Directors and Officers Insurance Coverage

Posted by on Jul 23, 2015 in News | 0 comments

Directors and Officers Insurance Coverage

On average, there are 1,285 claims made per year against directors and officers. It is not uncommon for this type of claim to end up costing millions of dollars.  The average overall cost of D&O claims in 2014 was over $51 million. These claims are not limited to large, publicly-owned organizations. Businesses and organizations of any size have risk. This includes privately-held firms, for-profit businesses, non-profit organizations, and educational institutions.

Watch this short video via our partner Chubb Insurance as a top executive learns that D&O liability insurance – and not his company’s GL policy – will help protect him against certain types of lawsuits.

So what is Directors and Officers Insurance?

D&O insurance is designed to protect board members, directors, officers, and managers from allegations of wrongdoing brought against them in regards to their role in the governance of the organization. It is liability insurance that provides personal financial protection for company officers and directors as individuals.

What Exactly Does D&O Cover?

It covers claims that arise against directors and officers from actions they have made that have resulted in negative financial consequences for the organization, including:

  • Actual or alleged wrongful acts
  • Decisions
  • Omissions

For listed stock companies D&O insurance can also cover claims that arise from a wrongful act in connection with the trading of its securities.

Defense costs and financial losses that result from claims against directors and officers are also covered under a D&O policy. Within the limit of liability, some D&O policies include defense expenses. What does this mean? The cost of defense expenses will be taken out of the total amount of insurance available to pay the claim. Now, some types of claims don’t involve a significant defense expense, while other types of claims have the potential of using most, if not all, of the liability limits. If the company has paid the claim of a third party on behalf of its managers, in some cases the policy will cover the insured company.

Most of the time, these policies are written to cover claims on a “claims-made basis,” which means claims that are made while the policy is in effect. In some cases, a policy will have an extended reporting period where claims can be reported after the policy has expired. Called a retroactive period, generally, a D&O policy will also cover claims for wrongful acts that took place before the policy’s inception.

Let’s Take a Look at What is Not Included Under D&O Coverage Where the Claim Arises from the Following:

  • Breach of contract
  • Bodily injury
  • Acting for personal profit
  • Property damage
  • Fraud
  • Dishonest acts
  • Pollution
  • Intentional acts of noncompliance
  • Claims made under a previous policy
  • Claims covered by other insurance

Keep in mind that corporate by-laws and/or indemnification agreements do not provide complete protection against D&O risk.

Who is Protected by D&O Insurance?

  • Directors
  • Officers
  • Managers
  • Committee members
  • Employees
  • Sometimes volunteers who are acting under the direction of the organization.

What Type of Exposures do Directors and Officers Face? 

  • Securities litigation
  • Allegations of misrepresentation
  • Regulatory actions
  • HR issues
  • Employment practices
  • Reporting errors
  • Shareholder actions
  • Failure to comply with regulations or laws
  • Inaccurate or inadequate disclosure
  • Making decisions that exceed the authority granted to the officer
  • Other breaches of fiduciary duties

Employee Piracy is another area of growing risk to directors and officers. How does this occur? When a key employee has left the company to either join a competing organization or start their own company. Because of this breach, the previous employer could end up suing the firm the past employee has joined as well as the directors and officers of that firm for theft of customers, intellectual property, or other business information.

Who Makes these Claims Against Directors and Officers?

Sadly, they can come from internal or external sources.

Internal liability includes:

  • Claims made by parties within the company, including the company itself,
  • Subsidiaries of the company,
  • Bankruptcy/insolvency trustees, etc.

External liability includes:

  • Claims made by employees
  • Competitors
  • Suppliers
  • Stockholders
  • Creditors
  • Social security, and tax authorities
  • Customers are behind a large majority of lawsuits against directors and officers

Unfortunately Not All Policies Are Created Equal

It is important to review your risks with your insurance advisor to ensure you are getting a policy that covers the risks you face since there is no standardization of policy forms for D&O coverage. Because these policies vary in terms, conditions, and scope of coverage, Harned Insurance can help you make an informed decision when choosing a policy that is tailored to the specific risks you face, both personally and professionally. Even though a D&O policy doesn’t protect you against everything, a policy properly tailored could significantly help in the reduction of risk that your directors and officers face.

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