Essential Takeaways
- D&O insurance protects against unexpected claims. Even well-managed boards can encounter lawsuits alleging compliance failures, breach of contract, or misconduct, making coverage essential.
- Policies can cover directors, officers, and in some cases, the company itself, reducing personal and corporate liability.
- D&O insurance helps mitigate the financial burden of legal defense costs, which can be substantial.
- High-level professionals may avoid working with boards that do not provide D&O coverage, making it a challenge to attract and retain industry talent.
- To prevent gaps in protection, boards must carefully review coverage scope, limits, exclusions, and definitions (e.g., whether volunteers or committee members are included).
The construction industry can be volatile, presenting risks from multiple sources, including materials acquisition, compliance, and more. However, when creating an insurance profile to address these challenges, many boards overlook the potency of D&O insurance. Even if a project team does everything right, they cannot predict whether a lawsuit alleging breach of contract will suddenly appear in the mail. Fighting this lawsuit is, in itself, an unexpected financial commitment, even if the breach never occurred. That is why D&O insurance can help; it serves as E&O insurance for trade associations.
Whether your member company and industry partners already have D&O protection or you are looking for it for the first time, knowing what makes a policy strong is essential. Below is everything you should know about D&O insurance to make the right choice within the scope of a trade board.
What Is D&O Insurance?
D&O insurance, or directors and officers insurance, is a type of errors & omissions coverage. It is meant to cover financial losses arising from third-party claims that a business engaged in misconduct in its management or actions. D&O insurance can protect the individuals who govern an organization, and depending on the policy, it can even shield the company itself.
Why You Need D&O Insurance
D&O insurance is one of the most commonly overlooked types of coverage within trade boards, likely because trade association management often assumes that as long as their member practices are satisfactory, no harm will come to them. However, claims of breach of contract, compliance issues, or malfeasance can arise even without clear cause, and defending oneself against the financial consequences of such claims may come at a hefty price.
Mitigating the Harm of Disputes
The main reason that most boards end up holding D&O insurance is that it reduces the financial risk when a dispute arises. Should a contractual partner, member, vendor, or other entity claim misrepresentation, lack of standard safety enforcement, or any of a myriad other missteps, the resulting legal fees to defend the company may be covered under D&O insurance protections.
Limiting Personal Liability
Depending on the scope of the policy, each director or officer may be covered by D&O protection. Thus, the entire company secures itself from the potential financial fallout of an issue with one of its governing members.
The Overlooked Risk: Talent
D&O insurance is not just about active financial protection. Many companies do not realize that they could be losing talent by not carrying this type of policy. Industry greats likely do not want to work with partners who do not provide protection for them.
Choosing the Right D&O Insurance Policy
If D&O insurance is the next best step in your oversight strategy, then knowing what to look for is important. Anytime you review a policy, be sure to:
Establish what is Covered
While you should read every policy document in detail, spend extra time reviewing what is actually covered.
- Are the directors and officers protected, or does insurance extend to the entire company?
- Are committee members, the advisory board, or past members protected within the definitions of directors or officers?
- What about employees and volunteers?
Failure to properly understand these protections can leave you vulnerable when you thought you were covered. Bring any questions or uncertainties to your insurance provider.
Consider Policy Minimums and Limits
Next, review how much coverage you want or need. Even smaller entities should carefully evaluate risk exposure to determine an adequate amount of protection. Do research in your niche of the construction industry to learn what average defense fees are, should you be forced to take legal action. Use this number to determine whether the policy deductible is suitable; if it’s too high, you will end up paying the legal fees anyway.
If your circle of influence contains strong vendor or contract membership, your risk is greater. Thus, your coverage limit should also be higher than that of those with minimal connections.
Review Coverage and Exclusions
Precisely what is covered matters. Some common challenges, such as fraud and illegal personal profit, may be excluded from the standard policy unless further customization is requested. Some jurisdictions may also consider fines or penalties uninsurable, and this exclusion may be reflected in the policy.
Get D&O Insurance to Mitigate Risk to Construction Trade Boards
As construction trade boards consider whether D&O insurance is the right fit, it is essential to remember that even high-quality businesses with strong risk management strategies can still fall victim to claims. Having protection, at a minimum for legal fee coverage, can make a significant financial difference. The team at CI Solutions provides personalized attention to each client to create a custom strategy to mitigate risk. Contact CI Solutions today to get started!