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D&O Insurance

Difference Between D&O Insurance and Professional Indemnity Insurance

Do you have the responsibility to recommend corporate insurance policies to your company? When you need to tell your bosses about the insurance policies to buy, you need to know the basic features of the policies. It helps in making a good decision. 

Two main categories of corporate insurance

There are broadly two major types of corporate insurance policies. The first one is the D&O policy. The second category is the professional indemnity (PI) insurance policy. It is important to know the differences between the D&O and PI insurance policies. 

The major difference

The major difference lies in the core functionality of the policy. The D&O policy covers the legal costs on behalf of the directors/officers of the company, when they face corporate lawsuits. On the other hand, the PI insurance policy covers the financial loss caused by the company to the clients due to supposedly wrong consultation or poor service delivery.

D&O liability insurance provides for financial protection in the event of a claim alleging a wrongful act in a managerial or supervisory role of the director, or an officer in the organisation. D&O liability insurance policy has the following three critical coverages called as “Insuring agreements”

  • Protection for directors and officers when the company cannot indemnify for the losses suffered by the director/officer
  • Reimbursement of the expenses the insured (company that purchased the policy) when they decide to pay for the losses suffered by its directors and officers
  • Covers the insured (company that purchased the insurance) when they face a suit along with its directors and officers

The policy provides coverage caused by “Wrongful Acts” which is defined as below:

any actual or alleged misrepresentation, misstatement, misleading statement, error, omis- sion, defamation, negligence, breach of warranty of authority or breach of duty

The definition of “Wrongful Act” and “Insuring agreements” will be the primary difference between the D&O liability insurance and a PI insurance  policy.

Professional Indemnity insurance protects businesses providing professional services to their clients against any legal liability. Similarly to D&O,  the definition of “Wrongful Act” needs to be understood to discover what claims would trigger coverage under this insurance policy:

This policy covers any act, error, omission, neglect, or breach of duty committed in the rendering of your professional services.

Like the case of the D&O policy, the PI  policy does cover decisions, mistakes and advice, but only those decisions, errors, mistakes or advice that were given to clients to whom the company is rendering a professional service.

Understanding the scenarios where both the policies are  applicable

It is crucial to be aware of the specific scenarios where D&O policy is applicable. You need to ask the insurer relevant questions about various aspects of the policy to get clearer ideas about it. 

You also need to know the scenarios when the PI policy is applicable. Take some time to place your queries to the insurer to know more details about the insurance policy. The information you gather will help in making the correct decision of buying a suitable policy

Knowing the factors that impact the insurance

There are some factors that you need to consider while differentiating between the scopes of these two broad categories of insurance policies. Such factors essentially affect the particular insurance, from a practical point of view. 

The type of business that seeks insurance is among the major factors. Also, the risk factor associated with the business is another incredibly important factor that one should never overlook. Yet another crucial factor is the location of the business. The age of the company or business is also an important factor.

The list of such factors is long and a person responsible to recommend the policy should have the basic knowledge to know the factors. The size of the business plays a major role that determines the impact of the insurance policy. The company’s credit score is a huge factor, too. 

Another extremely crucial factor in this context is the claims history of the business. It also impacts the applicability of the corporate insurance. It is the duty of the concerned person or entity to thoroughly know the various dimensions of these factors. Talking to the experts in the insurance sector can help.

Simple examples of how the insurance policies work

Simple examples can clearly explain the overall applicability of the D&O insurance and PI insurance policies. 

If a shareholder thinks that the management of the company is inefficient and causing harm to business growth, he can file a lawsuit against the directors/officers. In this case, the D&O insurance policy covers the legal expenses. 

On the other hand, suppose a client thinks that due to late delivery of an order he has incurred a loss. He files a lawsuit against the company. In such situations, the PI policy covers the legal costs. 

Helping in corporate risk management

Both types of insurance policies address the issues of corporate risk management, but in their distinct ways. The dynamics through which the policies try to integrate strategies of corporate risk management within the framework of the business are different, in terms of functional features.

It is wise to consider suggestions of an expert

When you have a priority to buy a corporate insurance policy that is either D&O or PI, it is better to get some opinions from an industry expert. You get clean, smart ideas to purchase or recommend an appropriate insurance policy.

Know about the coverage

You should be aware of the policy coverage before you buy it. The document has the details. Still, you need to ask the insurer about the amount. Do not remain in confusion when your company is about to spend money on the policy, paying premium amounts periodically. 

Clearly know about the insurance policy your business needs

It is extremely essential to be aware of the specific requirements of your company. Does it need a D&O policy or PI policy or both? There should be brainstorming sessions to reach a conclusion. Also, talk to the insurer from whom you have planned to buy the policy

Remain clear about the insurance amount your business needs

Having clear ideas about the insurance policy your business needs is not enough. You also need to have clear ideas about the insurance amount that your company needs to remain stable in the long run. 

It is intelligent to know the basic terms associated to the insurance policy. When you are aware of the meanings of the terms, it becomes easier for you to understand the various dimensions related to the applicability of the insurance policy.

Thoroughly reading the policy document is important

Every insurance policy has a detailed policy document. It should be a priority to thoroughly read each section of the policy document, before deciding to buy the policy. Do not overlook any clause or sub-clause of the policy. The rich information that you gather from the policy document helps you to understand the potential of its applicability. It also becomes more convenient to recommend it to your company.

Buy corporate insurance from a renowned broker

PlanCover is an expert insurance broker delivering insurance solutions to Indian businesses. You can get in touch with the service provider to know more about corporate insurance. 

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