How Much D&O Insurance Is Enough? Limits Explained

A real estate investment trust had a dispute with an investor. The lawsuit that followed lasted four years. Over those four years, they spent $2.7 million on defense costs alone. That's against a $3 million policy limit. The claim is still open, and if a second claim had come along during that time, there would have been almost nothing left to defend it. That's what happens when your D&O limits aren't right. Let me explain how to get them right. Hi, I'm Gordon Coyle, and for over 40 years, I have worked with seven, eight, and nine-figure business owners, helping them navigate the complex world of business insurance. I have seen every problem and costly mistake you can imagine, and here I share the insider strategies and real-world solutions that protect your business and save you money. In this video, we're talking about D&O insurance, directors and officers' liability, specifically how to determine how much coverage is actually enough to protect the people running your company. If this is useful, hit the thumbs up button. All right, most private companies buy a million dollars of D&O insurance. They buy it because a director or a lender required it, because an investor asked for it, or because that was the number their broker put in front of them without much explanation. Here's the problem. The median D&O claim for private companies settle at around $3.1 million. The average is $4.3 million, and that's just the settlement, not the total cost. Defense costs are on top of that, and in most D&O policies, defense costs erode your limits from the inside. Every dollar spent defending the case is a dollar that's not available for settlement. So a million-dollar policy doesn't give you a million dollars of protection. It gives you whatever is left after the lawyers are paid, and in a contested D&O claim, that can be very little. All right, so let me go back to the case I opened with, because it illustrates this better than any chart could. A real estate investment trust, or a REIT, had a dispute with an investor. The investor filed suit. The company had a $3 million D&O coverage, which sounds like a meaningful number, and it is, until you see how fast it disappears. Over the next four years, defending that one claim consumed $2.7 million. Not in settlement, but in legal fees, depositions, expert witnesses, motion practice. Four years of sophisticated litigation against a sophisticated plaintiff. The claim is still active and approaching settlement, but nearly the entire limit has been already spent just getting to this point. That policy was placed by a prior broker. When the client came to us, this is what we found, and the most frightening part isn't what happened, it's what could have happened. If a second claim had come along at any point during those four years, an employee claim, a regulatory inquiry, or another investor complaint, there would have been effectively no coverage left to respond to it. The personal assets of the funds' directors and officers would have been directly exposed. This is not an unusual outcome for investment funds and sophisticated entities with complex investor relationships. It's unusual only in that most people don't find out until it's too late. Here's a related issue that almost no one talks about when structuring D&O programs. Many companies buy a bundled management liability policy. It includes directors and officers, employment practice liability, and fiduciary liability. All in one policy with a single shared aggregate limit. On the surface, it looks efficient. One policy, multiple coverages, lower premiums. And it works for most small businesses, but the problem is the aggregate. Employment practice liability claims, for example, which include wrongful termination, discrimination, harassment, directed at individual directors, can be frequent, expensive, and drawn out. An EPLI claim that runs through $500,000 or $800,000 of your aggregate limit reduces what's available to pay for a D&O claim that may follow. The standard D&O policy does not cover employment acts, but if your EPLI and D&O limits share the same aggregate, one type of claim can silently gut the capacity for another. For most companies, the right answer is separate limits, separate policies, or at minimum, a structure where you truly understand what the aggregate covers and how quickly it can be depleted. So how do you figure out the right number? Here's the framework I use. The first thing I look at is that company size and revenues. A $10 million revenue business does not have the same exposures as a $100 million revenue business. Larger operations mean more stakeholders, more contracts, and larger potential damages. Then there's investor and shareholder profiles. The moment you have outside investors, particularly non-accredited investors, the risk of an investor lawsuit increases substantially. REITs with individual investors, these are high exposure profiles that require higher limits. Then there's board and leadership structure. The more directors means more exposures surface. Independent board members in particularly need to know that their personal assets are covered because they're named individually in D&O claims. Then you've got industry risks. Financial services, real estate technology, and other volatile sectors see disproportionately high D&O claim frequency. If you're in a sector with active plaintiffs bar or regulatory scrutiny, your limit should reflect that. And one more factor that doesn't get enough attention, doubling your D&O limits does not double your premium. Incremental limit increases often cost 30% to 50% more. Not 100% more. The additional protection is almost always worth the incremental cost. For more sophisticated organizations like investment funds, companies with significant investor relationships, firms with prominent individual directors, I strongly recommend considering what's known as side A coverage as part of the program. Most D&O policies are written on what we call an ABC form, where the company is reimbursed for indemnifying its directors and officers. Side A coverage is specifically designed to protect individual directors and officers directly in situations where the company cannot or will not indemnify them. Bankruptcy and regulatory prohibition top the list. A dispute between the company and the individual come in second. In these situations, without side A, the director or officer is personally exposed regardless of what the company policy says. Side A fills that gap. For high net worth executives and directors with meaningful personal assets to protect, it's not optional. It's the point of the whole program because that's what D&O insurance is ultimately for. Not to protect the company's balance sheet, but to protect the personal assets of the people running it. Every decision about limits, structure, and coverage should start from that premise. If your D&O program hasn't been reviewed by someone who genuinely understands these limits, not just the premium, but the structure, the aggregate, the erosion, and what side A means for the people on your board, that review is overdue. Schedule an insurance confidence assessment. 30 minutes, no obligation, no pressure, just an honest look. The link is below. If you found this useful, subscribe and drop any question you'd like in the comments below if there's something you'd like me to cover. Thanks.