Directors & Owners
Why Buy Directors and Officers Liability Insurance?
Directors and Officers (D&O's) are held responsible for implementing sound corporate policies and procedures and for monitoring management's implementation of such procedures. This can include day to day decisions such as sound investment management, release of non-public information, conflicts of interest, hiring and firing decisions, corporate policies regarding discrimination, sexual harassment, benefit plans, merger and acquisition activity just to name a few.Issues to Consider in Evaluating D&O Coverage
Directors & Officers (D&O) coverage insurance is available from many insurance carriers. Each carrier usually specializes in a particular industry and therefore the forms of each company may vary. Our professionals can custom tailor a program specific to each client.
- Policy Limits
Standard limits for most small to medium sized organizations start at $1.0 million, but most public companies buy at least $5.0 million in coverage. Companies typically buy and individual claim amount and an aggregate. For example, a minimum policy may be a $1 million/ $2 million policy. This means that the insurer will pay a maximum of $1 million for any one claim, but will pay an aggregate amount of $2 million in the given policy year. The could mean a million dollar claim and 10 $100,000 claims.
- Claims Made Coverage
Almost all polices are written on a claims made basis. However, almost all policies have an extended reporting endorsement meaning when you cancel the policy you may purchase coverage for a period of time at a predetermined rate covering claims that may come in later relating to the expired policy period. That rate can vary from 75% to 250% or more of the expiring premium. Usually, that rate is not negotiable, however, you should evaluate the cost between carriers.
- Make Sure the Policy Covers The Company Itself
Most D&O policies provide coverage for an individual Director or Officer (Usually Coverage Part A) and Coverage for the Company's indemnification of a Director or Officer (Coverage Part B), however, do not cover the actual Company in a D&O suit (Coverage Part C). You should make sure that the Coverage Part C for the "Entity" is included in the policy.
- Do Your By-Laws Indemnify the D&O's?
A D&O policy is triggered by the policy holder's (The Company's) legal obligation to defend a case or pay a settlement. If your D&O's are not indemnified in the Corporate By-Laws, the company has no legal obligation to defend the D&O's and therefore, even though the company may have a policy, no coverage may be available.
- Does your Policy Segregate Defendants?
Most D&O policies will exclude coverage for Fraud or other Criminal Activities. Although, insurance policies should not provide defense for Criminal actions, it should provide defense for the Company and other innocent parties that might be pulled into a lawsuit due to a criminal action on the part of someone else. Without a segregation clause, the other defendants may not be without any coverage if one of the other D&O's or even an employee commits a criminal act.
- Does your Policy Cover Fines, Penalties or Punitive Damages?
The actual settlements for large D&O cases involves not only actual damages, but punitive damages. In a recent case, we noted a $30,000 actual damage verdict with $6.9 million in punitive damages. Most policies specifically exclude punitive damages.
- Employment Practices Liability
Most D&O policies can provide some form of coverage for Employment Practices Liability relatively inexpensively. This coverage is not as comprehensive as a stand alone policy and usually has a high deductible with less actual coverage. You should review your own needs.
