of it. Shareholders, former employees, current employees, vendors and suppliers, creditors, even competitors. General business insurance won't protect against claims that hold directors personally responsible for company actions (like in the Enron or WorldCom cases). Enter directors and officers (D&O) insurance. Attracting top management talent and even decent outside directors requires more than cash and benefits. If they're smart, your prospects will be checking to see how much coverage for them is in the deal. Here are some tips on keeping your management team focused by transferring the risk using D&O coverage:
Do you need D&O coverage?As you might expect, it's not as simple as buying coverage and moving on. If you company is not required by state law to defend directors, then coverage - even if you buy it - won't apply.
Benchmark your companyGet an idea of the real numbers to figure out where your company fits into the D&O scheme.
Review D&O plans from the big league insurersYour local bank or regular agent will be happy to talk business liability insurance, but chances are they don't sell D&O. In part, that's because it's an expensive product and hard to sell to small business.
Find coverage through your trade associationOften, the best deals on business liability insurance are through a trade or professional associations. If you don't already belong, it might be a good time to join.
- New U.S. securities legislation, especially Sarbanes-Oxley, has made D&O a hot topic among companies that trade. If you are considering going public, talk to your lawyers about coverage well in advance.
- D&O coverage is particularly pertinent when companies collapse, leaving no assets behind to defend directors. If your industry is shaky or high-risk, high-reward, potential managers will be particularly concerned about getting coverage.
- While most common among larger, public companies, non-profits worry too about coverage, since board members tend to be wealthy, high-profile execs. If you volunteer to sit on a charity board, ask about what D&O it carries for your work there.