Providedby:MumbyInsuranceBrokers,Inc.
2
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.
3
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.
4
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.
5
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.
6
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:
7
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.
8
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.
9
INDEMNIFICATION
Anothermajorformofprotectionforcorporateofficialsisindemnification.Thisisastatutorilyauthorizedprotectionthatisoftendetailedincorporatedocuments,likeanorganization’sincorporationorbylaws.
10
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.
11
WHY DO ORGANIZATIONS NEED D&O INSURANCE?
TheneedtoobtainproperD&Oinsurancecannotbeoverstated.Acommonmisconceptionisthatallegedmisconductbydirectorsorcompaniesiscoveredunderotherliabilitypolicies,suchascommercialgeneralliability,errorsandomissions,orotherprofessionalliabilitypolicy.Inmanycases,thissimplyisnottrue.
Insomeinstances,misconductmaynotfallwithinthescopeofanorganization’sindemnificationclause.Evenifanorganizationhastheabilitytoindemnifytheirdirectorsandofficersforthewrongdoinginquestion,itmaynothavethefundstofinancetheongoingcostsandexpensesrelatedtoalawsuit.
Thesecostscanaddupquicklyandeasilyreachsixfigures.WithoutthefinancialbackingofaD&Oinsurancepolicy,anindemnificationclausemightnotadequatelyprotectthedirectorsandofficersoftheorganization.
12
13
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
14
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
15
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.
16
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.
17
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)
18
� 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.
19
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.
20
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.
21
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.
22
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.
23
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.
24
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.
25
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
26
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
27
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.
28
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:
29
Coinsurance
Outsideofalayeredformat,D&Oprogramscantakeonaproportionatecoinsurancestructure.Inthisstructure,thepanelofinsurerssharetheriskequallyandagreetopaythesamepercentageofanyclaimmadeagainstapolicy.Becauseofthis,eachinsurerreceivesanequalshareofthepremium.
30
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:
31
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.
32
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.
33
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.
34
� 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.
35
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.
36
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
37
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.
38
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.
39
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.
40
Intheeventthatapolicyholderfailstoinformtheirinsurerofaclaim’sprogress,settlementauthorityissuesmayarise.Forexample,ifaninsurerisinformedofasignificantincreaseinaclaimatthelastminute,theremaybedelaysinarrangingasettlementwhilethenecessaryauthorityissought.
Ifaninsurerbelievesthatasettlementisinthebestinterestsofbothparties,andtheinsureddoesnotapprovetherecommendedcourseofaction,theinsurermayinvokeaprotectiveclausereferredtoasthehammerclause.
Insurersusethehammerclausetolimitliabilitytotheamountthattheclaimcouldhavebeensettledforandanydefencecostsincurred.Ifaclaimendsupcostingmorethantherecommendedsettlementvalue,theinsurerwillnotpayadditionalcosts.
SUBROGATION
IntheeventthataD&Oinsurerprotectsapolicyholderfromacoveredclaim,itinheritstherighttosubrogateagainstothers.Thismeansthataninsurercanassumetherightsoftheinsuredandrecoverdamagesfromanypartiesfoundresponsibleforcausingtheloss.Thisisdoneasameansofrecoveringtheamountoftheclaimpaidbytheinsurancecarriertotheinsuredfortheloss.
41
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.
Top Related