Providedby:MumbyInsuranceBrokers,Inc.

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Table of Contents AboutThisGuide..........................................................................................................................................3

ResponsibilitiesofDirectorsandOfficers....................................................................................................4

SourcesofD&OLiability...............................................................................................................................5

ProtectingDirectorsandOfficers.................................................................................................................8

CoverageOverviewandInsuringAgreements...........................................................................................12

PolicyExtensionsandKeyTerms...............................................................................................................16

PolicyConditions........................................................................................................................................19

CommonPolicyExclusions.........................................................................................................................21

LimitsofLiability.........................................................................................................................................23

Self-insuredRetention................................................................................................................................30

TheApplicationandUnderwritingProcess................................................................................................33

DealingwithClaims....................................................................................................................................38

NextSteps..................................................................................................................................................41

This document is merely a guideline. It is not meant to be exhaustive nor be construed as legal advice. It does not address all potential compliance issues. Consult your licensed insurance representative or legal counsel to address possible compliance requirements. ©2018Zywave,Inc.Allrightsreserved.

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About This Guide Directorsandofficersliability(D&O)insuranceisacriticalcomponentofalmosteveryorganization’sriskmanagementprogram.Intoday’sbusinessclimate,D&Oinsuranceisnolongeranecessityforjustlarge,publiclytradedcompanies.Allorganizations—regardlessoftheirsize,missionorstructure—havesomeformofD&Oexposure.Yet,despitethefactthatD&Oinsurancehasbeenaroundfordecades,itremainsoneofthemostcomplexandmisunderstoodinsurancepolicies.

AtMumbyInsuranceBrokers,Inc.,wefeelit’sessentialtobringasmuchclarityaspossibletothesubjectofD&Oinsurance.Doingsoallowsourclientstomakeinformedbuyingdecisionsandstructurewell-roundedriskmanagementprograms.Assuch,wehavedevelopedthisguidetoeducateorganizationsontherisksfacingtheirdirectorsandofficersandhowD&Oinsurancecanhelp.

Remember,MumbyInsuranceBrokers,Inc.ishereforyou.Whetheryourepresentasmallnon-profitoralargepubliccorporation,wewilltakethetimenecessarytofullyunderstandyourorganizationandfindtheinsurancecoveragetosuityourneeds.D&Oinsuranceiseverchangingandvariesbetweeninsurancecompanies.Therefore,itisexceedinglyimportanttoworkwithanexpertinsurancebrokerthatspecializesinD&Oinsurance.MumbyInsuranceBrokers,Inc.isproudtoprovideknowledgeablestaffthatcanprotectyourorganization,boardroomandbottomline.

However,beforelearningaboutthemechanicsofD&Opolicies,it’simportanttounderstandthebasicdutiesofdirectorsandofficers.Whenorganizationsknowwhat’sexpectedoftheirleadershipteam,theyarebetterpreparedtomitigatetherisksthatleadtocostlyD&Oclaims.

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Responsibilities of Directors and Officers InordertounderstandthebenefitsofD&Oinsurance,wemustfirstexaminetheresponsibilitiesofdirectorsandofficers.

Whenitcomestobasiccorporatefunctions,directorsandofficersofbothprivateandpubliccompanieshaveanumberofspecificduties.Directorsandofficersareexpectedtofulfilthesedutiesandtheyhaveanobligationtoactinacompany’sbestinterests.Thefollowingaresomebasicexecutivedutiesdirectorsandofficersshouldbeawareof.

DUTY OF DILIGENCE

Sometimesreferredtoasdutyofcare,thisresponsibilityrequiresdirectorsandofficerstoactingoodfaith.Thismeansthatdirectorsandofficersmustconsiderallavailableinformationbeforemakingadecisionandactinthesamewayareasonablepersonfacedwiththesamedecisionandresponsibilitieswouldact.

Thisdutyrequiresnotonlyreasonablebehaviourwithrespecttomatterssubmittedforapproval,butalsoreasonableinquiryandmonitoringoftheorganization’saffairs.Thedutyofdiligencemaybehigherfordirectorsandofficersofcharitableorothertypesofnot-for-profitentitiesincertainjurisdictions.

DUTY OF LOYALTY

Directors’andofficers’dutyofloyaltyismeanttopreventthemfromengaginginconductthatwouldotherwisehurtortakeadvantageofthecompanytheyserve.Throughthisduty,directorsandofficershaveanobligationtoavoidanyconflictsofinterest.Someexamplesofleadersbreakingtheirdutyofloyaltyincludethefollowing:

� Gainingsecretprofitsorunfairgainsthroughpersonaltransactionswithoronbehalfoftheorganization

� Competingwiththeorganizationorstealingcorporateopportunities

� Profitingfromtheuseoftheorganization’smaterial,non-publicinformation

DUTY OF OBEDIENCE

Pertheirdutyofobedience,directorsandofficersareobligatedtofollowthestatutesandtermsoftheirorganization’sagreements.Directorsandofficersmaybeheldliableiftheyauthorizeanactthatisbeyondthepowersestablishedbytheircompany’scharter.

Itshouldbenotedthatnon-profitorganizationsarefrequentlyregulatedbyamultitudeofstatutes,rulesandregulations—manyofwhichareunfamiliartooutsidedirectorsandofficers.Assuch,it’simportantfordirectorsandofficersoftheseorganizationstobeextremelycarefulinordertoavoidaclaim.Failuretocomplywithtechnicalrequirementsmaysubjectthedirectorsandofficerstopersonalliabilityforanyorganizationaldamage.

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Sources of D&O Liability Regardlessofyourcompany’ssizeormission,thelegalcostsassociatedwithaD&Olawsuitcanbecripplingforbothanorganizationanditsleadership.Tocomplicatematters,D&Oliabilitycancomefromavarietyofsources,andclaimscanarisewithoutwarning.

WhileD&Oinsuranceprovidesalastlineofdefencefororganizationsandtheirleadershipteams,thebestwaytoprotectagainstaD&Oclaimistoavoidthemaltogether.UnderstandingthemainsourcesofD&Oliabilitycangoalongwayinavoidingcostlylegalaction.

EMPLOYEES

MostdirectorsandofficersaresurprisedtolearnthatemployeesareoneofthemostcommonsourcesofaD&Oclaim.Infact,forprivatebusinessesandnon-profitorganizations,employeesrepresentamajorD&Oexposure.

Ifemployeesaremistreatedduringanyphaseoftheiremployment,theymaybringtheirconcernstotheorganization’smanagementteam.Ifemployeesfeelthattheirconcernshavenotbeenaddressedinasufficientmanner,theymayseeklegalactionasameansofresolvingtheirgrievances.

Commonemploymentpracticesclaimsagainstdirectorsandofficersincludethefollowingallegations:

� Wrongfuldismissal

� Discrimination,includingworkplaceandsexualharassment

� Breachofemploymentcontract

� Failuretoaddresshealthandsafetyconcerns

COMPETITORS

Asorganizationsattempttogrowtheirmarketshare,managementteamsmustensurethatgrowthisachievedthroughfairbusinesspractices.Ifanorganization’scompetitorsbelievethattheyhavebeenunfairlydisadvantagedbydishonestorillegalbehaviour,theymayseeklegalrecourse.

Directorsandofficerscanbebroughtintolegalactionsforarangeofwrongdoings,includingthefollowingallegations:

� Breachesofintellectualproperty

� Misappropriationoftradesecrets

� Collusion

� Anti-competitivebehaviour

What’smore,directorsandofficersmaybeheldliableforactionsthatareperceivedasmisleadingordefamatory,withclaimantsseekingdamagesfortheirallegedlosses.

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CREDITORS

Amanagementteamhastheresponsibilityofmonitoringanorganization’sfinancialpositionanditsabilitytomeetdebtobligationsastheybecomedue.Ifanorganizationbecomesinsolvent,creditorswilloftenscrutinizethedecisionsofdirectorsandofficerstoseeiftheycanbeheldpersonallyresponsibleandwillsometimespursueexecutivesinanattempttorecoveroutstandingfunds.

Commonallegationsbycreditorsagainstdirectorsandofficersincludethefollowing:

� Breachoffiduciaryduty

� Breachofdutyofduecare

� Negligence

� Deliberatemisconduct

GOVERNMENT AND REGULATORY AUTHORITIES

Governmentandregulatoryauthoritiesmonitortheenvironmentinwhichorganizationsoperate.Thesebodieshelpensurethatdirectorsandofficersandtheorganizationstheycontrolconducttheiractivitiesinafairandlawfulmanner.

Governmentandregulatorybodiesmonitorcompliancewithabroadrangeoflaws,includingthefollowing:

� Corporations law:Governstheownershipandmanagementoforganizations

� Securities law:Governstheadministrationofpubliclylistedcompanies

� Consumer protection law:Governsthewayinwhichorganizationsdistributeproductsandservicestoconsumers

� Occupational health and safety law:Ensuresthatorganizationsmaintainasafeworkplace

� Taxation law:Governsthetaxationoforganizationsandindividuals

� Environmental law:Ensuresthatindustryparticipantsadheretoenvironmentalrestrictions

Fordirectorsandofficers,theenforcementpowerheldbythesebodiespresentsasignificantexposuretoD&Oclaims.Ifregulatorsdiscoverthatwrongfulconducthasoccurred,theymaypursuelegalactionagainsttheorganizationandtheexecutivesinvolved.

SHAREHOLDERS

Duetotheirfinancialinvestment,shareholdershaveanincentivetomonitoranorganization’songoingperformanceandensurethatdirectorsandofficersareactingintheorganization’sbestinterests.Withpotentiallylargesumsofmoneyatstake,ifshareholdersarenotpleasedwithanorganization’sdirection,theymaytakemeasurestoprotecttheirinvestment.

Ifitappearsthatmanagementhasbreachedtheirdutiestothedetrimentofanorganization,shareholdersmaybringaclaimagainstdirectorsandofficersthemselves.Ifshareholderswishtobringaclaimagainstexecutives,legalproceedingstypicallycomeaboutinoneoftwoways:

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1. Direct action—Inadirectactionlawsuit,ashareholderorgroupofshareholdersbringaclaimagainstmanagementfordamagesintheirinterestsasshareholders.Inthisinstance,shareholdersarethebenefactorsofanyfinancialsettlement.

2. Derivative action—Inderivativeproceedings,shareholders—actingastheorganization—suethedirectorsandofficers.Inthisformoflitigation,shareholdersgenerallyclaimfordamagescausedtotheorganization,withthebeneficiaryofanysettlementbeingtheorganizationitself.

CUSTOMERS

Whilecustomersdictateanorganization’ssuccess,disputesfromtheseindividualscanbankruptacompanyaltogether.Infact,customerdisputescanleadtolawsuitsagainstanorganization,aswellastheirdirectorsandofficers.Commonly,lawsuitsfromcustomersrelatetocontractualdisputes,debtcollection,thecostsorqualityofproductsorservices,therefusaltoextendcreditanddiscrimination.

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Protecting Directors and Officers Foranorganizationwithmanyinternalandexternalrisks,protectingitsdirectorsandofficerscanfeellikeanuphillbattle.Whiletheserisksareserious,companiescanrestassuredthattheyaren’twithoutrecourse.Thereareanumberofstrategiesorganizationscanimplementtodaythatwillprotecttheirleadershipteamwellintothefuture.

RISK MANAGEMENT

Whenitcomestolimitinganexposure,specificriskmanagementstrategiesarecritical.Fordirectorsandofficers,thefirstlineofdefencefromaclaimistohaveadeepunderstandingoftheirresponsibilities.Ingeneral,alldirectorsandofficersshouldbeawareofthefollowing:

� Theirresponsibilitytothecorporation

� Theroletheyfulfilontheboardorinamanagementcapacity

� Theexpertisetheyareexpectedtobringtotheposition

Withtheseresponsibilitiesinmind,directorsandofficersmustusesoundjudgmentandactwithcare.Thismeanstheyneedtodemonstratetactanddiligencewhenattendingboardmeetings,reviewingboardmaterialsandquestioningmattersputbeforetheboard.Doingsowillgreatlyreducetherisksoflitigation.

Somecarrierscanprovidegeneralmaterialsrelatingtoriskmanagementguidanceuponrequest.Directorsandofficersareencouragedtoconsulttheirownlegalcounselforspecificadviceasitpertainstocorporateduties,responsibilitiesandexposures.

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INDEMNIFICATION

Anothermajorformofprotectionforcorporateofficialsisindemnification.Thisisastatutorilyauthorizedprotectionthatisoftendetailedincorporatedocuments,likeanorganization’sincorporationorbylaws.

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Indemnificationprovidestherighttotheadvancementofdefenceexpensesandgeneralprotectionfromanylegalresponsibilityfollowingaclaim.IndemnificationisparticularlyimportantwhenyouconsiderthatD&Oinsurancehasitslimits.D&Oinsuranceissubjecttolimitsofliability,whereasindemnificationisunlimitedinpractice.WhileD&Opoliciesarelikelytochangewhentheyarerenewed,indemnificationismuchmorestable,especiallywhencorporateofficialsareallowedtonegotiatetheirowncontracts.

However,indemnificationcanbelimitedbasedontheindemnifyingcompany’sfinancialresources.What’smore,indemnificationisoftenverybroad,onlyapplyingtothemaximumextentpermittedbylaw.ThiscontrastswithD&Oinsurancepolicies,whichtypicallycontainnumerousexclusionsandconditions.

Acompany’sindemnificationprovisionswilldetailwhatproceduresdirectorsandofficersmustfollowinordertoreceiveprotection.Foraddedspecificity,companiesshouldconsidercreatingaseparatewrittenindemnificationprovision,whichprovidesclarityduringtimesofcorporateturbulenceandcertainprotectionsagainstthewrongfulwithholdingofindemnification.

INSURANCE

DedicatedD&Oinsuranceisoneofthebestwaystoprotectagainstmanagementrisks.Thiscoverageprotectsthepersonalassetsofdirectorsandofficersintheeventthecompanydoesnotpaydefencecostsorfundindemnification,anditisessentialtohelpingorganizationsattractqualifiedindividualstoserveontheirboards.

D&Opoliciesareano-brainerforcompaniesofallsizesandindustries,astheyrespondtofinanciallossesthatwouldnototherwisebecoveredbyageneralliability,securitiesclaimsorsimilarpolicy.What’smore,unlikeotherprofessionalliabilitypolicies,D&Ocoverageprotectsmorethanjustthecompany,extendingdirectlytoleadershipitself.

D&Oinsuranceworksbestwhenit’susedalongsideariskmanagementprogramandindemnification.D&Oinsuranceprovidesprotectionforcompanyofficialswhencorporateindemnificationisnotavailable,whetherduetofinancialrestrictionsorlegalprohibition.D&Oinsurancealsoprovidesamechanismforcorporationstobereimbursedwhentheydoindemnifytheirexecutives.

D&Opoliciescanbecustomizedtomeettheuniqueneedsofanyorganizationorleadershippersonnel.Companiesandtheirdirectorsandofficersshouldevaluatetheirspecificinsurancerequirementsbeforetheunderwritingprocessbegins.Doingsowillensuretherearenogapsincoverageandthatprotectionisavailablewhenit’sneeded.

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WHY DO ORGANIZATIONS NEED D&O INSURANCE?

TheneedtoobtainproperD&Oinsurancecannotbeoverstated.Acommonmisconceptionisthatallegedmisconductbydirectorsorcompaniesiscoveredunderotherliabilitypolicies,suchascommercialgeneralliability,errorsandomissions,orotherprofessionalliabilitypolicy.Inmanycases,thissimplyisnottrue.

Insomeinstances,misconductmaynotfallwithinthescopeofanorganization’sindemnificationclause.Evenifanorganizationhastheabilitytoindemnifytheirdirectorsandofficersforthewrongdoinginquestion,itmaynothavethefundstofinancetheongoingcostsandexpensesrelatedtoalawsuit.

Thesecostscanaddupquicklyandeasilyreachsixfigures.WithoutthefinancialbackingofaD&Oinsurancepolicy,anindemnificationclausemightnotadequatelyprotectthedirectorsandofficersoftheorganization.

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Coverage Overview and Insuring Agreements D&Oinsuranceiscrucial,butitscomplexitycanmakeitdifficulttofullycomprehend.D&Oinsuranceisrarelya“one-size-fits-all”solution,aspoliciesareflexibleenoughtomeettheuniqueneedsofavarietyofbusinesses.Whilenotwopoliciesarethesame,atypicalpolicyprovidesthreestandardformsofprotectionasoutlinedininsuringagreements—SideA,SideBandSideC.Understandingtheseagreementscanhelporganizationsbetterplantheirriskmanagementprogramsandprotecttheirleadershipteam.

SIDE A: DIRECTORS AND OFFICERS COVERAGE

SideAisthefirstinsuringagreementofaD&Opolicyanditinsuresindividualdirectorsandofficersagainstlossesthattheorganizationisnotlegallyorfinanciallyabletoindemnify.

Thiscoverageprotectsthepersonalassetsofdirectorsandofficersintheeventacompanydoesnotpaydefencecostsorfundindemnification.SideAcoverageisessentialtohelpingorganizationsattractqualifiedindividualstoserveontheirboards.What’smore,SideAcoverageprovidesanessentiallastlineofdefence,ensuringtheassetsofdirectorsandofficersareshieldedfromtheconsequencesofpersonalliability.

SIDE B: CORPORATE REIMBURSEMENT COVERAGE

SideB,alsoknownascorporatereimbursementcoverage,isthesecondinsuringagreementofaD&Opolicy.SideBreimbursesorganizationsforexpensestheyincurwhendefendingdirectorsandofficersinaccordancewiththeirindemnificationobligations.

Byindemnifyingtheirexecutives,organizationsbecomeresponsibleforpayinglegalexpensesandclaimsettlementsontheirbehalf.Thecostsofdoingthiscanbefinanciallycripplingforeventhelargestorganizations.SideBcoverageprovidesbalancesheetprotectionbyagreeingtoreimbursethecompanyifitadvanceslegalfeestoofficersordirectorsorindemnifiesthemagainstlosses.

ItshouldbenotedthatSideBwillnotprotectanorganizationfromdirectclaimsandisonlyintendedtoprotectagainstcostsincurredonbehalfofdirectorsandofficers.

SIDE C: ENTITY COVERAGE

Often,organizationsarenamedinlawsuitsalongsidetheirdirectorsandofficers,leavingtheentityexposedtoseriouslegalaction.SideCcoverage,sometimesreferredtoasentitycoverage,isthethirdinsuringagreementofaD&Opolicy.Thissideinsuresorganizationsforclaimsmadedirectlyagainsttheorganizationbyprovidingentityassetprotectionsandcoveragefordefencecosts.

Inpoliciesissuedtopubliccompanies,SideCcoverageisoftenlimitedtosecuritiesclaims.Incontrast,coverageforprivatelyheldorganizationsoftenappliesbroadlytoawiderangeofclaimsarisingfromwrongfulactsbytheorganizationoritsdirectorsorofficers.Anotherconsiderationisthatentitycoverageavailableunderaprivatecompanypolicyistypicallybroaderthanprotectionsfoundinpubliccompanypolicies.

Thisbroaderentitycoveragecouldleadtolimitsofliabilitybeingerodedbythedefenceexpensesandsettlementsoftheentity.Thiswouldnodoubtleaveindividualswithoutsufficientfundstodefendthemselvesorsettleclaims.Thebroaderentitycoverageinanentitypolicycouldinfluencesomebuyers

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toincreasetheD&Oinsurancelimitsofliabilityasonewaytoprotectagainsterosionorexhaustionlimits.

Companiescontinuetobecomeentangledinshareholderdisputes,makingSideCprotectionallthemoreimportant.Thisinsuringagreementisgenerallyoptionalandofferedbyinsurersforanextrapremium.ItshouldbenotedthatSideCcoveragecanbelimitedinthatitonlyappliestoclaimsthatresultfromanoffer,saleorpurchaseofsecurities.

SIDE A EXCESS DIFFERENCE-IN-CONDITIONS (DIC)

UnlikestandardSideAagreements,SideADICsitsontopofatraditionalD&Opolicy,effectivelyprovidingabroadercoveragewithseparatelimitsfordirectorsandofficers.Thisfillsthefollowinggaps:

� SideADICcoverageprovidesexcessinsurancethatkicksinonceacompany’straditionalD&Opolicyisexhausted.

� SideADICcoverageprovidesprotectionwhenanunderlyinginsurerfailsorrefusestopay,attemptstorescindcoverageorbecomesinsolvent.

� SideADICcoverageisnottypicallysubjecttotheexclusionsfoundintraditionalD&Opolicies,specificallythe“insuredversusinsured”and“pollution”exclusions.Thiscancreatepoliciesthataremoredynamic.

Withthesegapsaddressed,SideADICcoverageactsasasafetynetthatcanhelpattractandretainboardmemberswhowantbroadprotection.

HOW D&O INSURANCE IS STRUCTURED

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INSURING AGREEMENTS

Theinsuringagreements,sometimesreferredtoasinsuringclauses,ofaD&Opolicyspecifythescopeofcoverageaffordedbyapolicy.Insuringagreementsarepresentedinbroadtermsandsubsequentlymodifiedbyexclusions,definitions,conditionsandendorsementsnotedinapolicy.

D&OpolicieswillincludeseparateinsuringagreementsforanySideA,SideBandSideCentitycoveragetheorganizationobtains.Eachinsuringagreementoutlinesthepromiseoftheinsurertoprotectthepolicyholder(theinsured)inaccordancewiththetermsandconditionsofthepolicy.

Sample Insuring Agreement Language

Whilenotwopoliciesaredraftedthesame,thefollowingissampletextyoumightfindinastandardD&Opolicy:

� Side A:TheInsurershallpayonbehalfofeachInsuredPersonLossresultingfromClaimsfirstmadeagainstanInsuredPersonduringthePolicyPeriod,or,ifapplicableExtendedReportingPeriod,foraWrongfulAct,exceptforLosswhichtheCompanyispermittedorrequiredtopayonbehalfoftheInsuredPersonasindemnification.

� Side B:TheInsurershallpayonbehalfoftheCompanyLosswhichtheCompanyisrequiredorpermittedtopayasindemnificationtoanyoftheInsuredPersonsresultingfromaClaimfirstmadeagainsttheInsuredPersonsduringthePolicyPeriod,or,ifapplicableExtendedReportingPeriod,foraWrongfulAct.

� Side C:TheInsurershallpayonbehalfoftheCompanyLossresultingsolelyfromanySecuritiesClaimfirstmadeagainsttheCompanyduringthePolicyPeriod,or,ifapplicableExtendedReportingPeriod,foraWrongfulAct.

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Policy Extensions and Key Terms WhilestandardD&Opoliciesaredesignedtoprotectawidearrayofrisks,theyhavetheirlimits.Coverageextensionsareusedtoaddresstheselimits,fillgapsandprovideorganizationswithadditionalprotectionsoutsidethescopeoftraditionalD&Oagreements.

ThefollowingareD&Oextensionsorganizationsshouldconsiderinordertosecurethehighestlevelofcoverage.

ADVANCEMENT OF DEFENCE COSTS

Oneextensionthatcanproveinvaluableintheeventofaclaimistheadvancementofdefencecostsextension.Thisextensionrequirestheinsurertoforwarddefencecoststopolicyholdersthroughoutadefinedperiodoftime.

Withoutthisextension,anorganizationoritsexecutivesmayberequiredtofundtheirowndefencecostsuntilaninsurercanassesstheclaimandreimbursethem.Thisistypicallyatime-consumingprocessandcantakemonthsorevenyears.

Thisextensioniscritical,aslegalcostscangetexpensive,andmostorganizationslacktheupfrontresourcestopayforsuchservices.Itshouldbenotedthat,ifitisdeterminedthataclaimisnotcovered,thepolicyholderwouldberequiredtorepayanydefencecostadvancements.

RETIRED DIRECTORS AND OFFICERS

UndermanyD&Opolicies,inorderforanincidenttobecovered,organizationsmusthaveanactivepolicywhenaclaimarises.Becausesomeclaimsmaytakeyearstoarise,acompany’sretiredexecutivescanbeleftunexpectedlyexposed.Tomakemattersworse,retireddirectorsandofficerstypicallyhavenocontroloveranorganization’sinsuranceoncetheyhavelefttheorganization.Accordingly,theycannotensuretheirformerorganizationwillpurchasetheproperD&Oinsurance.

Toremedythisissue,policyholderscanprotecttheirformerdirectorsandofficersbyincludinganextendedreportingperiodintheirD&Ocoverage.Anextendedreportingperiodallowsorganizationsorretiredexecutivestoreportaclaimtotheinsurereveniftheorganizationnolongercarriesanactivepolicy.

OUTSIDE DIRECTORSHIPS

Insomecases,directorsandofficersserveonboardsofoutsideorganizations.Thisoftenoccurswhenanexecutivetakesaleadershippositionforanexternalnon-profit.

StandardD&Opoliciesmaynotoffersufficientenoughprotectionintheseinstances,andoutsidedirectorshipcoveragemaybeneeded.Thisextensionisparticularlyuseful,asitensuresthatexecutiveswillbecoveredintheeventthattheirnon-profit’sinsuranceisinsufficientorcompletelyexhausted.

NEW SUBSIDIARIES

Whenanorganizationpurchasesanewsubsidiary,itispossiblethattheexecutivesoftheseacquiredoperationscouldbeopentoD&Oexposures.

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Thenewsubsidiariesextensionismeanttoaddressthisconcernandautomaticallycoveranynewsubsidiariesandprovidethemwiththesameprotectionastheparentorganization.

Itshouldbenotedthatcoverageonlyappliestoclaimsthatarisefollowingthedateofanacquisition.Automaticcoveragemayalsobesubjecttothesizeoftheacquiredentity,andanendorsementmayberequired.

SPOUSES, HEIRS AND LEGAL REPRESENTATIVES

Toprotectthemselvesintheeventofaclaim,someexecutivestransferownershipoftheirassetstoathirdparty.Thisoftenincludeshusbands,wivesorguardians.

Whilethismightbeasoundlegalstrategy,itcanalsoleavethesethirdpartiesopentoclaims.Thespouses,heirsandrepresentativesextensionisdesignedtoprotectthirdpartiesandanexecutive’sassets.However,itdoesnotprotectthemfromtheconsequencesoftheirownactivities.

CONTINUITY OF COVERAGE

Continuityofcoverageisanextensionthatallowsclaimstobeacceptedlate.Typically,thisextensionisavailabletopolicyholdersthathavehelduninterruptedD&Ocoverageoverapredeterminedperiod.

Thisextensioncanproveusefulfororganizationsthatfailtonotifytheirinsurersofaclaimtheyfeltdidn’twarrantanotificationoranotificationwasunsuccessfulaltogether.Whilecontinuityofcoverageisaneffectivesafetynet,itshouldn’tbereliedonasasubstituteforpromptclaimsnotification.

KEY TERMS

Tounderstandinsuringagreements,organizationswillhavetointerpretkeytermsscatteredthroughouttheirpolicies.Moreover,tolearnspecificsonhowaD&Opolicywillrespondtoaclaim,it’simportanttounderstandthefollowingkeyterms:

� Insured person:ForD&Oandmostformsofinsurance,aninsuredpersonreferstotheindividualsorentitiescoveredbyaspecificpolicy.Toqualifyasaninsuredperson,directors,officersandorganizationsmustfallunderabroad,predefineddescription.Thesedefinitionsoftenincludealldirectors,officersandcorporateentitiesofthenamedinsured(theparentorganization).

� Loss:Lossspecifiestheclaimcostscoveredbyapolicy.Specifically,lossinD&Opoliciesreferstoexpenses—investigationcosts,legalfeesandsettlements—facedbydefendantsinvolvedinlitigation.Lossescanalsoincludecourtawardedjudgments,likedamages,civilfinesandpenalties.Coveredlossesdependheavilyonthepolicywording;however,thefollowingaregenerallynotincludedinstandardD&Oinsurance:

o Criminalfinesandpenalties

o Taxes

o Employment-relatedbenefits

o Restitution(theactofpayingbackmoneythatwasneveryours)

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� Claim:InorderfortheprotectionofD&Oinsurancetobecomeactive,aclaimthatfallsunderthescopeofapolicymustoccur.Mostpoliciesdefineaclaimtoincludeanywrittendemandreceivedbyaninsured,aswellasanycivil,regulatoryoradministrativeproceedingarisinginthelineofcorporateduties.Thedefinitionofclaimmayalsoincludeanycriminalproceedingboughtagainstanorganizationoritsmanagers.

� Claims made (and notified): D&Opoliciesoperateonwhatisknownasaclaims-madeandnotifiedbasis.Thismeansthatapolicyprovidescoverageforclaimsmadeagainstaninsuredandnotifiedtotheinsurerduringtheperiodofinsurance.Inorderforaclaimtobecovered,itmustmeetthefollowingrequirements:

o Managementmustbecomeawareofaclaimduringthepolicyperiod

o Theinsurermustbenotifiedofaclaimwithinthepolicyperiod

� Wrongful act:Thetermwrongfulactspecifieswhattypesofactionsarecoveredbyapolicy.D&Opoliciesoftendefinethistermbroadlytoensuredirectorsandofficersareprotectedfromavarietyofclaims.Inmostinstances,awrongfulactisconsideredtobeanyactualorallegedact,error,omission,misstatement,misleadingstatement,breachofduty,breachoftrust,neglectandbreachofwarrantyofauthority.

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Policy Conditions D&Opoliciescontaindetailedspecificsonthingslikeconfidentiality,costallocationandsimilarconditions.Inordertounderstandthedepthoftheircoverage,organizationsmusthaveabasicunderstandingofcommonpolicyconditions.Notonlydoesthisknowledgegivepolicyholdersasenseofhowtheirinsurancerespondsfollowingaclaim,butitcanalsoprovidepeaceofmindfororganizationsandtheirleadership.

CONFIDENTIALITY

D&OpoliciestypicallyprohibitorganizationsandtheirdirectorsandofficersfromdisclosinginformationabouttheirD&Ocoverage,suchasterms,conditions,policylimitsandself-insuredretentions(SIRs),tothirdparties.Thepurposeofthispolicyconditionistoprotecttheorganizationandtheinsurerfrommaliciousthirdparties.Forexample,ifathirdpartygatheredinformationaboutanorganization’sD&Opolicy,theinformationcouldthenbeusedtomakeunreasonabledemandsduringlitigation.

ItshouldbenotedthatthispolicyconditionallowsorganizationstodiscusstheirD&Opolicywithhiredprofessionaladvisors,suchasinsurancebrokers,riskprofessionalsandattorneys.

COST ALLOCATION

D&Opoliciestypicallycontainanallocationclause,whichstatesthataninsurerisliableforanylossessustainedbytheinsuredanditsmanagementtotheextentthepolicyaffordscoverage.Essentially,insurersonlypayforclaimstheyarelegallyrequiredtobasedonthetermsofthepolicyitself.

Allocationissuesoftenariseinsituationswheretwopartiesarefacingthesameclaimandaren’tcoveredbythesameD&Opolicy.Commonly,allocationcanoccurifanexecutiveandhisorherorganizationarebothnamedonalawsuitandnoentitycoverageisincludedintheorganization’sD&Opolicy.

RETROSPECTIVE COVERAGE

Retrospectivecoverageisusuallyunlimited,and,inmostcases,insurancewillkickinregardlessofhowlongagoawrongfulactoccurred.Insomecircumstances,however,alimitationmaybeplacedonretrospectivecoverage.Thisisknownasaretroactivedate,whichremovescoverageforclaimsthatariseasaresultofactionscommittedbeforeaspecifiedtime.

Retroactivedateswillbespecificinapolicy’sscheduleandareoftenappliedbyunderwritersonacase-by-casebasis.Retroactivedatesareoftenusedifanunderwriterbelievesthatanapplicant’spastexposuresaretoogreattoinsure.

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SEVERABILITY

MostD&Opoliciescontainanexclusionseverabilityprovision.Thisprovisiondictatesthatanexclusionapplyingtooneexecutive’sbehaviourwon’taffectthecoverageaffordedtoanother.Insimpleterms,thismeansthatinnocentexecutiveswillbeprotectedregardlessofwhetherornototherleadersactoutsidetheboundariesofapolicy.

Forexample,ifaclaimisbroughtagainstaboardofdirectorsforthedeliberateandillegalactionsofoneexecutive,suchasfraud,apolicyexclusionmaybetriggered.Withexclusionseverabilityinplace,insteadofcoveragebeingexcludedfortheentireboard,theexclusionwillonlyapplytotheoffendingexecutive.POLICY INTERPRETATION

Thepolicyinterpretationclauseoutlineswhichjurisdiction’slawsgovernthepolicy.Forthevastmajorityofpolicies,thelawsofthecountryinwhichthepolicywasissuedcontrolthepolicyinterpretation.Thepurposeofthisclauseistoensurethatallpartiesinvolvedhaveaclearunderstandingofhowthepolicywillbeinterpretedintheeventofadisputethatleadstolitigation.

TERRITORIAL AND JURISDICTIONAL LIMITS

TerritorialandjurisdictionallimitsofaD&Opolicyareofparticularimportancefororganizationswithinternationaloperations.Specifically,theselimitsrefertothejurisdictionalregioninwhichtheinsurerwillrespondwithcoverage,shouldalegalactionarise.Similarly,territoriallimitsrefertothegeographicalareafromwhichaclaimcanoriginate.

Whilemanypoliciesprovideworldwideterritorialcoverage,theycanalsolimitthejurisdictionalcoverageavailableforregionsthatareconsideredhighlylitigious.

RUN-OFF COVERAGE

Followingachangeincontrol,anorganization’sD&Opolicywillautomaticallyconvertintorun-off.Run-offcoverageiswhenapolicyremainsinforcebutonlycoverclaimsthatmaterializefromactionsthathaveoccurredbeforethedateofatransaction.Policiesthatautomaticallyconvertintorun-offcanbeparticularlybeneficially,asanyclaimsorcircumstancesthatarisefrompastactionscanbenotifiedundertheexistingpolicyuntiltheendoftheinsuranceperiod.

Run-offpremiumsarecalculatedusingarangeofmethodsbuttypicallyreflectthediminishingriskofnewclaimsovertime.Insurerscanprovidearangeofoptionsforrun-offs,thoughorganizationsshouldseekcoverageforaslongaspossible.

Overall,run-offcoverageisacriticalriskmanagementtoolthathelpseffectivelyinsuredirectorsandofficersfordecisionsmadeinpreviousroles.

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Common Policy Exclusions D&Oliabilityinsuranceisintendedtoprovidebroadandsufficientcoverageforpolicyholdersandtheirofficers.However,D&Opoliciesdonotcoverallconductandmanycontainanumberofnotableexclusions.SomeexclusionsarecommonplaceandcanbefoundinthevastmajorityofD&Opolicies,whileothersarerare.

Astimeconsumingasitcanbe,organizationsshouldalwayssitdownwiththeirinsurancebrokerandreviewtheexclusionscontainedintheirD&Opolicy.Thiswillhelpensurethattheorganizationandtheirofficersunderstandhowtheirpolicyworksinpractice.Inmanycases,organizationsassumetheyarecoveredforaclaimwhen,infact,policyexclusionscouldapply.

ThissectionexaminescommonexclusionsfoundinD&Oinsurancepolicies.

KNOWN CLAIMS AND CIRCUMSTANCES

Duetotheclaims-madenatureofD&Ocoverage,policiestypicallydonotcoverknownclaimsandcircumstances.Putanotherway,D&Opoliciesdonotcoverclaimsthatshouldhavebeenreportedduringapastpolicyperiod.Accordingly,allclaimsandcircumstancesthatanorganizationisawareofbeforetheinceptionofapolicyareexcludedfromcoverage.

PRIOR OR PENDING LITIGATION

Thisexclusionremovescoverageforclaimsthatarisefromlitigationthatwaspendingpriortoacertaindatesetfortheitherinthepolicydeclarationsorintheexclusionitself.

Thependingandpriorlitigationexclusiondateensuresthattheinsurancecompanydoesnothavetopayaclaimarisingfromactiveorpendinglitigationthatanorganizationknewaboutbeforetheeffectivedateofthecoverage.

Atypicalscenariowherethepriororpendinglitigationexclusionscomesintoplayiswhenalawsuitagainstanorganizationislateramendedtoincludedirectorsandofficersasnameddefendantsaftertheinceptiondateofthepolicy.Inaddition,directorsandofficerscanbeexposedtothisexclusionifalawsuitisfiledbeforethepriororpendingdate,butmanagementdoesn’tfindoutaboutituntilafterward.

CONDUCT EXCLUSIONS

CoverageforcertaintypesofconductisexcludedfromD&Opolicies.Theconductexclusionsfoundinmostpoliciesprecludecoverageforthefollowingtwocategoriesofconduct:

1. Forclaimsrelatedtofraudulentorcriminalmisconduct

2. Forclaimsrelatedtoillegalprofitsorwagestheinsuredexecutivewasnotlegallyentitled

Theseconductexclusionsexistbecauseinsurancecompaniesareprohibitedfromcoveringcriminalorfraudulentactivity.Itshouldbenotedthatsomepoliciesallowtheinsurancecompanytoadvancedefencecoststoadirectororofficer.Thisisdoneonthepresumptionofinnocence,andaformalcourtrulingoradmissionofguiltisrequiredtodeclinecoveragecompletely.

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INSURED VS. INSURED EXCLUSION

D&Opoliciesprecludecoverageforclaimsbroughtbyoneinsureddirectororofficeragainstanotherdirectororofficeralsocoveredunderthesamepolicy.Thepurposeofthisexclusionistoeliminatecoverageforinternaldisputesamongdirectorsandofficersandclaimsinvolvingcollusion.

CATASTROPHIC HAZARDS

D&Opolicies,likeothertypesofinsuranceclasses,oftenexcludelossesorincludeexclusionsforlossesthataredeemedcatastrophichazardstotheinsurancecompany.Theseincludeclaimswheretheinsurancecompanycouldnotrealisticallycoverthecostofpayoutswithoutdestroyingitsownfinancialposition.

Examplesofcatastrophichazardsincludelossesresultingfromwar,terrorismandinstancesofcatastrophicenvironmentaldamage.Someoftheseexclusions,particularlytheenvironmentaldamageexclusion,willoftenhavecoveragecarve-backsforcertaintypesofclaims.

PARTICULAR CIRCUMSTANCES EXCLUSIONS

DuringtheD&Ounderwritingprocess,aninsurancecompanymayidentifyspecificcircumstancesorrisksitisunwillingtoinsure.Accordingly,theinsurancecompanymayoffercoveragetotheorganizationonarestrictedbasis.Theseexclusions,whicharesometimesreferredtoaslaserexclusions,areoftenusedwhenanorganizationhasdisclosedaseriousclaimorcircumstancethatoccurredduringapastpolicyperiod.Particularexclusionsarerelativelycommon,but,ifpossible,anorganizationshouldattempttoacquireD&Ocoveragewithoutthem.

CompaniesseekingD&Oinsuranceshouldworkwithaqualifiedinsurancebrokertofindapolicythatfitstheirneeds.Dependingontheparticularsofanorganization’soperations,itmaybeimportanttoensureapolicydoesn’tcontaincertainexclusions.Ifthisisthecaseforyourbusiness,besuretobehonestandbringupyourspecificneedsduringtheunderwritingprocess.

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Limits of Liability Whenitcomestounderstandingwhatcoverageyourorganizationhasavailablefollowingaclaim,it’scriticaltoexamineyourlimitsofliability.EveryD&Opolicyincludesalimitorlimitsofliabilitythatspecifiestheamountofinsuranceavailabletoapolicyholder.

Putsimply,thelimitofliabilitysetsthemaximumamountthataninsurancecompanyispreparedtospenddefendingandsettlingclaimsonbehalfofabusinessanditsmanagement.Alimitofliabilityisavailableforthepaymentoflegaldefencecosts,settlementsandcourtawardedjudgmentsthroughoutapolicyperiod.

D&Opoliciesaretypicallysubjecttoanaggregatelimitofliability,meaningthatthelimitappliestoallclaimscombinedduringthepolicyperiod.Accordingly,onelarge,expensivelossoranumberofsmallerlossesthataccumulateduringthepolicyperiodcouldexhaustalimitofliability.

Tobetterunderstandhowtheirinsurancerespondstoaclaim,organizationsneedtoexaminetheessentialsoflimitsofliability,whichareoutlinedbelow.

DEFENCE COSTS

MostD&Opoliciesaredefencecostinclusive,meaningthatfeesaccruedtopaylawyerscontributetotheoverallpolicylimit.So,ratherthanpayinglegalexpensesinadditiontoclaimsuptothepolicylimit,D&Opoliciessubtractlegalexpensesfromthepolicylimititself.

Asaclaimisdefended,thelimitofliabilitygraduallyerodes,leavinglessfundsavailableforsettlingclaimsorpayingforfutureclaimsduringthepolicyperiod.Infact,witheverydollaranorganizationspendsonlitigation,lessfundswillbeavailableforanysettlementsorjudgments.

Toensurethatyouhaveadequatelimitsofliabilitytodefendandsettleseriousclaims,youmustconsideryourdefenceexpensescarefully.Thisisespeciallyimportantwhenyouconsiderthatbothsettlementsandlitigationexpenseshavebeenescalatingyearoveryear.

SELECTING A LIMIT OF LIABILITY

Selectingalimitofliabilityisarguablyoneofthemostimportantconsiderationsforanorganization’smanagementwhenacquiringD&Oinsurance.Thepressuretoselectanadequatelimitofliabilityismagnifiedwhenyouconsiderthatthewronglimitscouldaffectthelivelihoodofdirectorsandofficersintheeventofaclaim.ThelevelofcoverageunderaD&Opolicycouldbethedifferencebetweenanorganizationanditsleadersbeingcomfortablyprotectedandfinancialruin.

ButhowdoesanorganizationknowhowmuchD&Ocoveragetocarry?Thisisacomplexquestion,ascompaniesneedtobalancetheirunpredictable,futureliabilitieswithtoday’spremiumexpensestodeterminethelevelofcoveragetheyneed.

D&Oinsurancelimitsneedtobesufficientenoughtopayforavigorousdefenceofclaimsforalldirectorsandofficers,aswellasthecompanyitself.What’smore,thereneedstobeenoughfundsremainingfollowingadefencetosettleclaimsandsatisfyanyjudgments.Thisensuresthatplaintiffswillnotgoafteryourdirectors’andofficers’personalassets.

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Unfortunately,forbusinessesconsideringD&Oinsurance,selectingalimitofliabilityisnotanexactscience,andthereisnooneformulatodeterminehowmuchacompanywillneed.Selectingtheproperlimitofliabilitydependsonexaminingawiderangeoffactorsalongsideaknowledgeableinsurancebroker.

The next sections will describe six factors to consider when selecting a limit of liability for a D&O policy.

CONSIDERATION 1 - OWNERSHIP STRUCTURE: PUBLIC VS. PRIVATE

Anorganization’sownershipstructureplaysanimportantroleindeterminingthelevelofD&Ocoverageneeded.WhilebothpublicandprivateorganizationsfaceD&Oexposures,publicorganizationstendtofacethemostsevereandcostlyclaims.

Public CompaniesPubliccompaniesmustcontendwiththeever-presentthreatofasecuritiesclass-actionlitigation.Inmanycases,asecuritiessuitrepresentsthecompany’slargestmanagementliabilityexposure.Asaresult,publiclyheldorganizationstendtocarryD&Opolicieswithhigherlimitsthantheirprivatelyheldcounterparts.

Private CompaniesThisisnottosaythatprivateorganizationsdonotfacecomplexD&Oexposures.Infact,D&Oclaimsagainstprivateorganizationsoftensettleforhundredsofthousandsofdollarsor,insomecases,millions.Similartopubliccompanies,thelimitsofliabilityforprivatecompaniesissubjecttoerosionbydefenceexpenses.Thismeansthatmanyofthesameconsiderationspubliccompaniestakeconcerningdefenceexpensesapplytoprivatecompaniesselectingalimitofliability.

AnadditionalconsiderationforprivateorganizationsthatcarryD&Oinsuranceisthattheentitycoveragecontainedinmostprivatecompanypoliciesisbroaderthantheentitycoverageprovidedtopubliccompanies.Whilepubliccompanypoliciesaregenerallylimitedtosecuritiesclaims,privatecompanyentitycoverageisnotasnarrow.

Thisbroadercoveragecreatesthepossibilitythatdefenceexpensesandsettlementsoftheentitycoulderodethelimitsofliability.Thiscouldleaveindividualdirectorsandofficerswithlittleornoinsuranceremainingtodefendthemselvesorsettleclaims.Additionally,broaderentitycoveragecouldinfluencesomebuyerstoincreasetheirlimitsofliabilityinordertoprotectagainsterosionorexhaustionofpolicylimits.

CONSIDERATION 2 - SIZE

Similartoanorganization’sownershipstructure,acompany’ssizeisalsoagoodindicatorofD&Oexposure.Anumberofmetricscanmeasurethesizeofanorganization,includingannualrevenue,marketcapitalizationandemployeecount.

Asageneralrule,largerorganizationsexperiencemoresevereandfrequentD&Oclaims.Thus,theseorganizationstendtoseekhigherD&Opolicylimits.Bycontrast,smallerorganizationsgenerallycarrylessD&Oriskandsubsequentlyseeksmallerlimits.Insomecases,underwritersmaynotofferhigherlevelsofcoveragewherethelimitofliabilityislargerthanthetotalvalueoftheorganizationitself.

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CONSIDERATION 3 - NUMBER OF DIRECTORS AND OFFICERS

ThetotalnumberofexecutivesrequiringprotectionunderaD&OpolicyhasasubstantialeffectonthelevelofD&Ocoverageneededbyanorganization.Whendefendingclaims,alldirectorsandofficersdrawcoveragefromthesameinsurancepolicyandlimitofliability.

Inmanycases,directorsandofficersmaynothavethesameinterestand,therefore,mayrequiretheirownseparatelegalcounsel.Thiscanleadtotherapidexhaustionofthelimitofliability.Forexample,someofficersmaybeallegedtohaveknowinglyparticipatedinfraudulentacts,whileothersareallegedsimplytohavebreachedtheirdutyofcare.Whenthisoccurs,innocentdirectorsandofficersareforcedtosharedefencecostswiththosedirectlyimplicatedinaclaim.

Accordingly,alimitofliabilityshouldtakeintoaccountthenumberofindividualscoveredunderthepolicy.OrganizationsthathavealargenumberofpeopleundertheirD&Opolicyshouldconsiderraisingtheirlimitsofliability.

CONSIDERATION 4 - TERRITORY

Thelocationofanorganization’soperationsandbusinessinterestsshouldalsobeconsideredwhenselectinglimitsofliability.Organizationsthatoperateinforeignmarketstendtofaceahigherriskofclaimsduetoincreasedcomplianceobligations.What’smore,whenorganizationsfirstenteranewmarket,theycanberelativelyunfamiliarwithlocallaws.Thiscanleadtounlawfulconductandclaimsagainstdirectorsandofficers.

Finally,organizationsthatoperateinhighlylitigiousjurisdictions,suchastheUnitedStatesorEuropeanUnion,shouldbeespeciallymindfuloftheirpolicylimitsconsideringtheescalatedriskoflegalaction.

CONSIDERATION 5 - PEER BENCHMARKS, MARKET REPORTS AND LOSS TRENDS

Agrowingnumberoforganizationstakeadata-drivenapproachwhenselectingtheirpolicylimitsbyexaminingthepurchasingdecisionsofpeerorganizations.ThisdataissortedinsuchawaythatorganizationscanreviewD&Oinsurancepurchasingtrendsintheirindustry.Organizationscanthenbenchmarktheirpolicy’slimitagainstthelimitsoftheirpeers.

Thisinformationisoftenprovidedbyunderwritersandinsurancebrokersandcanbeuseful.However,organizationsshouldalwaysensurethattheirD&Opolicyisadequateenoughtomeettheirownspecificneeds.Thereisnoguaranteethatanorganization’speersarepurchasingthecorrectlimit.What’smore,benchmarkingdatavariesandcanbebiased.

Inadditiontoreviewingpeer-benchmarkingdata,organizationsshouldscrutinizeclaimstrendsintheD&Omarket.D&Omarketreports—availablethroughinsurancebrokers,underwritersandotherthirdparties—canprovideinsightsintoD&Olitigationtrends,newpiecesoflegislationandoverallmarketconditions.Thesereportscontaininformationaboutclaimsinvariousindustries,thesizeoflawsuitsettlementsandthetypeofclaimscommonlybroughtabout.

CONSIDERATION 6 - BUDGET

ThevastmajorityofbusinessesdonothaveanunlimitedbudgettospendoninsuranceandmusttakeintoaccountthecostofacquiringD&Ocoverage.Thisisespeciallytrueofsmallerorganizationsthatare

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morecost-conscious.Likeotherformsofinsurance,organizationsneedtoweighliabilityscenariosagainstthelevelofpremiumtheycanafford.

InsurancebrokerscanbeavitalresourceforbusinessesbalancingtheneedforD&Ocoverageandtheirbudgetaryconstraints.Withthehelpofinsurancebrokers,organizationscanoftenreducetheirpremiumexpendituresbysafelyalteringthecoversoftheirD&Opolicy.

ThecomplexityoftheselimitselectionandprogramstructureissuesunderscorehowindispensableitisthatinsurancebuyersenlistknowledgeableandexperiencedadvisorsintheirD&Oinsuranceacquisitionprocess.

IMPLICATIONS OF ENTITY COVERAGE

OnewaytoaltertheoperationofalimitofliabilityistoincludeentitycoveragewithinaD&Opolicy.Thefollowingaresomeconsiderationsorganizationsshouldkeepinmindwhenaddingentitycoverage:

Removing Cost Allocation Disputes

WhenorganizationsincludeentitycoverageintheirD&Opolicies,itremovesthetediousissueofcostallocation.Withoutentitycoverage,thepotentialforadiversionofinterestsbecomesapparent.Thisisbecauseinsurersarepayingonbehalfofexecutivesandorganizationsarepayingforthemselveswhileattemptingtodividethecostsoflitigation.

Whenentitycoverageisinplace,bothmanagementandtheorganizationareinsuredunderthesamepolicy.Thisalignstheinterestsoftheinsuredandtheinsurer,whichcouldleadtosmootherclaimsresolutions.

Sharing the Policy Limit

Whileentitycoveragecangoalongwayincontrollingcostallocationdisputes,it’snotwithoutitsdrawbacks.Onemajordownsidetoentitycoverageisthewayitaffectsthelimitofliability.

Again,thelimitofliabilityiscommonlysharedacrossallsectionsofaD&Opolicyand,assuch,anycoststhataccumulatewhendefendinganentityfromaclaimadverselyimpacttheoverallpolicylimit.Inshort,thecoverageavailabletodirectorsandofficersshrinkseverytimeanorganizationdefendsitsowninterests.Insomecases,thelimitofliabilitycanbeexhaustedcompletely,leavingacompany’smanagementteamwithoutfinancialrecourseintheeventofaclaim.

Withthisinmind,organizationsmustconsiderhowincludingentitycoveragecannegativelyimpacttheirdirectorsandofficers.Whenseekingcoverage,besuretobringupspecificconcernswithaqualifiedinsurancebroker.Yourbrokerwillthenbuildapolicythatmeetsyouruniqueneedswithoutleavingkeyindividualsopentothefinancialimpactofaclaim.

SOLUTIONS FOR SHARED LIMIT OF LIABILITY

Becauseentitycoverageandsharedlimitsofliabilityhavethepotentialtoexhaustcoverageforanorganization’smanagementteam,manysteerawayfromit.However,therearewaystoovercometheissuescreatedbyentitycoverage,includingthefollowing:

1. Remove entity coverage altogether.OrganizationshavetheoptiontonotinsureSideCorelectemploymentpracticesliability(EPL)coverage.Bydoingthis,theissueofsharedlimitsis

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removedaltogether.Instead,organizationscanpreservetheirentirelimitstoprotecttheirmanagementteamandrecoupthecostsofindemnification.

2. Purchase stand-alone entity coverage.WhileremovingentityandEPLcoveragefromaD&Opolicycansolvetheissueofsharedlimits,itcanleaveorganizationsexposed.Tocounteractthis,companiescouldpurchasestand-aloneentitycoverage.Whilethisistypicallymoreexpensive,itpreventsentityclaimsfromdrainingaD&Opolicylimit.

3. Elect separate towers.Wheneversmalltomid-sizedbusinessesacquiremanagementliabilitycoverage,theyhavetheoptionofelectingseparatetowersforeachinsuringagreement.Thismeanseachsectionofcoverageisisolatedwithitsownlimitofliability.Thiscanbeparticularlyusefulintheeventthatcorporateliabilitycoverageisexhausted,asotherinsuringagreementswouldremainintact.

4. Purchase additional Side A coverage. Togarnerhigherlimitsthanwhat’softenofferedbytraditionalD&Opolicies,organizationshavetheoptiontopurchaseadditionalSideAcoverage.Manyinsurersofferstand-aloneSideAcoveragetocomplimentstandardagreements,whichcanprovidethefollowingbenefits:

a. Difference-in-limit (DIL) coverage—Akeybenefitofpurchasingadditionalstand-aloneSideAprotectionisthatitprovidesDILcoverage.Inessence,thisgivesorganizationsexcesslimits,availableonstandby,ifaprimarypolicylimitisexhausted.

b. DIC coverage—DICworkseffectivelyas“dropdown”coveragethatindemnifiesexecutivesifanorganizationoraprimaryD&Opolicycannotprotectthem.Thisispossiblebecausestand-aloneSideApoliciesprovideorganizationswithbroaderprotectionandlessexclusions.

D&O PROGRAMS

OrganizationsthatrequirealargerlimitofliabilitymustworkwithanexperiencedinsurancebrokertodevelopaD&Oprogram.Theseprogramsalloworganizationstoacquiretheirtotalpolicylimitofliabilityfrommultipleinsurers.Thisisparticularlyusefulwhenacompany’suniquerequirementsaretoomuchforoneinsurer.

Layering of Indemnity Limits: The D&O Tower

MostinsurancecompaniesmanagetheirownexposuresbylimitingtheamountofD&Oinsurancetheyselltoanyoneorganization.Typically,insurancecompaniesareabletoprovidecoverageupto$10million.WhenanorganizationrequiresahigherlimitofD&Ocoveragethananinsurancecompanyiswillingtoprovide,theywillneedtoworkwithanexperiencedinsurancebrokertodevelopaD&Otower.D&Otowersareconstructedtoalloworganizationstoacquiretheirdesiredpolicylimitfrommultipleinsurancecompanies.

Often,aleadinsurerhelmsapanelofinsurersthatmakeupaD&Otower.ThisgroupisveryexperiencedwithD&Opoliciesandistaskedwithhandlingclaimsandcreatingpolicywording.Inaddition,theleadinsurerisresponsibleforissuingtheprimarylayerofcoverageandisthefirstgrouptopayoutwhenclaimsarise.

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Followingtheprimarylayer,excesslayersofcoverageareacquiredfromotherinsurersandstackeduntiladesiredlimitismet.Excesslayersaresubjecttothesametermsandconditionsoftheprimarylayerinwhat’sknownasfollowform.

WithabasicknowledgeofhowD&Otowersareestablished,it’simportanttounderstandthemechanicsofhowtheyreactfollowingaclaim.WheneveraclaimisbroughtagainstaD&Oprogram,thelimitliabilityiserodedfromthebottomup.Effectively,onceaclaimexceedstheself-insuredretention,theprimarylayerofcoverageiserodeduntilthefirstexcesslayerisreached,thenthesecondandsoon.Thiscontinuesuntilthetotalprogramlimitisexhaustedorthepolicyperiodends.

Duetothisstructure,theleadinsuranceisoftentheonethatincursthemajorityofthelossesandisresponsibleforsettlementanddefencecostpayments.However,becausetheleadinsurerinveststhemosttimeintonegotiatingthetermsandconditionsofcoverage,theyreceiveamuchlargershareofthepremiumthanexcesslayerinsurers.Insurersresponsiblefortheexcesslayerstypicallyplayasecondaryrole,coveringlargeclaimsoronesthathaveaccumulatedtoahighlevel.

Togetabetterunderstandingofhowlayeringworks,seethefollowingexamplebelow:

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Coinsurance

Outsideofalayeredformat,D&Oprogramscantakeonaproportionatecoinsurancestructure.Inthisstructure,thepanelofinsurerssharetheriskequallyandagreetopaythesamepercentageofanyclaimmadeagainstapolicy.Becauseofthis,eachinsurerreceivesanequalshareofthepremium.

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Self-insured Retention Self-insuredretention(SIR),sometimessimplyreferredtoasretention,isanimportantcomponentofD&Opolicies.SIRisadollaramountspecifiedinaliabilityinsurancepolicythatmustbepaidbytheinsuredbeforethepolicywillrespondtoaloss.

ForD&OpolicieswithSIRprovisions,organizationspaytheinitialcostsofaclaim,suchastheearly-stagelegalfeesandsettlements,untiltheSIRlimitisreached.Afterthatpoint,theinsurancecompanymakesanyadditionalpaymentsforexpensescoveredunderthepolicyuntilthepolicylimitisreached.IninstanceswhereaclaimissmallandcanbesettledforanamountlessthantheSIR,anorganization’sD&Opolicymaynotrespondatall.

Inessence,SIRprovisionsrepresenttheamountofriskanorganizationiswillingtoabsorbbeforeapolicykicksinandprovidesprotection.SIRprovisionscanbecomplex,andthereareanumberofconsiderationsorganizationsandtheirdirectorsandofficersshouldkeepinmind.

SIR VS. DEDUCTIBLE

WhileSIRsanddeductiblesaresimilarinthattheybothrequiretheinsuredpartytobearthefinancialportionofaloss,thereareimportantdistinctionsinthewaytheyoperate.

DOES SIR APPLY?

Aspreviouslymentioned,astandardD&Opolicyhasthreeinsuringagreements,oftenreferredtoasSidesA,BandC.TheseinsuringagreementsspecifythedegreeofcoverageprovidedbyaD&Opolicyandsummarizethepromisebytheinsurertoindemnifythepolicyholderfromlossesincurredfromaninsurableevent.

ItshouldbenotedthateachinsuringclauseinaD&OpolicyissubjecttoaseparatelevelofSIR,whichcanaddalayerofcomplexitywhenitcomestounderstandingcoverage.ThefollowingisabriefoverviewofhowretentionappliestospecificsidesofD&Opolicies:

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1. Retention applying to Side A—Asareminder,SideAisthefirstinsuringagreementofaD&Opolicyanditinsuresindividualdirectorsandofficersagainstlossesthattheorganizationisnotlegallyorfinanciallyabletoindemnify.WhenitcomestoSIR,SideAcoverageistypicallynotimpacted.Thismeansthatdirectorsandofficescanseekprotectionfromaninsureratnocost,providedtheyhaven’tbeindemnifiedbyanorganization.

2. Retention applying to Side B—SideB,alsoknownascorporatereimbursementcoverage,isthesecondinsuringagreementofaD&Opolicy.SideBreimbursesorganizationsfortheexpensestheyoccurwhendefendingtheirdirectorsandofficersinaccordancewiththeirindemnificationobligations.Side-BcoverageisgenerallysubjecttoamoderatelevelofSIR.Thisisbecauseanorganizationisviewedashavingthefinancialresourcestocontributetothecostofclaim,whendefendingdirectorsandofficers.

3. Retention applying to Side C—Side-Ccoverage,sometimesreferredtoasentitycoverage,isthethirdinsuringagreementofaD&Opolicy.Thiscoverageinsuresorganizationsforclaimsmadedirectlyagainsttheorganizationbyprovidingentityassetprotectionsandcoveragefordefencecosts.AnyentitycoverageapplyingtoD&Oissubjecttoaself-insuredretention.Becauseorganizationswithentitycoveragegenerallyuseinsuranceaspartofabroaderriskmanagementprogram,itisexpectedthattheycanaffordtocontributetotheirownclaimscostandsharesomeoftherisk.ThisissimilartoSideB,however,SideCattractsahighlevelofretentionasorganizationswithentitycoverageareoftenmorepronetolitigation.

FormoreclarityonhowSIRappliestoD&Opolicies,seetheflowchartbelow.

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3 POTENTIAL BENEFITS OF SIR

1. A cleaner claims history—BymanagingclaimsontheirownunderSIR,organizationscanmaintainacleanclaimshistory.Thiscanmaketheseorganizationsmoreattractivetoinsurancecompanies.Inthelongrun,acleanclaimshistorycanleadtoinsurancecompaniesofferingbettertermstotheorganizationforitsD&Oinsurance.

2. Consistent coverage—SIRprovisionstypicallyapplytoeveryclaim,withorganizationspayingforlossesuptothelevelofretentionforeachseparateclaim.However,manypoliciestreatmultipleclaimsthatarisefromthesamewrongfulactasasingleclaim,thusattractingonlyoneSIR.

3. Lower premiums—OrganizationsthatretainmoreoftheirownD&OriskthroughahigherSIRlimitcanhavetheirpremiumcostsreduced.Insomecases,organizationsdonothaveachoice,ashighretentionsareoftenimposedonriskyaccountsandfrequentlyclaimedpolicysections.

SELECTING A SIR LEVEL

TherearemanyfactorstoconsiderwithselectingalevelofSIR.It’simportantfororganizationstoconsidertheirabilitytobearthecostsofclaimsandoveralllevelofrisk.

IftheSIRistoohigh,anorganizationmaynotbeabletoaffordtofinanceclaimstothatlevel,especiallyifitisdefendingmultipleclaimsatthesametime.Conversely,ifretentionissettoolow,thepolicymayrespondtoofrequently,establishingapoorclaimshistoryfortheorganization.

Ingeneral,anorganization’slevelofSIRisrelativetothesizeofitsassets.WhenselectingaSIRlevel,businessesshouldconsidertheirabilitytomeetretentionobligationsandonlychooselevelstheycanafford.

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The Application and Underwriting Process EveryD&Oinsurancepolicybeginswithaformalapplicationforcoverage.Insurancecompaniesusetheapplicationandunderwritingprocesstodetermineanorganization’soperations.Theinformationcollectedduringtheapplicationandunderwritingprocessallowsinsurancecompaniestoassessanorganization’slevelofD&Orisk,pricetheD&Ocoverageappropriately,andapplytermsandconditionstothepolicy.

Whiletheapplicationandunderwritingprocessmightseemstraightforward,itisnonethelessimportantthatorganizationstakethetimetoputtogetheracompleteandthoroughapplicationforcoverage.Doingsocanhelpeliminatefutureheadaches.

THE APPLICATION

InordertoobtainD&Oinsurance,organizationsmustsubmitanapplicationthatconsistsoftwoparts.Thefirstpartistheproposalform.Thisformisaformalapplicationdocumentthatasksawiderangeofquestionsaboutanorganization,itsoperationsanditsmanagerial-relatedexposures.

Inadditiontotheproposalform,organizationstypicallyhavetosubmitaseriesofsupportingdocuments.Thesedocumentsallowunderwriterstotakeacloserlookatanorganizationanditsstanding.Generally,insurancecompanieswillrequireanorganizationtosubmitthefollowing:

� Auditedfinancialstatements

� Annualstatements

� Acompletelistofdirectors,trustees,executivesandofficers

� Copiesoftheorganization’sbylaws,indemnificationprovisions,charterorconstitution,andothersimilardocuments

� Copiesoftheorganization’semployeehandbookorothersimilardocumentorpolicies

GET BETTER RESULTS WITH QUALITY APPLICATIONS

Organizationshaveanincentivetopresentunderwriterswithacompleteandaccurateapplication.Whenunderwritershaveacompletepictureofanorganization,theytendtobemorecomfortablewiththemanagementriskstheorganizationpresents.ThiscomfortlevelcreatesconditionswhereunderwritersmaybemorewillingtoofferanorganizationD&Ocoverage.

DISCLOSURE REQUIREMENTS

OrganizationsandtheirmanagementhaveadutytoactingoodfaithwhencompletingapplicationsforD&Oinsurance.Inparticular,organizationsarerequiredtodiscloseinformationthatcouldleadtofutureclaimsduringtheapplicationprocess.Typically,theinformationorganizationsarerequiredtodiscloseincludesthefollowing:

� All material facts—Inshort,amaterialfactisanypieceofinformationorknowledgethatcouldinfluenceanunderwriterwhendecidingtotakeonanorganization’srisk.Underwritersusematerialfactstocreateariskprofileanddetermineapolicy’stermsandconditions.

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� Prior claims and circumstances—Insurersrequireorganizationstodiscloseallpriorclaimsandanycircumstancesthatcouldleadtofutureliability.Often,thesepriorclaimsandcircumstancesareexcludedfromcoverageastheorganizationmovesthroughtheunderwritingprocess.Underwriterswilltakeintoaccountanorganization’sdisclosureofpriorclaimswhendeterminingapolicy’spremiumandtermsofcoverage.

Anorganization’sdutyofdisclosureisnotsimplyaone-offaffair,butrather,acontinuedresponsibility.Businessesandtheirexecutivesmustcontinuallynotifytheirunderwritersofaccurateinformationthroughoutanapplicationupuntilcoverageisgranted.Intheeventthatfactsorcircumstanceschangeatanypointduringtheinitialstagesofelectingcoverage,it’sinmanagement’sbestinteresttodiscloseanyrelevantinformation.

UNDERWRITING CONSIDERATIONS

Overtheyears,insurancecompanieshaverefinedtheirunderwritingpracticesforD&Oinsurancetorewardorganizationsthatimplementproactiveriskmanagementmeasures.WhilecompaniesacrossthecountryhavedevelopedagreaterappreciationfortheimportanceofD&Oinsurance,manymisconceptionsabouttheunderwritingprocessforD&Oinsurancepersist.Understandingtheunderwritingprocesscanhelporganizationsgetabettergrasponhowtopreparewhenseekingcoverage.

The Nature and History of Operations

ApplicationsforD&Oinsurancegenerallystartbyaskingapplicantsforabasicprofileoftheirorganization.Inparticular,underwriterswanttoestablishtheorganization’ssize,location,historyandindustry.Whilethisinformationmayseemelementary,itaffectsanunderwriter’swillingnesstoacceptanapplicationforcoverage,aswellassetstheprice,termsandconditionsofthepolicy.Ofthese,generalitems,anorganization’shistorycanbeamajorfactorindeterminingpremiums.Underwritingisusuallymorefavourablefororganizationsthathavesuccessfullybeeninbusinessforlongerperiodsoftime.Thisisbecausethesecompanieshavedemonstratedthattheyhavewhatittakestorunwithoutseriousissues.

Itshouldbenotedthatanorganization’sindustrymaycontributetoaninsurancecompany’sperceptionoftheD&Oriskposedbyanapplicant.Whenforminganopinionofapotentialnewclient,underwriterswilloftentakeintoconsiderationanyrecentlitigationtrends,alongwiththeirownunderwritingexperiencewithorganizationsinthatsector.

Underwritersmayalsouseacompany’sownershipstructureasanindicatorofD&Orisk.Understandingwhetheracompanyispublic,privateornon-profitcanhelpunderwritersinferwhatkindofclaimscouldoccur.

Publiclytradedcompaniesoftenhavethemostrisk,makingthemsubjecttohigherlevelsofscrutiny.Fortheseorganizations,insurancecompaniesrequireadditionalanalysisduringtheapplicationprocessandmayexamineoperationalspecificslikeaccountingpractices,corporatestructure,stockpricevolatility,executivecompensation,disclosurepracticesandcorporategovernance.

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Financial Condition

Typically,underwritersrequireorganizationstosubmitacopyoftheirauditedfinancialstatementsalongwiththeirapplicationforD&Ocoverage.Underwritersrequirethisinformationsotheycandevelopanunderstandingofanorganization’sfinancialcircumstances,particularlyitskeyincomestatementcomponentsandbalancesheetcomponents.Thisinformationisusedtocreatearangeoffinancialratiosandbenchmarkanapplicanttoothersimilarorganizationswithinitsindustry.

Oneofthemainquestionsunderwriterstrytoansweriswhetheranorganizationhassufficientcashorcreditavailabletofunditsoperationsandserviceitsdebtobligationsthroughouttheproposedpolicyperiod.Underwritersgenerallylookuponorganizationswithastrongfinancialstandingfavourably,especiallyiftheyoperateinanindustrywithapositiveeconomicoutlook.

Tohelpbenchmarkacompany’sfinancialratiosagainstsimilarfirms,underwriterswilloftenexaminethefollowing:

� Currentratios,whichcompareacompany’sassetsandliabilities

� Debt-to-equityratios,whichdisplaytheproportionofshareholderequityanddebtusedtofundanorganization’sassets

� Interestcoverratios,whichdeterminehoweasilyanorganizationcanpaytheinterestonitsoutstandingdebts

� Profitmargins,whichcomparenetprofitsagainstoverallrevenuetoexpressanorganization’soperatingprofitability

Inadditiontotheabove,stockpricevolatilityisanimportfactorforunderwriterswhenexamininganapplicant’sfinancialcondition.Ingeneral,acompanythathasasharepricethatdramaticallyregistersevensmalleventsiscapableofproducinglargeshareholderdamages.Forthatreason,companieswithvolatilestockpricesrepresentanunfavourableriskclassformanyunderwriters.

Merger and Acquisition Activity

Ifanorganizationhasbeeninvolvedinmergeroracquisition(M&A)activity,underwriterswilltypicallyinvestigatethereasonsforthesetransactionstogainanunderstandingofanyassociatedrisk.InsurancecompaniesareinterestedinthisinformationbecausefinancingandM&AactivitiesoftenleadtoD&Oclaims.

Ingeneral,thesizeandnatureofanM&Ahasaninfluenceonthelikelihoodofclaims.Often,thelargerthetransaction,thehighertherisk.Dependingonthenatureofanorganization’sM&Aactivity,anunderwritermayimposecertainconditionsorrestrictions,suchasplacingretroactiveexclusions,imposingsublimits,charginghigherpremiumsordecliningcoveragealtogether.

Claims History

Insurancecompanies,bytheirnature,wanttoextendcoveragetoorganizationsthatwillallowthemtoremainprofitable.Insurancecompaniesgenerallyviewanorganizationwithahistoryoffrequentclaimsorpendinglitigationasundesirable,andmaydeclinetooffercoverageorchargemoreforcoveragebasedonthelikelihoodofafutureloss.

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WhileeachinsurancecompanyhasitsowninternalD&Ounderwritingpractices,underwriterstypicallylookatthefollowing:

� Recentcivilorcriminalaction,oradministrativeproceedingsallegingviolationofafederal,provincialorforeignsecuritieslaw

� Involvementininsolvencyorbankruptcyproceedings

� Instancesofemploymentorlabour-relatedlitigationorproceedings

� Disputesoveremployeebenefitsorpensionplan

Byanalyzingpreviousclaimsandcircumstances,underwritersattempttoweedoutbadrisksbeforeofferingcoverage.Underwriterswilltypicallyrequestasummaryofeachincident,aswellasthevalue(orestimatedvalue)ofthelossesincurred.

Employment Practices

CurrentandformeremployeesareacommonsourceofD&Oinsuranceclaims,especiallyforprivateandnon-profitorganizations.Inordertogetabettersenseofhowlikelyanorganization’sdirectorsandofficersaretobepulledintoadisputewithemployees,insurancecompanieswilltypicallyaskaseriesofquestionsrelatedtoemploymentpractices.Commonquestionsinclude,butarenotlimitedto,thefollowing:

� Doesyourorganizationhaveaformalhumanresourcesdepartment?

� Doesyourorganizationhaveanemployeehandbook?

� Hasyourorganizationrecentlycompletedanylayoffs,facilityclosuresorearlyretirementprograms?

� Whatisyourorganization’sannualturnoverrate?

� Doesyourorganizationhavepoliciesforbiddingdiscriminatoryconductintheworkplace?

� Doesyourorganizationhaveformalhiringandinterviewingguidelines?

International Exposures

Underwritersoftentakeextraconsiderationsforcompaniesthathaveinternationalbusiness.ThisisbecauseorganizationsthathaveoperationsinforeigncountriestendtofaceahigherdegreeofD&Oriskduetothecomplexcompliancerequirementsthatexistinoutsidejurisdictions.

Managingthecomplexityofinternationalcomplianceandfairbusinesspracticesplacesanadministrativeburdenonleadership,whichcould,inturn,leadtoerrorsandsubsequentclaims.Accordingly,underwriterswilltypicallyaskanorganizationapplyingforD&Ocoveragetoestimatewhatpercentageofitsbusinessisdoneathomecomparedtowhat’sdoneinothercountries.

The Quality of Management

WhenunderwritingD&Opolicies,thequalificationsandexperienceofyourexecutiveswillnodoubtbeexamined.Underwriterswilloftenanalyzeeachleader’smanagerialtrackrecordtoforecasttheirfuture

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performance.Underwritersmayrequestdetailedprofessionalprofilesofyourexecutives,soit’simportanttoprepareyourleadershipteambeforeenteringtheapplicationprocess.

Relatedtotheexperienceofyourmanagementteam,underwriterswilloftenlookatexecutivecompensation.Excessiveexecutivecompensationissometimescitedasthesinglemostreliableriskmarker,asitusuallyinvitesahostofdangerous(andsometimesdestructive)behaviours.Essentially,payingexecutivesgenerouslyupfrontdoesnotincentivizehigherperformance.Whenexecutivesarepaidwellupfront,theyarelesslikelytofocusonlong-termstrategies,whichcouldleadtodecisionsmadeinsilos.

SELECTING THE RIGHT INSURER

WhenselectingaD&Opolicy,it’stemptingtosimplychoosethepolicywiththelowestpremiums.However,whenselectinganinsurer,organizationsshouldkeepthefollowinginmind:

� Terms and conditions—PerhapsthemostimportantfactortoconsiderwhendecidingwhichD&Opolicytopurchasearethetermsandconditionsofthepolicyitself.Aboveall,it’simportanttorememberthattermsandconditionsinD&Opoliciesarenotstandard.Aninsuredwhosavesafewdollarsinpremiumsbyselectinganinferiorpolicymayfinditselfwithoutadequateprotection.

� Claims handling—NeverforgetthatyoupurchaseaD&Opolicytopayclaims.Differentinsurershandleclaimsusingtheirownuniquemethodology.BeforedecidingtopurchaseaD&Opolicy,itisimportanttoknowtheinsurer’sreputationforpayingclaims.Insuredsmayalsofindithelpfultoknowwhethertheinsurerhasitsownexperiencedclaimsstafforwhetheritusesoutsidefirmsforitsclaims.

� Financial ratings—Thefinancialstrengthofaninsurerisimportant.OnewaytodeterminethefinancialstrengthofacompanyistoconsideritsratingfromA.M.Bestorasimilarratingagency.

� Longevity in the industry and experience with D&O insurance—Someinsurerstrytotimetheirentryandexitfromparticularareasofinsurancewiththehardandsoftmarketcycle.Whilesuchaninsurermaybeabletoofferlowerpricesduringcertaintimesoftheyear,itistypicallybettertoworkwithaninsurerwhowillremaininthemarket.

Whilenooneknowsyourbusinessbetterthanyou,insurancebrokershaveadetailedunderstandingoftheD&Orisklandscape.D&Oinsuranceisoftenthelastlineofdefenceforthepersonalassetsofadirectororofficer.Assuch,selectinganinsurerisaprocessthatshouldn’tbetakenlightly.

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Dealing with ClaimsTypically,aD&Oinsurancepolicyisn’tusedinagivenyear,andorganizationscangoyearsbetweenD&Oclaims.However,whenaD&Oclaimarises,itisimperativethatanorganizationknowshowtorespond.Often,correctlyrespondingtoaD&Oclaimcanmeanthedifferencebetweenpeaceofmindandfinancialdisaster.

NOTIFICATION

Aspreviouslymentioned,mostD&Opoliciesareunderwrittenonaclaims-madeandnotifiedbasis.Forpolicyholders,thismeansthattheymustnotifytheirinsurerwhentheyfirstbecomeawareofaclaimorspecificcircumstancesthatcouldleadtoaD&Oclaim.

Accordingly,ifanorganizationbelievesthatacertainactionoreventislikelytocreateaD&Oclaiminthefuture,theyshouldprovidethefollowingtotheirinsurerandinsurancebroker:

� Detailsregardingthenatureoftheclaimandthecircumstancesthatleadtoit(includethenamesofactualorpotentialclaimants,yourviewsontheclaimorcircumstancethatleadtoit,andanyallegationsthathavebeenmadeormightbemadeagainstyou)

� Alistofpartiesinvolved(otherthantheclaimant)

� Thedateyouwerefirstmadeawareoftheclaimorthecircumstancesthatledtoit

It’scrucialtoincludeasmuchdetailaspossiblewhenyoufirstnotifyyourinsurer.Aslongasnotificationisdoneproperly,aninsurerisobligatedtocovertheincident,evenifitdoesnotdevelopintoaclaimuntilafterthepolicyhasexpired.

Beforenotifyingyourinsurer,thereareanumberoflegalprotocolstokeepinmind,andorganizationsshouldavoiddoingthefollowingsixthings:

1. Admittingliability

2. Correspondingwithoutsidepartiesregardingaclaim

3. Makingorpromisinganypayment

4. Incurringanycostswithoutaninsurer’sapproval

5. Takinganyactionthatmighthinderaninsurer’sabilitytoinvestigateaclaimorcircumstance

6. ProvidingdetailsoftheirD&Opolicytotheclaimant

Inmostcircumstances,foraD&Opolicytorespondeffectively,organizationsmustprovidetheirinsurerswithaclaimnotificationwithinthepolicyperiod.Again,mostpoliciesrequiretheinsuredtonotifytheirinsurerassoonasreasonablypracticableorimmediatelyafteranotifiablecircumstance.

LATE AND DELAYED NOTIFICATION

Inlimitedcircumstances,insurersmayprovidesomeleewayforaclaimnotificationtobeaccepted.Thisgenerallyhappensinsituationswhereanorganization’sD&Opolicyhasanextendedreportingpolicyprovision.Anextendedreportingperiodisadesignatedamountoftimeafteraclaims-madepolicyhasexpired.Duringthistimeframe,aclaimmaybemadeandcoveragecanbetriggeredjustasiftheclaimhadbeenmadeduringtheoriginallystatedpolicyperiod.

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Failuretoproperlynotifyaninsurerofaclaimorcircumstancesthatleadtoaclaimcanhavedrasticconsequencesforanorganization,eveniftheinsurerhasnotbeenaffectedbythelatenotification.Ifanotificationismadelateandthereisnoextendedreportingperiodinplace,anysubsequentclaimmaybedeclinedbytheinsurer.Conversely,iflatenotificationispermitted,butnotmadewithinareasonabletimeframe,aninsurermayarguethatithasbeenprejudicedbythedelay.Thismeansthattheinsurermayattempttoreduceitsliabilityordenyaclaim.

Toavoidlatenotices,considerdoingthefollowing:

1. Haveacandiddiscussionwithyourtrustedcounsel.Thisdiscussionshouldrevolvearoundclaimsasserted,yourcompany’sdefencesandclaimsthatcouldbeasserted.

2. Communicatewithyourinsurancebrokeronaregularbasis.Thesecorrespondencesshouldfocusonallofyourvariousinsurancepoliciesandneeds,notjustyourD&Oliability.

3. Consultwithyourtrustedcoveragecounselonspecificpolicyprovisionsregardingclaims,noticeandinterrelatedwrongfulacts.It’simportantthatyouunderstandthebasicsofyourpoliciesandwhatisexpectedofyou.

4. Providenoticeifyouareeverindoubtaboutaparticularclaimorcircumstance.

CO-OPERATION

OnceaD&Oclaimbegins,aninsuredorganizationanditsrepresentativeshaveanobligationtoco-operatewiththeinsurer.Theco-operationclausefoundinmostD&Opoliciesrequirestheinsuredtoco-operatewiththeinsurerintheinvestigation,settlementordefenceofaclaim.

Insomecases,aD&Opolicywillexplicitlystatewhatisexpectedoftheinsuredpartyduringtheclaimsprocess.Othertimes,thepolicywillnotspelloutexactlywhatpolicyholdersmustdotoco-operate.Ineithercase,itisexpectedthatdirectorsandofficersprovidetheinsurancecompanywithallinformationandassistancerequested,andhelpinmitigatingfurtherlosseswhereverpossible.

Intermsofco-operation,directorsandofficersshoulddothefollowing:

� Keeptheircarrierinformedaboutaclaim.

� Providecopiesofpleadingsandotherkeydocumentstotheinsurancecompany.

� Providetheinsurancecompanywithinformationrelatedtothedefenceofaclaim.

Whiletheabovestepsmaynotberequired,carryingthemoutisgoodpracticeandwilllikelyleadtoasmootherclaimsresolution.Someco-operationprovisionsmayrequiretheinsuredtofileresponsivepleadings,attendhearingsandreporttotheinsureronthestatusofaclaim.

CONSENT TO SETTLEMENT AND THE HAMMER CLAUSE

Inmostcases,insurerswillinsistonbeingcloselyinvolvedinaclaimsproceeding.Often,insurersplaypivotalrolesthroughoutthedurationofthelegalprocess,providingfinancing,workingwithlegalcounselandhelpingdetermineaneffectivedefence.

Assuch,it’simportantforpolicyholderstoobtaintheirinsurer’sblessingbeforeaclaimissettled.Ifmultipleinsurersareinvolvedinaclaim,allinterestedpartiesmustsignoffbeforeasettlementcanbefinalized.

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Intheeventthatapolicyholderfailstoinformtheirinsurerofaclaim’sprogress,settlementauthorityissuesmayarise.Forexample,ifaninsurerisinformedofasignificantincreaseinaclaimatthelastminute,theremaybedelaysinarrangingasettlementwhilethenecessaryauthorityissought.

Ifaninsurerbelievesthatasettlementisinthebestinterestsofbothparties,andtheinsureddoesnotapprovetherecommendedcourseofaction,theinsurermayinvokeaprotectiveclausereferredtoasthehammerclause.

Insurersusethehammerclausetolimitliabilitytotheamountthattheclaimcouldhavebeensettledforandanydefencecostsincurred.Ifaclaimendsupcostingmorethantherecommendedsettlementvalue,theinsurerwillnotpayadditionalcosts.

SUBROGATION

IntheeventthataD&Oinsurerprotectsapolicyholderfromacoveredclaim,itinheritstherighttosubrogateagainstothers.Thismeansthataninsurercanassumetherightsoftheinsuredandrecoverdamagesfromanypartiesfoundresponsibleforcausingtheloss.Thisisdoneasameansofrecoveringtheamountoftheclaimpaidbytheinsurancecarriertotheinsuredfortheloss.

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Next Steps Directorsandofficersareoftenthekeydecision-makersinacompany,helpingsteerorganizationstowardsuccess.Intheeventthatthingsgobad,however,theycouldbeheldaccountable,resultinginamajorlossofpersonalassets.Whetheryouareaprivateorapubliclyheldcompany,yourdirectorsandofficersfaceseriousriskseveryday,regardlessoftheindustryinwhichyouoperate. Withclaimsbecomingincreasinglycommon,it’smorecrucialthanevertoseekprotectionusingD&Oinsurance.Unlikeacommercialgeneralliabilitypolicy,D&Opoliciesprovidecoverageforawrongfulact,suchasanactualorallegederror,omission,misleadingstatementorneglect.Intoday’sriskenvironment,youcan’taffordtoleaveyourleadershipteamexposedtoD&Oliabilities.

WhiletheapplicationandunderwritingprocessforD&Oinsurancemayseemdaunting,MumbyInsuranceBrokers,Inc.’sknowledgeableinsuranceprofessionalsareheretoensureyourorganizationfindsthecoverageitneeds.Weencourageyoutousethisguideasaresourcetohelpyoubetterunderstandyourcoverageoptionsbeforeyouentertheunderwritingprocess.

ContactustodaytolearnmoreabouttheappropriatelevelofprotectionforyourcompanyinordertosafeguardyourfirmfrompotentialD&Oliability.