Directors and Officers Liability Policies are usually "Manuscript Policies" in the insurance business.  That means that they are not standardized, and each company tends to make a lot of variations even within their own issued policies.

D&O insurance coverages are highly negotiable. Your insurance agent should make every effort to customize coverage to meet the unique needs of your organization and its management structure.

Let's look at common coverage involved in D&O policies.

Most policies have two separate divisions, an A portion and a B portion.  Although each policy will employ its own language, Insuring Agreement A, or  “A-Side Coverage,” typically provides coverage directly to the directors and officers for loss – including defense costs – resulting from claims made against them for their wrongful acts. A-Side Coverage sometimes is written to apply only where the corporation does not indemnify its directors and officers. A corporation may not indemnify its directors or officers because either (1) the company is prohibited by law from doing so, (2) the company is permitted to do so by law but the company’s bylaws do not allow it to do so, (or the board of directors chooses not to do so), or (3) the company is financially incapable of doing so, due to bankruptcy, liquidation, or lack of funds. 

On the other hand, A-Side Coverage sometimes is written the other way round -- that is, to apply only where the corporation does indemnify its directors and officers. The theory of these insurers is that if the corporation has to put its money where its mouth is, that is by requiring the corporation to pay to settle claims against its directors, and then seek indemnity, the corporation will not be pressuring the insurer first to make payments for settlement of claims against officers and directors when their liability to third parties is questionable or the officer's loyalty to the corporation is questionable..

Agreement B, or “B-side coverage,” reimburses a corporation for its loss where the corporation indemnifies its directors and officers for claims against them. B-side coverage usually does not provide coverage for the corporation for its own liability.   Understand that last sentence.

There is sometimes a corporate protection coverage as a part of the policy as “Insuring Agreement C”. This optional coverage protects the corporation against securities claims or other special types of claims not covered by general liability policies. Such coverage provides protection for the corporation for its own liability. Many policies today provide such coverage to the corporation whether or not its directors and officers are also sued; other policies, however, provide such coverage only where the corporation is a co-defendant with its directors and officers. 

Directors should notice that if  extra coverage for the corporation is in the D&O policy, the extension of coverage has the effect of reducing the amount of  protection available to the directors for their personal liability.  That is, the D&O policy usually provides for X amount of money to be paid in total for all claims in a year.  If the corporation gets protected on a securities claim for Y amount of money, it leaves only X minus Y dollars available for the directors' protection.

Employment Practices Liability (“EPL”) coverage has become a common addition to corporate coverage – often by endorsement to the D&O policy or as a standalone policy issued to the company, or as an addition to the CGL (Comprehensive General Liability) policy of the company. . EPL coverage typically protects directors, officers, employees and/or the company against employment-related claims brought by employees - and, in certain circumstances, specified third-parties. For example, it provides coverage for wrongful dismissals or failures to promote, sexual harassment, and other violations of federal, state or local employment and discrimination laws brought by the company’s employees.

Here are some of the things to watch for, if you are a director. 

1. Get a non-cancelable policy, except for non-payment of the premium. Require the insurer to give a minimum of 90 days written notice of non-renewal.
    
2. Get - if possible -  an affirmative coverage statement regarding punitive damages.
    
3. Be clear on the extent of entity coverage afforded for settlements, judgments, and defense expenses between the company and the directors, when the amount of coverage is less than the amount it will take to defend or settle or pay a judgment.  This is a real example of how the interests of the directors and the company will diverge.  Settle the allocation now, before a lawsuit that is bigger than the policy limits.
    
4. Generally, exclusionary language for professional services or for errors or omissions is too broad. Seek coverage carve-out for failure to supervise, if the exclusion cannot be removed entirely.
    
5. The Failure to Maintain Insurance Exclusion  declines any claims resulting from or in any way based upon the company not carrying adequate insurance (e.g., a D&O claim is brought because management did not have property coverage and an important asset burned down). Some carriers will remove this exclusion if they review and accept a current schedule of insurance, but most carriers will at least attempt to add this exclusion.  If the D&O carrier says they will not remove the exclusion, you should be looking at your insurance coverage.
    
6. Seek automatic coverage for newly acquired or created organizations.
    

7. Protection for Individual Directors and Officers: Side A Coverage  is an option.  You can restructure the typical policy to include an additional Side A limit. and decrease the Side B limit. What this does is replace a portion of the program that had originally included entity/corporate coverage with coverage that only protects Directors and Officers from Non-indemnifiable loss. This might save a company 40% of the premium associated with the top layer for the company.
    

8. Make sure there is a specific provision for the insurer to advance defense costs to the insured.
    
9. Obtain the option to pre-approve the insurer's choice of defense counsel.
    
10. Secure coverage for non-officer employees named in a covered suit with officers and/or directors.
     
11. See that a minimum of 12 months is allowed for the extended reporting period (discovery clause).
     
12. Be sure coverage includes outside directors.
     
13. Bet a carve-out from the usual insured versus insured exclusion to cover claims brought by bankruptcy trustees, federal or statutory receivers, and debtors-in-possession. This is valuable in situations involving bankruptcy of the insured organization.
     
14. Be sure to check the most recent application that was signed, as well as the policy itself to determine if deliberate fraud by one individual can allow the Insurer to deny coverage for the remaining innocent individuals. Some Insurers are now looking to limit or in some cases completely eliminate the severability feature.
     
15. Check the policy to make sure that payments for protecting the individual Directors and Officers are prioritized ahead of payments made to protect the Company. In cases such as bankruptcy, without such a provision, it is possible that the policy will be considered an asset of the company - preventing defense costs to be paid to protect the individual Directors and Officers. Insurers will typically add this wording for no additional premium, however it's up to you to make sure it's requested.

Back to a main page of the seminars section.