what is directors and officers insurance? by floyd arthur (doc)

7/25/2019 What is Directors and Officers Insurance? By Floyd Arthur (DOC)

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What Is Director's and Ofcers 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 conseuences. !owever" it applies only to decisions and actions of board

members and #$level management staff.

%hat Is Directors and Officers Insurance'

%hat Does D&O Insurance #over'

any business eecutives mistakenly believe that D&O insurance is designed

specifically for publicly owned companies and provides coverage only for securities$

related claims. !owever" this is not at all true. *lthough D&O insurance covers #$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. +or

eample" D&O insurance includes coverage for,

Allegations of fraud" such as when a lender claims a senior manager misrepresented

the companys ability to repay a loan" and the company subseuently defaults.

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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 -*.

Allegations of wrongful termination of a high$level employee due to the improper

actions of other #$level eecutives

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 eecutives

Any allegation by a stakeholderthat #$level employees or board members failed toperform in a manner that was consistent with their /duty of care0 and loyalty to the

organi1ation

Directors and officers insurance can be written for most business entities" including

educational institutions" non$profits" private for$profit businesses and publicly owned

firms. olicy forms for non$profits offer the broadest level of coverage and typically

include employment practices liability insurance and coverage for the organi1ation as a

whole.

%hat *re the 2imitations of D&O Insurance'

D&O insurance is an important ad3unct to a commercial general liability coverage4

however" it has limitations. 5hese include,

Limited Coverage for the Organization, 6enerally" D&O coverage forms for

publicly held companies cover only the actions of the directors and officers. 5here is

limited protection for the company as a whole" and what protections eist only coversecurities$related claims. On the other hand" coverage for private firms is usually more

comprehensive" and often includes some coverage for the organi1ation itself.

Shrinking efense Limits! 7nlike most commercial general liability policies" D&O

insurance is typically written with /shrinking defense limits"0 which means defense costs

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are subtracted from the maimum 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.

uty to "ay #ersus uty to efend! 5ypically" D&O insurance policies contain a

/duty to pay0 rather than a /duty$to$defend0 clause. 7nder most #62 policies" the

insurer has an eplicit duty to defend against any claim" even if it the claim is ultimately

denied. 5his includes the obligation to /assume control0 of the defense process" including

selecting counsel and paying legal bills. 7nder the /duty to pay0 clause" the insurer is

only reuired to reimburse the insured for his defense costs.

Claims$made #ersus Occurrence %rigger! D&O policies are typically written on a

/claims made0 basis" which means that coverage applies only to claims that are

submitted to the insurer during the period the policy was in force. 5hus" if the policy

term is from 8an. 9" :;9< to 8an. 9 :;9=" the insured is covered only for claims submitted

to the insurer during that year. >y contrast" /occurrence$based0 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

comple and difficult process. +or that reason" many firms wind up under$insured.

Dont let your lack of eperience in insurance matters undermine your firms financial

security. 6et a comprehensive business insurance review today. Our eperts are

available every weekday from ? a.m. to < p.m." so call us at @9

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