DIRECTORS & OFFICERS INSURANCE
Directors & Officers (or “D&O” for short) liability insurance covers individuals for claims made against them while they are serving on a board of directors or as an officer of a corporation. Typically, D&O policies not only cover the directors and officers, but also the legal fees and costs the organization incurs due to the suit. D&O claims usually arise from shareholders, but they may also be filed by the following groups: creditors, employees, government bodies, competitors, customers, and the organization itself.
The 3 Sides to Every D&O Policy
D&O policies are usually comprised of 3 separate coverage parts or clauses, which are typically referred to as “sides.” These sides identify who and what is covered under the policy.
- Side A – Director & Officer Personal Protection
- This coverage part covers the directors & officers when the company cannot indemnify them, such as when the entity is facing bankruptcy or there is a derivative lawsuit.
- Side B – Corporate Reimbursement
- This coverage part reimburses the organization after it indemnifies its directors & officers. This is the most common side where claims arise, and therefore a deductible or retention typically applies.
- Side C – Entity Coverage
- This side covers the entity when it is sued alongside its directors and officers. Typically, private companies are provided much broader coverage than public entities, which are typically only are covered for securities claims. Like Side B, this coverage part is usually subject to a deductible or retention.
D&O Coverage Language & Exclusions
Unlike many Commercial Property & General Liability policies, D&O policy language is not standard. Most of the coverage language and forms vary from carrier to carrier. Therefore, it’s important to read your policies. It also beneficial to have an independent insurance agent, such as the agents at Insurance Resources, who understands the coverages offered. Although exclusions vary from carrier to carrier, there are a few that seem to be standard throughout the D&O insurance marketplace, such as the following:
- Insured vs. insured (director suing another director or officer)
- Bodily injury, sickness, disease, or death
- Property damage
- Emotional distress
- Mental anguish
- Assault & battery
- Criminal acts
- Pollution claims
- Fraudulent or criminal conduct or acts
- Illegal profits or renumeration
- Prior knowledge (known circumstances)
- Prior acts
- Continuing a wrongful practice after learning it is wrong
- Willful failure of the insured to comply with a law
- Aiding or abetting legal actions of others
- Conflict of interest
- Contractual liability
- Employment related matters (unless Employment Practices is included)
- Securities Act of 1933 or Securities Exchange Act of 1934 violations
- Employee Retirement Income Security Act (ERISA) of 1974 violations
What is the Difference Between General Liability & Directors & Officers Insurance?
Claim Type: Bodily Injury & Property Damage vs. Wrongful Acts
Unlike General Liability policies, which pay for claims resulting from property damage or bodily injury, D&O policies are focused on wrongful acts, which a D&O policy specifically defines. In general, a wrongful act is an actual or alleged act, breach of fiduciary duty, error, omission, misleading statement, or misstatement, or neglect.
Coverage Type: Occurrence vs. Claims Made
Most officers & directors know about General Liability policies which are considered “occurrence” policies. Occurrence policies respond to incidents that occurred during the coverage period and are covered regardless of when a claim is reported. Therefore, claims may be covered years after they happened. However, most D&O policies are considered “claims made.” This means they typically respond to incidents that occurred on or after the continuity date, if those claims are reported during the policy period or extended reporting period.
What is the Difference Between a Continuity Date and a Retroactive Date?
Unlike Professional Liability policies, Directors & Officers insurance policies typically use a continuity date rather than a retroactive date. The continuity date typically acts like the retroactive date in that it prevents claims thatoccurred before the date to be covered. However, unlike a retroactive date, the continuity date is typically not specifically defined in a D&O policy, but it does get referenced often in the exclusions section. There you’ll usually see that the policy will not respond to wrongful acts that directors or officers had prior knowledge of before the continuity date. The exclusion section also usually states that the coverage will not respond to any prior or pending litigation, administrative or regulatory proceedings, demand letters, or government investigations that took place prior to the continuity date.
Most Common D&O Claims
As mentioned, D&O policies respond to wrongful acts committed by the directors & officers of an organization. D&O policies define wrongful acts, but they don’t specifically state the types of claims it might cover. Below we’ve compiled a list of common claims that D&O policies respond to. However, since each D&O policy typically has carrier specific wording not all these claims may be covered by every policy.
- Breach of fiduciary duty
- Breach of duty of due care
- Errors in judgment
- Securities litigation
- Regulatory actions
- Failure to comply with regulation or laws
- Reporting errors
- Inaccurate or inadequate disclosure
- Anti-competitive behavior
What Types of Businesses Need Directors & Officers Insurance?
Directors & Officers insurance is not only meant for large Fortune 500 companies. Any organization that has a board or a mix of owners should look at purchasing D&O coverage. In fact, the most common D&O policy we sell at Insurance Resources is for condo association boards. Typically board members are not compensated; however, they can be sued. Below you’ll find a list of all the organizations that need D&O insurance.
- Publicly held business
- Privately held firms
- Non-for-profit organizations (including trade associations and chambers of commerce)
- Condo & HOA boards
- Financial institutions
Worthwhile D&O Endorsements
As mentioned, D&O policy wording is not standardized. Therefore, policy wording is typically similar yet different amongst insurance companies. Sometimes carriers are able to set themselves apart by offering different endorsements. Below are 4 endorsements we think are worthwhile investments.
- Defense Costs Outside the Limits
- This allows for insurance company’s defense costs in a suit to not impact the liability limits of the policy. If defense costs are inside the limit, a costly lawsuit (with expensive attorney bills) could eat up much (if not all) of the organization’s indemnity limit.
- Insured vs. Insured Coverage
- An insured vs. insured exclusion is common on all D&O policies. However, some carriers may be willing to remove it, especially for non-for-profit boards, like a condo or HOA.
- Duty to Defend Wording
- With this wording the insurance company will take control to defend the association if there is a potential claim. This is better than duty to indemnify policies which only reimburse an insured for out of pocket legal costs.
- Additional Side A Coverage
- This provides additional coverage once the original Side A coverage limit is depleted. This coverage is extremely important for your company’s directors and officers, so additional coverage can be used to attract new talent to the board to improve strategic decisions.
- Soft Hammer Clause
- A hammer clause (or consent to settle clause) is a clause in your D&O policy which compels your organization to settle a claim. Many policies include a hard hammer clause in which an insurance company can settle a claim without your consent. With this clause your organization would be on the hook for all litigation expenses after the carrier offers its original settlement offer. However, with a soft hammer clause the insurer will allow shared expenses after it offers its original settlement offer. Typically, these consent to settle offers are shown as fractions, such as 50/50, 70/30, or 80/20. For example, in a 70/30 clause additional expenses would be shared 70% by the insurance company and 30% by the insured.
Pricing & Markets for D&O Coverage
Premiums for D&O policies can vary widely based on organization type, revenues, assets, claims history, and number of board members. Another big premium driver is market & claim trends. Over the past few years we have seen many class action claims affecting publicly traded companies, so their rates have increased dramatically.
The Directors & Officers market is a bit of a niche space. Most of the top insurance companies have their hands in the pot, but many of the smaller companies don’t typically participate. The most common carriers we see in the space are AIG, Aspen, Chubb, C.N.A., Great American, Liberty Mutual, Nationwide, Lloyd’s of London, Philadelphia, Travelers, & USLI. These companies offer their D&O through insurance agents and brokers such as Insurance Resources.
If your organization is without Directors & Officers coverage or if you don’t understand the coverage (and/or exclusions) provided by their current provider, please reach out to Brian T. Ford, CPCU at 727-345-0242 or firstname.lastname@example.org.
Who Needs D&O Insurance?
- Publicly held business
- Privately held firms
- Non-for-profit organizations
- Condo & HOA boards
- Trade associations
- Chambers of commerce
- Financial institutions