How Much Does Directors and Officers Insurance Cost?

A D&O policy typically covers the cost of defending directors and officers against claims alleging wrongful acts in their management of the company, and any resulting awards or settlements where insurable. Claims may come from shareholders, regulators, employees, creditors, insolvency practitioners or other third parties.

Cover commonly extends to legal defence costs, regulatory investigation costs and compensation awards. Criminal fines and penalties are generally not insurable, though defence costs for many proceedings often are. D&O is frequently bought as part of a wider management liability product that often also includes crime insurance, employment practices liability (EPL) and corporate legal liability (CLL).

Directors of residential management companies face a related but distinct exposure. Our guide to D&O insurance for RMC directors covers this in detail.

Insurers typically assess several factors when pricing D&O cover:

• Company size and turnover: larger companies generally present larger and more complex exposures.
• Financial health: insolvency is one of the most common sources of D&O claims, so weak balance sheets, poor cash flow or heavy debt tend to increase premiums, and may limit insurer appetite altogether.
• Sector: industries with heavier regulation or higher failure rates, such as financial services or construction, are often rated higher than lower-risk sectors.
• Claims and circumstances history: previous claims, ongoing disputes or notified circumstances usually affect pricing significantly.
• Limit of indemnity: higher limits cost more, though the relationship is rarely linear, and the second million of cover typically costs less than the first.
• Group structure and overseas exposure: subsidiaries, US operations or listed status can each add complexity and cost.

Common limits for UK SMEs range from £1 million to £5 million, with larger companies often buying £10 million or more. The right limit generally depends on the scale of decisions the board makes, the company's financial exposure and the potential cost of defending a complex claim, as defence costs alone in a regulatory investigation can be substantial.

Limits are usually written on an aggregate basis, meaning the limit applies to all claims in the policy year combined. Boards may therefore wish to consider whether a limit that seems adequate for one claim would remain adequate if several arose in the same year.

Steps that may help keep D&O premiums proportionate include:

• Presenting the company well: up-to-date accounts, sound governance and clear board processes generally support better terms.
• Choosing an appropriate limit for the company's actual exposure, rather than defaulting to the highest available.
• Reviewing at renewal: having a specialist broker re-market the cover periodically, particularly if the company's position has improved.
• Packaging covers: management liability products combining D&O with crime, employment practices liability and corporate legal liability may price better than standalone policies.
• Addressing known issues: resolving disputes and strengthening finances before renewal can materially improve insurer appetite.

Many of these principles mirror those in our guide to reducing office business insurance costs.

For most boards, the question is best framed around personal exposure. Directors' personal assets, including homes, savings and investments, can generally be at risk from claims alleging wrongful acts, and defence costs can run to significant sums even where allegations are ultimately not upheld.

Against that exposure, D&O premiums for most SMEs are comparatively modest. Many experienced directors and non-executives now expect D&O cover to be in place before accepting an appointment, which can make the policy a practical necessity for attracting board talent as well as a protection.

The same applies around corporate activity. Boards working through mergers and acquisitions face heightened scrutiny of their decisions, and professional services firms often arrange D&O alongside their wider management liability programme.

For some companies, the decision is effectively made for them. Businesses that receive external investment, particularly where an investor appoints a director to the board, would usually be required to have D&O cover in place under the terms of the investment agreement. Directors of technology and AI businesses raising funding often meet this requirement early.