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Why Has the Price of D&O Insurance Increased?

Why Has the Price of D&O Insurance Increased?

As a result of the recent recession, it seems that the price of everything went up: gas, groceries, interest rates, you name it. We’re paying more for everything.

In this increasingly litigious society, many lines of insurance have increased, but none more than Directors & Officers (D&O) Liability Insurance.  Have you ever wondered why? We did, so we did some checking around to find out why.


Directors & Officers Is Important Coverage

D&O is often the most overlooked type of coverage.  Other lines of coverage like liability and property cover tangible things like slips & falls or a building lost in a fire. What does D&O cover?  Decisions.

D&O is also called Professional Management Liability because it covers decisions made by board members, company owners and officers, and even upper management.  The decisions of these leaders can make or break the success of a business, but those leaders shouldn’t be held personally responsible for any fiduciary losses.  That is why D&O coverage is so important.


The Mortgage Bubble Burst

Between 2008-2010 a number of banks, mortgage loan companies and other lenders were accused of predatory loan practices, leading to what is known as the mortgage or subprime mortgage crisis.  Home buyers were assured that the already high-priced homes they were purchasing would increase in value over time, but they didn’t.

In addition, the home buyers themselves were purchasing 100% mortgage loans with poor or no credit and when the job market collapsed they found themselves upside down on their payments.  Those buyers had to default on their loans, causing even more financial upset in the home lending community.

Investors in these companies were losing money, and along with home buyers who felt duped, filed suit against these lending institutions.  The result was many lengthy, expensive legal battles. D&O insurance paid out millions in judgements and settlements and even more in legal fees.


Trickle Down Economics

Insurance is actually a way to pool risk. All of the premiums insureds pay to the insurance company for any line of coverage goes into a big pool of money and claims are paid out of that account.  Insurance companies use certain strategies including underwriting techniques and investments to make sure there is enough money in that pool to cover the claims they may incur.

The companies separate this money by line of coverage (liability, auto, etc), by type of business, and even by geographic area.  For instance, you’ll pay more for an auto policy in San Francisco than you will in Des Moines because the risk of a claim is greater.  More traffic = more traffic accidents.

When D&O policies, specifically for lending institutions, began paying out lots of claims, the pool of money to pay those claims shrank significantly.  To make up the difference, D&O insurance companies had to increase their premiums not just for lending institutions but for all companies that might require D&O insurance.


Some claims and lawsuits relating to the mortgage crisis are ongoing, so further premium increases may be necessary.  However, D&O insurance should continue to be an important part of your insurance portfolio.  Even with higher premiums, the coverage offered in the event of a claim is still too valuable to be ignored.

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