Does your firm need directors and officers insurance?

Are your board members protected from potential risks?
Posted on January 4, 2016 in Business

Time is of the essence for the average board of directors, with few having any to spare. However, research from McKinsey & Company reveals that risk management may be suffering due to this lack of time. 

However, it is also imperative that these individuals are financially protected, which may require something more targeted than an enterprise's management liability insurance. In cases such as these, organisations can benefit from incorporating directors and officers cover within their overall business insurance package.

How effective are boards at managing risk?

Boards are only devoting 12 per cent of their time to risk management.

When it comes to adequately evaluating risk and forming strategies, there are key ways for board members to improve. A 2012 global survey undertaken by McKinsey & Company states that directors are finding it difficult to effectively manage business risks.

It revealed that 29 per cent of respondents state their company boards have minimal comprehension of the risks facing their organisations. Furthermore, the survey indicated boards are only devoting 12 per cent of their time to risk management.

However, the report also identifies three key ways in which this can be improved:

  • Delegate more focus to risks: The survey revealed that boards need to pay further attention to potential risks. This can be achieved by incorporating risk management strategies company-wide.
  • Devote increased time to board-related duties: According to the study, there are advantages to directors that devote more time to their board work. Remaining engaged with the key issues at hand can make a considerable difference to the way risk management is undertaken.
  • Learn from colleagues: Finally, the report suggests taking a systematic approach to operations. Take note of strategies that evaluate past projects to ensure success in the future.

It is important that the business insurance of any enterprise reflects the significance of a board and its members. As such, taking out directors and officers insurance (D&O) may be advisable.

Are your board member adequately managing risk?Are your board members adequately managing risk?

What is the purpose of D&O insurance?

According to the International Risk Management Institute (IRMI), management liability covers common claims made against management whether it be financial, governance-related or alternatively, arises from benefits.

Liability insurance covers a wide range from professional indemnity to directors and officers liability insurance. The IRMI states that this type of insurance provides cover for the individual directors and officers serving on a board. 

There are many ways that these individuals are open to financial liability, from unfair dismissal claims to breaching law aimed at enterprises – such as the Corporations Act.

A report by the Corporations and Markets Advisory Committee (CARMAC), covers the significance of D&O insurance. CARMAC states that D&O insurance is taken out in order to protect the private assets of directors and officers.

While board members need to understand and manage risk more effectively, they must also be adequately protected from any financial liabilities. For more information on D&O insurance or other forms of business cover, speak with the brokers at MGA Insurance who can provide assistance so you can make an informed decision.