Because its inception about fifty years ago, D&O insurance coverage has evolved into a family members of items responding differently to the requires of publicly traded firms, privately held companies and not-for-profit entities and their respective board members, officers and trustees.
Directors’ & Officers’ Liability, Executive Liability or Management Liability insurance coverage are primarily interchangeable terms. Nevertheless, insuring agreements, definitions, exclusions and coverage selections differ materially based upon the kind of policyholder becoming insured and the insurer underwriting the danger. Executive Liability insurance coverage, when regarded as a necessity solely for publicly traded firms, especially due to their exposure to shareholder litigation, has develop into recognized as an necessary element of a danger transfer system for privately held firms and not-for-profit organizations.
Optimization of protection is a typical purpose shared by all forms of organizations. In our opinion, the most effective way to realize that objective is via engagement of hugely knowledgeable insurance coverage, legal and economic advisors who operate collaboratively with management to continually assess and treat these specialized enterprise danger exposures.
Private Firm D&O Exposures
In 2005, Chubb Insurance coverage Group, a single of the biggest underwriters of D&O insurance coverage, carried out a survey of the D&O insurance coverage getting trends of 450 private firms. A considerable percentage of respondents gave the following factors for not getting D&O insurance coverage:
• did not see the want for D&O insurance coverage,
• their D&O liability danger was low,
• believed D&O danger is covered below other liability policies
The firms responding as non-purchasers of D&O insurance coverage knowledgeable at least a single D&O claim in the 5 years preceding the survey. Final results showed that private firms with 250 or extra staff, have been the topic of D&O litigation throughout the preceding 5 years and 20% of firms with 25 to 49 staff, knowledgeable a D&O claim.
The survey revealed 43% of D&O litigation was brought by consumers, 29% from regulatory agencies, and 11% from non-publicly traded equity securities holders. The typical loss reported by the private firms was $380,000. Firms with D&O insurance coverage knowledgeable an typical loss of $129,000. Firms devoid of D&O insurance coverage knowledgeable an typical loss of $480,000.
Some Popular Examples of Private Firm D&O Claims
• Main shareholder led acquire-outs of minority shareholders alleging misrepresentations of the company’s fair marketplace worth
• purchaser of a enterprise or its assets alleging misrepresentation
• sale of enterprise assets to entities controlled by the majority shareholder
• creditors’ committee or bankruptcy trustee claims
• private equity investors and lenders’ claims
• vendors alleging misrepresentation in connection with an extension of credit
• customer protection and privacy claims
Private Firm D&O Policy Considerations
Executive Liability insurance coverage policies for privately held firms ordinarily deliver a mixture or package of coverage that incorporates, but may possibly not be restricted to: Directors’ & Officers’ Liability, Employment Practices Liability, ERISA Fiduciary Liability and Industrial Crime/ Fidelity insurance coverage.
D&O policies, regardless of whether underwritten on a stand-alone basis or in the kind of a mixture-kind policy kind, are underwritten on a “claims-produced” basis. This suggests the claim have to be produced against the Insured and reported to the insurer throughout the exact same efficient policy period, or below a specified Extended (claims) Reporting Period following the policy’s expiration. This is a fully distinctive coverage trigger from other liability policies such as Industrial Basic Liability that are traditionally underwritten with an “occurrence” trigger, which implicates the insurance coverage policy that was in impact at the time of the accident, even if the claim is not reported till years later.
“Side A” coverage, which protects person Insureds in the occasion the Insured entity is unable to indemnify people, is a normal agreement contained inside lots of private enterprise policy types. These policies are usually structured with a shared policy limit amongst the different insuring agreements resulting in a extra inexpensive insurance coverage solution tailored to compact and mid-sized enterprises. For an added premium, separate policy limits may possibly be bought for a single or extra of every single distinct insuring agreement affording a extra customized insurance coverage package.
Also, policies need to be evaluated to ascertain regardless of whether they extend coverage for covered “wrongful acts” committed by non-officers or directors, such as staff, independent contractors, leased, and element-time staff.
Imputation of Understanding & Severability
Coverage can be materially impacted if an Insured person has understanding of information or situations or was involved in wrongful conduct that gave rise to the claim, prior to the efficient date of policy below which the claim was reported. Policies differ as to regardless of whether and to what extent, the understanding or conduct of a single “terrible actor” may possibly be imputed to “innocent “person Insureds and / or to the Insured entity.
“Severability”, is an significant provision in D&O policies that is usually overlooked by policyholders till it threatens to void coverage throughout a significant pending claim. The severability clause can be drafted with varying degrees of flexibility– from “partial” to “complete severability.” A “complete severability” provision is normally most preferable from an Insured’s standpoint. Numerous D&O policies, impute the understanding of particular policy-specified senior level officer positions to the Insured entity. That imputation of understanding can operate to void coverage that may possibly have otherwise been readily available to the Insured entity.
M&A and “Tail Coverage” Considerations
The “claims-produced” coverage trigger is critically significant in an M&A context exactly where contingent liability dangers are inherent. In these contexts, it really is significant to evaluate the seller’s policies’ selections to buy a “tail” or “extended reporting period” for every single of the target company’s policies containing a “claims-produced” trigger.
A “tail” coverage solution makes it possible for for the reporting of claims alleging “wrongful acts” that occurred throughout the expired policy period, however have been not essentially asserted against the Insured till immediately after the policy’s expiration, but as an alternative have been asserted throughout the “extended reporting” or “tail” period. An acquiring company’s insurance coverage skilled need to operate closely with legal counsel’s due diligence group to determine and present options to handle contingent exposures.
What a Director or Officer Does not Know Will Hurt Them
Directors’ & Officers’ Liability insurance coverage policies have been initially produced solely to guard the individual assets of the people serving on public enterprise boards and executive officers. In 1992, a single of the most prominent D&O insurers led a important transformational adjust in D&O underwriting by expanding coverage to consist of particular claims against the insured entity. Entity coverage for publicly traded firms is ordinarily restricted to securities claims, even though privately held firms and not-for-profit organizations advantage from extra extensive entity coverage for the reason that they lack the public securities danger exposure of publicly traded firms.
The “Claims- Created” Coverage Trigger
D&O policies are universally underwritten on a ‘claims-made’ basis. This translates to an unequivocal contractual requirement that the policyholder report claims produced against an Insured to the insurer throughout the efficient policy period. The only exception is in the case exactly where an optional reporting ‘tail’ is bought which affords the Insured the potential to report claims throughout a specified “extended reporting period,” as extended as the wrongful act occurred throughout the efficient period of the quickly preceding policy.
D&O policies issued to public firms usually include no explicit duty to defend and some call for the Insured to choose from a pre-authorized panel of pre-certified defense counsel. In contrast, lots of private enterprise D&O policies do include a provision putting the defense obligation squarely upon the insurer, and nevertheless other policies include selections permitting the defense to be tendered by the Insured to the insurer inside a distinct period of time. Some D&O policies include defense expense provisions that call for an allocation or sharing of the defense expenses in between the Insured and Insurer, primarily based upon a determination of covered versus non-covered allegations.
D&O policies ordinarily include a “settlement hammer” provision. This clause operates to limit an insurer’s obligation to indemnify in the occasion the Insured refuses to consent to a settlement that is acceptable to the insurer. Some policies may possibly express the quantity the insurer will spend for covered loss below this circumstance as a percentage of the ultimate covered settlement or judgment. Other D&O policies may possibly limit their financial exposure to the quantity for which the case could have historically settled, but for the Insured’s refusal.
Regulatory Proceedings and Investigations
Most D&O insurance coverage policies afford certified protection against “regulatory and governmental” investigations, “administrative or regulatory proceedings,” and criminal proceedings. Policies usually call for the proceedings to be directed against a all-natural individual Insured, to be commenced and maintained in a manner specified in the policy, such as a ‘formal’ order of investigation, and only for policy-defined defense costs incurred immediately after the issuance of a formal order or an indictment.
D&O policies’ definitions and other corresponding provisions and exclusions differ, and need to be cautiously evaluated to ascertain regardless of whether they encompass informal investigations from the time a subpoena is received, or from the time an Insured individual is identified in writing as a individual against whom charges may possibly be filed.
Studying the A,B,C’s and D’s of D&O Coverage
The 3 most important Insuring Agreements discovered in public enterprise D&O policies, are ordinarily referenced as “Side A, B, and C coverage”. They are sometime supplemented with an optional Coverage D.
“Side A “Coverage – Person Insured Coverage
“Side A Coverage,” also identified as the “Non-Indemnifiable Loss Insuring Agreement,” supplies coverage to person officers and directors against claims for their policy-defined wrongful acts in their official capacities, below relatively uncommon situations in which the Insured entity either can’t or will not offered indemnification.
The policy’s “Side A” coverage for non-indemnifiable claims against directors and officers, practically universally supplies that no retention is expected to be paid by person Insureds. A separate “Side A” limit may possibly be readily available in addition to the classic D&O policy’s aggregate limit of liability. “Side A” excess D&O policies have develop into extra commonplace in the previous many years, and particular “Side A” excess policies may possibly also offer you “distinction in situations” (‘DIC’) coverage that usually supplies a function of ‘dropping down’ to respond to claims either not paid by the key or underlying D&O policy insurer, or in the occasion indemnification is unavailable from the Insured entity, the underlying limits are eroded by covered claims against the entity, or the underlying D&O insurers deny coverage to the directors. Some Side A policies are underwritten as non-rescindable by the insurer. Purchasers of this coverage need to also look at, if readily available, an solution for reinstatement of policy limits for the outdoors directors, in the occasion of premature policy limit exhaustion.
“Side B” Coverage – Corporate Reimbursement Coverage
This insuring agreement reimburses the Insured entity for covered loss below claim situations exactly where the corporation is indemnifying its directors and officers. This provision does not afford any coverage to the Insured entity for its personal prospective liability, and is topic to a self-insured retention (“SIR”) that have to be paid by the Insured entity ahead of an Insurer will make any payments. It is significant to note that lots of Insureds do not recognize they are contractually obligated to acquire the insurer’s prior consent to incur expenses and costs, and only these expenses and costs authorized in advance by the insurer will be deemed to have happy the Insured entity’s SIR obligation. It is significant for policyholders to have an understanding of they run a significant danger of losing some or all of their otherwise readily available coverage, if they incur legal costs prior to reporting the claim, or if they enter into negotiations or attain a settlement agreement in principle devoid of the insurer’s prior understanding and consent.
“Side C” Coverage – Entity Coverage
This insuring agreement affords coverage to the publicly traded Insured entity only for it personal liability and is ordinarily restricted to coverage for securities-associated claims. “Securities Claims” is a policy-defined term, encompassing only claims arising from the Insured entity’s personal securities. Privately held firms and organizations are afforded substantively distinctive coverage below this insuring agreement.
“Side D” Coverage – Outdoors Entity Insured Individual Coverage
This insuring clause is readily available as an solution on most D&O policies. It supplies coverage to designated “Insured Persons”, for their liability as a outcome of their membership on an “Outdoors Entity” board. This coverage applies on a “double excess” basis, which means it is triggered immediately after the exhaustion of any indemnification offered by the Outdoors Entity to the Outdoors Entity director, as nicely as any insurance coverage coverage readily available from the Outdoors Entity. Standard D&O policies ordinarily extend automatic coverage to insured Folks who are designated by the policyholder to participate as a board member of a not-for-profit organization.
Some More Considerations
In addition to the subjects highlighted earlier, D&O insurance coverage purchasers need to obtain familiarity with how their policies may possibly respond below bankruptcy circumstances, prospective coverage difficulties arising from a Particular Committee’s investigative activity, prospective difficulties involving priority of payments amongst Insureds, hidden D&O insurance coverage system design and style flaws that can render excess D&O policies unresponsive to catastrophic claims, and the altering needs of international D&O coverage to stay compliant with neighborhood nation regulations. These subjects will be covered in a future report.
This report supplies common details and is neither intended to deliver any legal guidance nor to deliver any guidance with regard to the distinct interpretation or operation of any insurance coverage policy. Any insurance coverage policy’s applicability is hugely truth distinct. Certified legal counsel need to be consulted concerning laws that may possibly apply with respect to policy coverage interpretation in the state in which the policy will be interpreted.
The author, James J. Ilardi, CPCU, is a Chartered Home and Casualty Underwriter and President of SECURA Threat GROUP, LLC.
SECURA Threat GROUP is a New York primarily based, independent industrial insurance coverage brokerage and advisory firm. The firm specializes in the evaluation, design and style and procurement of business enterprise insurance coverage policies and insurance coverage applications for privately held enterprises, publicly traded firms, non-profit organizations and skilled service firms. SECURA Threat GROUP also supplies claims advisory and assistance solutions.