Directors & Officers Insurance

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In this episode of Risky Business, Colin Rooke explains the importance of learning about DNO – directors and officers insurance for board of directors of corporations and non-profits, how the current rise in wrongful dismissal and discrimination claims is making it essential for directors to educate themselves on DNO. 

Listen to the full episode here, or read the full transcript below.

Paul Martin:

Welcome to Risky Business Commercial Insurance with Butler Byers. This is Paul Martin, the CKLM business commentator and joining me, Colin Rooke commercial risk reduction specialist with Butler Byers Insurance. Colin, we have talked almost endlessly about three topics, isn’t it? And probably maybe one, cyber. We’ve talked cyber, cyber, cyber. We talked quite a bit about COVID, but today we’re going to change subjects completely. So if you’re a regular listener of the show, get ready, you’re going to hear something different. We’re going to talk about what’s called DNO or directors and officers insurance. This is one of those sort of mundane obscure little topics and they are the realm of insurance. But you say it’s all of a sudden something we got to be talking about, why is that?

Colin Rooke:

It’s really always been around, it’s just sort of seldom discussed. And if you are on a board or are someone inside of an organization that is responsible for looking after the insurance, you will know that in the last 18 months directors and officers has become quite a challenge. Depending on the type of organization, you might see some or all three of these things, but you’re seeing carriers just declined to renew altogether, we’re seeing reduced reduced capacity, stripped down coverages, and wildly increasing deductibles. And then lastly, despite all that, sharp increases in pricing as well.

And it’s really started a lot of conversation around the subject because traditionally, it was sort of a set and forget type of policy. I mean, you wouldn’t have a lot of challenges with it. It wouldn’t be uncommon to, for example, place the coverage on a three-year term at a fixed premium and maybe on the fourth year at renewal, it wouldn’t change at all. And so suddenly you have this sort of not really thought about coverage that’s causing a lot of problems. And the insurance companies are citing worldwide claims and so, a lot of clients are asking, “What happened, why are we seeing this, and why is it so hard to get?”

And until recently, the literature, the sort of proactive risk management, even the description of what it is it wasn’t a lot out there. I mean, at a high level, it serves to protect the board and its officers against some of the decisions that are made that could be later accused of wrongdoing, or making wrong decision. But it just really wasn’t in the limelight and then suddenly, in our line of work, overnight it’s become this problem child. And so we thought we better do something about it. And what we’ve done is, we’ve really designed a program, a loss control questionnaire plus a guide to an actual coverage, which not only we’re talking about a risk, but in this case we’re actually talking about a coverage, and that’s kind of unique to us. 

Paul Martin:

So what caused this change? Can you point to anything, or are we back to the same old culprits, cyber and all of those COVID, those kinds of things, or was there an outbreak, a rash of claims that the insurance company said, “Hang on, this is completely different ball game than it was even a year ago?”

Colin Rooke:

I don’t really know what started it all but suddenly, we’re seeing these, not quite unusual claims, but very high profile payouts or claims going through accusations. And some of the usual culprits so for example, you’ve got a board of directors that somehow, or is overseeing the organization, and maybe they’re involved in the insurance, or maybe they’re involved with the IT overall. And there’s a major data breach with policy limit payouts, or in excess of that, or maybe cyber wasn’t purchased at all. And suddenly, we’ve got lawsuits around that. And I guess one of the newer, not new topics but sort of rising, or in frequency and severity is all around the employment practices. And I would say COVID probably has a lot to do with that.

We’re seeing a lot more wrongful dismissal type claims. It’s weird so discrimination is a huge topic right now. And you can go, how could COVID cause this? And it’s not that COVID is causing it, or at least if you look at everyone working from home, a lot of people are working from home, or just a break in the norm, and you get employees with sort of time to think, or time away from the routine, time away from the office, and suddenly there’s these accusations coming forward, because you realize the toxic environment you worked in, suddenly you shut that down, everyone goes home, and you have time to clear your head and realize how bad it was. And so, we’re seeing a lot of that. And then, more so tied to COVID failure to address health and safety concerns, breach of employment contracts due to layoffs or closures around COVID. I mean, those are some of the hot buttons. It’s certainly not all tied to employment practices, but we’re certainly seeing a significant spike in that area.

 

Paul Martin:

Let’s just think about the headlines these days over the last year or two. Clearly, the responsibility and roles of those in positions of authority is coming under question. Start with major national and international institutions facing all kinds of allegations around sexual abuse, the Me Too Movement, inclusion, diversity, all of these really major items that are coming forward, and they’re not swept under the carpet anymore. I mean, think about even the residential school story, and that story coming out of British Columbia that, all of a sudden those in positions of authority are really coming under scrutiny and that probably amplifies the conversation we’re having here today, because one, it says, if you’re in a position of authority, you’d better be on the game. And secondly, if you’re in a position of authority you better make sure you’ve got some insurance in case you do miss a step, is that part of it?

Colin Rooke:

Yeah, absolutely. And as an example, it’s… Sorry, can we back up? My team’s ticker is going off in my ear and someone keeps messaging me over and over again. I’ve now closed it, but as you’re talking it’s just ding, ding, ding. So with recent events in the media, like you mentioned the whole Me Too Movement, certainly, I think that one accusation, or one new story is certainly going to bring out other accusations, other news stories. Again, according to the literature, certainly when those have more time to think, more time to really evaluate their experiences, I think that a lot of boards are now getting blamed for decisions that sort of have always been. And I think, why the spike? For example, the Me Too Movement was prior to COVID, right? But again, you have that break, you have that time to reset, you have that time to think, you have the time to think about where you work, and do you want to continue. And I think that is causing certainly a spike in claims, absolutely.

Paul Martin:

Well, I think there was a period of time, Colin, when people were afraid to come forward and to lodge complaints. And I think that as a few of them get lodged, more of them start to surface, and that story is very well known. But we’ve got to take a little break. And when we come back, I want to pick this up and I want to maybe talk a little bit about these guides, and the programs that you’ve got to assist boards. You’re listening to Risky Business Commercial Insurance with Butler Byers. This is Paul Martin with Colin Rooke, we’ll be back after this.

Welcome back to Risky Business Commercial Insurance with Butler Byers. Paul Martin, your host here, and joining me is Colin Rooke, the commercial risk reduction specialist with Butler Byers.

And Colin, we’re talking about some pretty serious stuff here today, societally serious in the sense of, those in positions of authority, particularly corporate authority, directors and officers of companies and that kind of stuff. I mean, there might’ve been kind of this movie style impression of, it’s a bunch of old guys sitting in a posh room with padded chairs, smoking cigars, and drinking cognac, it’s way different than that now. And the responsibility that’s falling on directors of organizations has always been there, but I think that, that fiduciary responsibility has really been amplified now and the insurance companies are responding to that. And you’re saying, it’s getting more difficult for companies to get adequate coverage or any coverage at all. And so, how are you helping those organizations?

Colin Rooke:

So a number of ways, one, we need organizations to really understand what the coverage means, the cause of claims, and the duties of a board, and have proper policies and procedures. And to look at real risk management techniques that’s going to protect the board, it’s going to protect the organization, it’s going to protect the people in it. And it all starts with, sort of guide one is, what is directors and officers, what does it entail, what types of coverages are there? And in this guide, it explains what those coverages are in a really easy to understand format. It talks about risk management, top 10 things that you must have as a board. Must have a plan around, which is really helpful.

Yes, step one is absolutely the education around it. And believe it or not, all the time you’ll run into organizations that will have a board of directors that don’t carry the coverage. And by the time that you get around to explaining what it does, there’s panic, they can’t believe they didn’t have it, they can’t believe how exposed they were. So you got to start with education; what it is, what can I do about it, how do I properly set up, what is the coverage, and typical types of claims. From there though, let’s say that either the board of directors or the coverages, it’s not new, it’s not a new thing, but you’re certainly feeling the pinch of the market. Again, high deductibles, reduced coverage, no coverage, three to four time rate increases, and all of the above.

What can you do? Well, the flip side to that is our loss control questionnaire. And again, we’ve talked about this for other specific industries, but not really relevant to a coverage. But what this does, it allows you to self evaluate your board, and there’s probably close to 100 questions here. And it’s yes, no, not applicable, and then we want you to write some notes, but it really makes you think like, do I do this, or do we do this, do we have a policy for that, how is information taken in? How is it distributed? How are officers selected, do they have prior experience, what kind of conflicts exist, if any? Do you go out of your way to hire external help, is your board primarily weighted based on those already inside the organization. It really makes you think, and it is interactive.

And going through this exercise, it’s really eye opening to all the concerns that the underwriters are going to have, and it allows you to take a step back and say, “Just because we haven’t had any claims and it’s sort of been a non-issue, we’re not as good as we thought we were. And now that we understand how these claims are arising, and then we did our own internal assessment, and really we’re not proactively looking at this,” it’s just very eye-opening to the organization where you might fall, and how the insurance companies are now looking at you.

Paul Martin:

Colin I recall taking a director training myself sometime back. And one of the notes of instruction that came from the person leading the program was, and I might just throw this out as anybody who is the director of an organization you might want to keep this in mind is, answer this, how would you answer that question on the stand? The theory being that you could end up in court over this kind of stuff. And you hold a fiduciary responsibility as a member of a board and ultimately, the buck stops with you, I guess. So you’d better make sure you do your homework on it. And I think that’s the point you’re trying to make here.

Colin Rooke:

Absolutely. And really to expand a little bit further, this guide is great for anyone that’s considering joining a board. You can use this as questions to ask, if you’re considering joining a board. And you might have some, certainly, if you’ve got experience, any board experience, however, this is particularly thorough. And for anyone listening knowing that claims are on the rise, and there’s a lot more scrutiny, there’s more accusations than ever has been. It’s a good idea to get your hands on this thing to say, “I’m not going to wait for an assessment, I want to know the answers myself before I actually commit to this thing,” because you’re right the buck does stop at the board, and fiduciary liability claims are at the top of the list when we’re talking directors and officers insurance. So it’s really an important thing to understand that, what am I getting myself into? What type of board this is, so you could use this as sort of a pre-evaluation tool.

Paul Martin:

Just one quick question out of curiosity, I think most people that are listening to this, probably assuming we’re talking corporate boards. So the boards of directors of corporations, what about not for profit boards, should this conversation be happening there too? 

Colin Rooke:

Yeah, and I would say same would apply. And depending on the not for profit, you will see boards made up of super fans, they’ve really put a lot of work in, and they were chosen to sort of help grow the organization. So depending on the organization, individuals that may be less well versed in the ins and outs of directors and officers insurance or really the duties of a board member. And so I would say, for anyone that just isn’t sure and just wants to make sure that they have something, the guide to explain what directors and officers insurance is, is over 40 pages long. 

I mean, it’s thorough but there’s no redundancies here. And so you think, “Geez, 40 pages just to understand what it is, and then what we’re getting into.” And then we’ve got a 14 page document that’s going to assess that board. And you think, “That’s a lot of literature,” and you’d be right, but it’s needed now. It’s really becoming difficult to get, it’s really becoming difficult to afford. And if you really don’t have answers to underwriters questions, they’re going to start stripping coverages out. They’re going to start dramatically increasing deductibles. But again more importantly, it’s about protecting the organization and those serving it.

Paul Martin:

I’m guessing you’re talking about a 40 page this, and a 20 page that, but five years ago those things would have been considerably shorter.

Colin Rooke:

Yeah, a little handbook that sort of said, at a high level, here’s what it is. And it’s easy to buy, and you just leave it with the same carrier, and that was about it.

Paul Martin:

And that probably underscores just how much things have changed in the last year or two. So even if you think you’re relatively current, you better just give it another look because things are changing rapidly in this particular front. 

Colin Rooke:

Yeah. Absolutely.

Paul Martin:

Colin, thanks very much, as always very insightful. And the scenario that you pointed out at the very beginning of this program that doesn’t get a lot of attention but probably needs to, and that it just falls under this whole conversation we’re having as a society is that, those in positions of authority are coming under scrutiny. So if you’re in a position of authority, you better make sure you have all your Ts crossed and your Is dotted. You’ve been listening to Colin Rooke the commercial risk reduction specialist with Butler Byers. I’m Paul Martin. Thanks for joining us. Join us again next time for a Risky Business.