Commercial Real Estate Exposures and the D&O Liability Policy

Many experienced business owners leave themselves open for claims because they don’t understand their commercial real estate company may require a Directors & Officers (D&O) liability policy. D&O is not just for publicly traded companies, as many believe. If you form a board of directors to help manage your real estate company, you and your named directors open yourselves to significant threats, including lawsuits from customers, employees, investors and others. According to a 2018 survey by Towers & Watson, the top concerns of risk managers from a variety of industries, in descending order, are cyber threats, employee claims, regulatory risk and claims by investors. In a surprising result in the survey, investor claims concerned only about 30% of respondents. However, according to a recent Milliman study, almost every insurer surveyed reported increased D&O risks from investor claims.

What is Directors & Officers Insurance?

According to the International Risk Management Institute, D&O insurance is a liability policy that protects your organization’s directors and officers if claims arise from their board-related actions. Many business owners whose commercial real estate organizations are not publicly traded, mistakenly believe they are immune from D&O exposures. In today’s increasingly litigious world, that is far from true.

Three top risks including a) securities action lawsuits, b) suits for social issues such as gender pay gaps, and c) cyber security risks trouble all types of companies today. These risks have been a significant driver for D&O policy rate increases in the past few years.

If your real estate company is privately held, here is some good news. Because you’re not traded on the stock exchange and ownership is usually limited, D&O insurers are less concerned about class action suits that target larger, publicly traded companies. Therefore, premiums for private company D&O coverage are respectively much lower than for publicly held organizations generally.

When Should My Commercial Real Estate Company Buy D&O Insurance?

If you have an advisory committee or corporate board of directors, you should strongly consider a D&O policy. You don’t have to post millions of dollars in earnings to become a target for a class action or other claim. Here are some of the management and fiduciary issues where a D&O policy can respond.

Claims alleging a hostile work environment, discrimination, or gender pay gaps
Claims alleging the theft of intellectual property or the poaching of other organizations’ customers or employees
Claims alleging a breach of fiduciary duty that results in financial losses or insolvency
Claims alleging the mismanagement of cyber risk exposures
Claims alleging the misrepresentation of investment information or the distortion of company assets

Almost any management decision your board makes can result in a D&O claim. For example, an investor believes your investment prospective contains overly optimistic information. The investor files suit when returns are unexpectedly low. Alternatively, your employees may allege that you paid one gender more than another, resulting in a wage gap.

How Does D&O Insurance Protect My Organization?

A D&O policy protects your corporate or advisory board members when claims or suits allege their negligence. Insurers define these decisions or actions as “wrongful acts.” In today’s business environment, D&O coverage protects your board against various mismanagement allegations, even when those allegations are false. The policy also provides a defense for these claims in what’s called “shrinking limits,” meaning the defense costs come out of the policy limit. Therefore, when choosing a limit of insurance, be sure you consider not only what the insurer may pay to settle the loss, but also the cost of defense. In these types of claims, defense costs can easily exceed any settlement.

Choosing the Right D&O Policy for Your Real Estate Company

Consider three main questions when choosing D&O insurance listed below.

The insurance company
The policy limits
The deductible or self-insured retention

Let’s consider each of these concerns.

The insurance company – You want to choose an insurer that understands the commercial real estate industry. Because you specialize in real estate, your insurance company should understand your industry’s unique risks and employ adjusters and attorneys experienced in defending real estate claims. Also consider the financial strength of the insurance company by determining its AM Best rating or other accepted agency’s independent review of its solvency.

The policy limits – This is a difficult question to answer, even with expert advice. When choosing policy limits, one approach is to talk with your board members and determine the liability limits that make them feel comfortable. However, a better approach may be to review one or more benchmarking studies that explore the limits other businesses choose when they buy a D&O policy. With that information, you can approach your board members with well-researched recommendations. Chubb Insurance offers its 2018 Liability Limits Benchmark & Large Loss Profile by Industry Sector at this link. Every company differs in size, risk appetite and assets at risk, so your limits should be a tailored choice.

The deductible or self-insured retention – Whether you choose a deductible or a self-insured retention (SIR), you are responsible for that portion of the loss. Choosing your deductible or SIR level is important. You want to ensure that you balance the cost of the policy with what you will save by increasing either your deductible or SIR. Choose an amount that will not negatively impact your operations. As premiums increase in the D&O coverage arena, policyholders are evaluating the benefits of higher deductibles and SIRs to reduce premiums. You may want to talk with your accountant to help you determine the best amount to select.

What Other Policies Should the Commercial Real Estate Owner Consider?

Many types of insurance coverage are available to protect the assets of real estate owners. From general liability insurance to adequate property coverage, working with an agent or broker who understands the risks faced by your industry is imperative.