Q&A: How Much Does Board of Directors Insurance Cost?

While fiduciary liability insurance protects businesses against mismanagement claims, it doesn’t adequately safeguard board directors from potential claims regarding decisions and actions carried out in their role. For that, many organizations obtain board of directors liability insurance, also called directors and officers (D&O) insurance.

Understanding the costs associated with D&O insurance can be challenging, given the variety of factors that influence premiums. Read on for more insight into the cost of board member liability coverage. 

What is Board of Directors Insurance?

Board of directors insurance is essential for attracting and retaining talented individuals to serve on a company’s board, as it provides members with a level of protection against personal liability. Some common examples of claims covered by directors and officers insurance include allegations of breach of fiduciary duty, mismanagement of company funds, and conflicts of interest.

D&O insurance includes typically includes 3 coverage policies:

1. Side A: Covers the legal fees of directors and officers from claims in the event that the company is unwilling or unable to agree to the terms of an indemnity agreement. 
2. Side B: Covers the losses of directors, officers, and some employees when the company does grant indemnification. 
3. Side C: Offers protection for the organization itself.
    

Factors That Influence Board of Directors’ Insurance Costs

According to TechInsurance, the average cost of board of directors insurance is $138 per month ($1,653 annually). The site, which uses the insurance policies purchased by its customers as the basis for its findings, also notes four in 10 policyholders pay less than $100 a month for coverage. TechInsurance lists $2,500 as the average policy deductible for a D&O policy. 

The following factors impact the price of board of directors insurance:

1. Company Size

The most significant factor in determining the price of D&O insurance is the size of the company. An organization’s size can be assessed based on several metrics, including the total number of funding rounds, the number of paying customers, and the number of employees. Employment-related claims are a common cause of D&O lawsuits, making this information particularly relevant. Recent structural changes, such as mergers, acquisitions, new board term limits, or revisions to the shareholder agreement also impact the insurance cost.

Liability coverage cost is usually higher for startups because they have less predictable revenue streams and a shorter history of effective management. In contrast, established companies provide underwriters with more data to predict their trajectory accurately.

2. Industry Risk

Your industry type also affects the cost of D&O insurance. Certain industries, such as technology, finance, and health care, are considered higher risk due to regulatory scrutiny, rapid changes, and the potential for large-scale litigation. Companies in these sectors may face higher premiums compared to those in less volatile industries.

If an organization conducts business across countries or continents, it must adhere to the domestic laws and compliance regulations in each location. That additional layer of complexity could increase the final price of a policy.

3. Financial Performance

The ability to demonstrate steady growth, dependable debt management, and an overall healthy outlook leads to lower premiums. Organizations with more volatile revenue or financial foundations pay more for their coverage. 

4. Risk Management Practices

Companies that demonstrate strong internal controls, comprehensive compliance programs, and proactive risk management strategies are viewed more favorably by insurers. Implementing these practices leads to lower premiums by mitigating potential risks that could result in legal claims.

5. Claims History

A company’s legal history impacts how an underwriter perceives the business. Previous lawsuits or regulatory threats against an organization or its board members raises board of directors’ insurance rates. 

If your organization does have legal cases in its past, it’s best to be upfront and honest about the proceedings to help underwriters understand and contextualize your past. If your company has no claims in the past five years and is not currently in litigation, you can expect to pay lower premiums.  

OnBoard Delivers an Integrated D&O Questionnaire

D&O insurance offers valuable protection. To make obtaining insurance easier, OnBoard offers D&O questionnaires designed to streamline the insurance application and renewal process. This feature simplifies the collection and organization of critical information needed for D&O insurance, ensuring accuracy and efficiency. 

In addition, OnBoard offers the following board governance features to ensure duty of care:

• Automated data collection: OnBoard automates the process of gathering necessary information from board members, reducing manual effort and minimizing errors.
• Real-time collaboration: Board members can collaborate in real time, ensuring all necessary input is captured promptly and accurately.
• Centralized documentation: All D&O-related documents are stored in a single, secure location, making it easy to access and review information as needed.
• Compliance and security: OnBoard ensures all collected data complies with industry standards and regulations, providing peace of mind regarding data security.
  
  

For a glimpse into how OnBoard can unlock efficiency for any organization, check out our free Board Meeting Minutes Template.