Many small and medium-sized enterprise (SME) owners in the UK think that they do not need D&O insurance, believing that they are unlikely to ever encounter the kind of issue that might give rise to a D&O claim. In addition, SME owners believe that a director’s personal assets will be safe from litigation. Unfortunately, this is not an accurate reflection of the risk environment.
Research conducted by AIG in the UK indicates that SME decisions makers often lack the knowledge about where and how easily management liability might arise and also about the nature of the D&O product and what it covers.
Our feedback from brokers confirms that a significant number of their SME clients do not understand the nature of D&O cover well and underestimate the degree of differentiation between different carriers’ D&O insurance products.
In short, there is a lack of appreciation of the unique value of the product and the significant value that an experienced D&O insurer can provide to small businesses.
At a glance
Business owners are confident that they can manage the risks facing their organisations – with or without D&O insurance. After all, theirs are well run, professionally managed businesses. However, brokers appreciate that the situation is more complex than that.
We presented SME decision-makers and their brokers with six scenarios that might be covered by D&O insurance, ranging from employee lawsuits to regulatory investigations. Individually, these are low frequency, high-impact events. Each of the scenarios was seen by majorities in both groups as improbable.
However all of these small probabilities do add up. Almost 30% of SMEs said that they were likely to face at least one of the risk scenarios we presented to them. Top amongst their worries was an investigation by a regulator. For brokers, legal action by employees was seen as the most likely of the six scenarios.
A majority of SMEs (60%) felt that at least one of these scenarios would, if realised, have a major impact on their business. This view was shared by brokers.
More generally, business decision-makers’ perceptions may be influenced by the publicity and impact of high-profile events – PR crises, for example, loom large in their imagination even though brokers find them to be relatively rare for SMEs.
As part of our survey, we also asked SME decision-makers how wellprepared they thought their business is to deal with different types of risk. Across all six scenarios their responses were almost exactly the same. In fact, our statistical analysis suggests that, rather than considering each type of incident individually, business respondents were actually looking at those questions in the round and thinking about whether their business was well managed or not.
The feedback from brokers, however, is somewhat different. To them it is clear that SMEs are better at handling some risks than others. SMEs are more prepared to deal with risks that are closer to their business: they can visualise being taken to an employment tribunal by an employee or to a small claims court by a supplier. It’s much harder for a small business decision-maker to plan for a public relations crisis or a boardlevel dispute that ends with one director suing another for defamation.
A really telling point that emerged as part of our research is that many directors feel their personal assets would not be exposed as part of a D&O claim. However, directors can be personally exposed - especially in the case of insolvency.
“Working with an experienced insurer is essential to the successful resolution of a claim – the most experienced insurers have dealt with just about any claims scenario, no matter how complex or how infrequent.”
When it comes to buying D&O insurance, business owners and managers tell themselves that they would not compromise on cover to get a lower price. They say that they would give a range of factors nearly equal weight, including the overall claims experience provided by their provider and the importance of a well-established brand.
However there appears to be a disconnect between the feedback provided by SMEs and that provided by brokers, who suggest that in practice their clients prioritise cost (83% of brokers say it’s important for their clients) over cover (69% say it’s important to their clients). Brokers also report that their clients place limited importance on an insurer’s experience.
The extent to which decision-making is largely driven by price at the possible expense of other factors should be a major concern, as it potentially exposes SMEs to inadequate claims handling at a time when they can ill afford it. Our experience in the D&O market suggests that what really matters is a carrier who can effectively deal with any claim and can also provide guidance and information to an insured to prevent claims occurring in the first place.
Given the number of insurers offering management liability cover, choosing a suitable D&O carrier can be confusing. The value of experience cannot be overstated, so it is extremely encouraging that our research reveals that approximately 28% of brokers will not, as a matter of principle, compromise on claims experience when recommending insurance to their SME clients.
Taking out a policy with an experienced insurer means the insurer is likely to respond very quickly and to help reduce overall exposure to their clients’ business. For example, a more experienced insurer will be better able to help their client manage a PR issue before it gets out of control, or provide access to a solicitor after office hours to help a client who has just been accused of wrongdoing.
It is clear that the quality of product on offer really tells in such a crowded space. We know that the provision of value-added services, such as a pre-claim hotline or access to a panel of trusted legal advisers, can be the key differentiator that really matters at the crucial point of client contact.
Another reason for choosing an experienced insurer is the time it can take to finalise a claim. D&O claims are often complex and as a consequence can take years to resolve. Clients should therefore find an insurer whose expertise will guide them through the claims process. Brokers play an important role here–managing their clients expectations in relation to the time can take to resolve a claim. Anecdotally, however, brokers tell us that some SMEs have unrealistic expectations in this regard. What is increasingly apparent is that insurers need to work with brokers to reinforce the message that the quality and range of services on offer, taken in tandem with the depth of claims experience of an insurer, should be core considerations for SMEs in choosing cover.
"The product has really come a long way. The legal advice on offer is much broader than what was previously available to companies and gives them access to a top law firm. A business without this kind of cover could find itself engaging a generalist on a matter critical to its survival.”
Businesses that buy D&O insurance are likely to underestimate how much difference having the right cover can make for their business. Yet in some ways they are the best informed among the business population. In fact, 29% of SME decision-makers have not heard about D&O insurance and a further 18% have heard of it, but never considered obtaining cover.
An area of particular concern revealed by the research is the potential exposure of personal assets to management liability actions. Some 27% of SMEs surveyed said their personal assets were not at all exposed, while 14% said they simply didn’t know. The fact is that directors can be personally exposed in certain circumstances, especially with regard to insolvencies and the surrounding trading circumstances. In addition, the cost of defending a claim can be substantial, and where there is no management liability policy in place, these costs would have to be met by the company or by the individual directors.
Brokers are uniquely placed to demonstrate the benefits of appropriate cover from an experienced insurer. Business owners know what keeps them awake at night, but insurance intermediaries know where claims actually arise and can help businesses prepare for the unexpected.
On the whole, SMEs appear to underestimate the coverage available under a D&O policy. Out of a sample of 9 types of risks covered under a D&O policy the average SME decision-maker expects D&O insurance to cover only 5.
For example, half of the SMEs surveyed (50%) expected D&O to cover failure to comply with UK laws and regulations. While it’s encouraging that compliance is top of mind for business owners and managers, the remaining 50% appear to be unaware that this key coverage may be available to assist them with a regulatory
investigation. For a business involved in construction, manufacturing or agriculture, for example, failure to comply with UK regulators such as the Health & Safety Executive can easily result in enforcement action and a fine.
Even if they don’t have any ‘problem’ employees on the workforce already, can an SME be 100% confident they are not going to inadvertently employ one in future?
Few SMEs expect employment practices and HR issues cover to be included in a D&O policy. Brokers, on the other hand, agree that this is an essential element of management liability insurance. In our experience, employment issues are a big driver of claims, and in general we see high volumes of Employment Practices Liability claims coming in.
Such claims are not the stereotypical industrial accidents that some business decision-makers might imagine (which would typically be covered under the company’s liability policy); rather they are disputes over alleged sexual or racial discrimination, maternity and equal pay rights and unfair dismissal - to name just a few. These make up a large share of management liability claims.
"I’m not convinced that clients in the SME space really appreciate what is in it for them. We know that many clients see it as one of the least important types of insurance. This surprises me – D&O can actually save your business”
A director of two related companies may try to ensure that the related company’s invoices get paid ahead of the other creditors (thus preferring the interests of the related company at the expense of the wider creditors). This type of transaction could potentially leave the director – and his or her personal assets – exposed to claims from disgruntled creditors and liquidators/administrators. It could also result in serious regulatory action against the director. It is important for business decision-makers to remember that in an insolvency a director can incur tens of thousands of pounds of legal costs defending an action.
Our research shows that around a third of SME decision-makers (31%) have a good understanding of the D&O insurance and are keen to purchase this cover. Another 44% are not clear about what is covered and what is excluded. The remaining 25% expect only basic cover, however their expectations are typically not aligned with what D&O actually provides.
When dealing with larger SMEs or mid-market companies, brokers can expect a greater level of product knowledge. For example, a business with 50-250 employees is almost twice as likely as a small entity (67% vs 38%) to have considered or bought D&O insurance.
We cannot stress enough that a wide range of corporate disputes can become personal - involving the company’s directors and officers and even giving third parties a claim on directors’ personal assets. Business owners can easily imagine such disputes arising out of industrial accidents, but are often not as clear about other sources of risk. Brokers can help clients view D&O as an element
of holistic risk management for SME directors in an increasingly challenging liability landscape. Brokers play an important part in promoting the benefits of D&O cover.
Once clients overcome misconceptions about D&O there is a final hurdle to overcome: the trade-off between cover and price. Clients may not always be prepared to trade one against the other and end up being swayed by price. Brokers should highlight the importance of cover that is suited to the need of the client and point out the consequences of selecting an insurance provider
based solely on price. By doing so brokers will take control of the narrative.
Some start-ups may be putting off the decision to buy D&O cover. While hiring the first employee may not necessarily trigger a call to the insurance broker, planning to raise capital to grow the business definitely should.
This is particularly important for those thinking of venture capital, crowdfunding or angel finance. Such start-ups will often operate in technology-enabled industries, for example in IT, life sciences or renewable energy. Many of them will naturally be drawn to protecting themselves, but brokers can certainly help them
further by educating entrepreneurs early on.
In conducting this research, AIG surveyed 235 decisionmakers in UK SMEs, as well as more than 200 commercial insurance brokers. The research was carried out in March 2016 and in February 2017. This report provides a detailed insight into D&O readiness of SMEs as well as the role of the broker in guiding their purchasing decisions.