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What Is Director's and Officers Insurance?
By Floyd Arthur
Directors and officers insurance (also known as D&O insurance) is liability insurance
that covers directors and officers of a company for claims arising from actions
performed while serving in their official capacity. It is similar to an errors and omissions
policy in that it covers claims that result from professional decisions that have negative
financial consequences. However, it applies only to decisions and actions of board
members and C-level management staff.
What Is Director's and Officers Insurance?
What Does D&O Insurance Cover?
Many business executives mistakenly believe that D&O insurance is designed
specifically for publicly owned companies and provides coverage only for securities-
related claims. However, this is not at all true. Although D&O insurance covers C-level
employees whose actions result in financial damages to the companys stockholders (for
instance, a sudden drop in the stock price) it offers other protections as well. For
example, D&O insurance includes coverage for:
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Allegations of fraud, such as when a lender claims a senior manager misrepresented
the companys ability to repay a loan, and the company subsequently defaults.
Allegations of misconduct, such as a claim alleging that the companys officers were
negligent in failing to notice or report violations of federal environmental policy,
resulting in regulatory action by the EPA.
Allegations of wrongful termination of a high-level employee due to the improper
actions of other C-level executives
Customer or client allegations of systematic wrongdoing by the company that board
members failed to deter
Intellectual property disputes involving the actions of high-ranking executives
Any allegation by a stakeholder that C-level employees or board members failed to
perform in a manner that was consistent with their duty of care and loyalty to the
organization
Directors and officer's insurance can be written for most business entities, including
educational institutions, non-profits, private for-profit businesses and publicly owned
firms. Policy forms for non-profits offer the broadest level of coverage and typically
include employment practices liability insurance and coverage for the organization as a
whole.
What Are the Limitations of D&O Insurance?
D&O insurance is an important adjunct to a commercial general liability coverage;
however, it has limitations. These include:
Limited Coverage for the Organization: Generally, D&O coverage forms for
publicly held companies cover only the actions of the directors and officers. There is
limited protection for the company as a whole, and what protections exist only cover
securities-related claims. On the other hand, coverage for private firms is usually more
comprehensive, and often includes some coverage for the organization itself.
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Shrinking Defense Limits: Unlike most commercial general liability policies, D&O
insurance is typically written with shrinking defense limits, which means defense costs
are subtracted from the maximum indemnification the policy allows. In other words, any
damages paid by the insurer are reduced by the amount of litigation costs and attorneys
fees. In the event of a lengthy lawsuit, this can mean a significant reduction in the
amount the insurer pays on the claim itself.
Duty to Pay Versus Duty to Defend: Typically, D&O insurance policies contain a
duty to pay rather than a duty-to-defend clause. Under most CGL policies, the
insurer has an explicit duty to defend against any claim, even if it the claim is ultimately
denied. This includes the obligation to assume control of the defense process, including
selecting counsel and paying legal bills. Under the duty to pay clause, the insurer is
only required to reimburse the insured for his defense costs.
Claims-made Versus Occurrence Trigger: D&O policies are typically written on a
claims made basis, which means that coverage applies only to claims that are
submitted to the insurer during the period the policy was in force. Thus, if the policy
term is from Jan. 1, 2016 to Jan. 1 2017, the insured is covered only for claims submitted
to the insurer during that year. By contrast, occurrence-based policies cover the
insured for claims that occur during the policy period, regardless of when the claim is
made.
Deciding how much and what kind of insurance to purchase for your business is a
complex and difficult process. For that reason, many firms wind up under-insured.
Dont let your lack of experience in insurance matters undermine your firms financial
security. Get a comprehensive business insurance review today. Our experts are
available every weekday from 9 a.m. to 6 p.m., so call us at 516-292-3780 to schedule an
appointment. Or if you prefer, request a free consultation online now.
Resource: International Risk Management Institute