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Directors & Officers Liability

D&O Insurance is almost always misunderstood by the very people who need the coverage and make the decision on whether to purchase it. The policy provides coverage for the directors and officers of a company and for the company itself for damages and the cost of defense in the event they are sued for alleged wrongful acts while acting in their capacity as the directors and officers of a company. The coverage can be extended to defense costs arising out of criminal and regulatory investigations and trials as well; in fact, often civil and criminal actions are brought against directors and officers simultaneously especially in the case of particularly serious data security breaches. Traditionally there are three insuring clauses. Insuring Clause 1 (a/k/a Side-A) provides coverage to individual directors and officers when not indemnified by the corporation; Insuring Clause 2 (a/k/a Side-B) provides coverage for the corporation when it indemnifies the directors and officers; and Insuring Clause 3 (a/k/a Side-C) provides coverage to the corporation itself for securities claims brought against it. Many Directors and Officers Liability policies also provide Insuring Clause 4 (a/k/a Side-D), which provides a sublimit for investigative costs coverage related to a shareholder derivative demand.

All this sounds simple enough, but not all D&O policies are the same and in this area, what you don’t know can definitely hurt you. The following list outlines just some of the areas that policies vary and need to be evaluated by you and your insurance professional.

Coverage Issues

  • Sufficiency of limits
  • Retention amounts
  • Can other coverages be added i.e.: Employment Practices, Crime, and Fiduciary

Definition of a Claim

  • Written demand for monetary/non-monetary relief
  • Civil proceedings
  • Criminal proceedings
  • Arbitration proceedings
  • Administrative/Regulatory Proceedings
  • Administrative or Regulatory Investigation
  • EEOC or State/Local Agency Proceedings
  • Shareholder Derivative Demands/Investigative Costs

Definition of Insured

  • Past/Present/Future Directors or Officers

Definition of loss

  • Defense Expenses & Damages
  • Pre & Post Judgment Interest
  • Punitive, Exemplary, Multiple Damages w/ Most Favorable Venue wording

Definition of Outside Entity

  • All forms of Non-Profit Organizations

Definition of Change in Control/Material Event

  • Right to elect or appoint more than 50% of board
  • More than 50% of the Equity or Asset
  • Bankruptcy Filing

Definition Newly Created/Acquired Subsidiaries

  • Automatic coverage provisions

Exclusions

  • Fraud and dishonesty “Final Adjudication” wording
  • Personal profit
  • Bodily injury and property damage
  • Pollution
  • ERISA
  • Insured vs. insured (former D&O’s)
  • SEC
  • Professional services
  • Shareholder Claim Carveback
  • Management Supervision Carveback
  • Anti-Trust • Severability of Exclusions

Other Terms & Conditions

  • Duty to Defend
  • Choice of Counsel
  • Velvet Hammer Clause (50/50, 70/30, 80/20)
  • Defense Outside of Limits
  • ERP Options Offered
  • Full Worldwide Coverage
  • 100% Defense Allocation