Directors’ & Officers’ Liability Insurance general information

What is Directors’ & Officers’ Liability Insurance?  What does it do; who does it protect; why buy it?  These are just a sample of questions anyone in the business of D&O (buyer or seller) will have heard throughout their years of working in this particular specialty of insurance.

I once heard an esteemed partner in a well-recognized law firm offer that, in Canada, if there were 100 insurance companies that sold this form of insurance policy one would not find 2 identical policies anywhere in the country – can you imagine that this might be any different in the USA?  I can’t.

Who sells Directors’ & Officers’ Liability (more commonly called D&O) today?  Many insurance companies will offer the coverage but some will only write the “non-profit” market or Not-For-Profit Organizations, Associations, etc.  Others will write both classes (“For Profit”, as well) of business and still, other sources might include the “wholesale” marketplace or Managing General Agents (MGA’s).  These MGA’s attempt to access markets (e.g. Lloyds’) and design a policy specific to an industry or sector, in some cases.

What might be the Purpose of D&O insurance?  A simple response might be “good corporate governance” but nothing will truly be simple in a discussion of D&O.  Why is D&O necessary?  Legislation and the many decisions of the world’s Judicial System have required that anyone in the place of a Director and/or an Officer of any Corporation be protected due to the large personal risk that one faces – the loss of “personal assets” of a director/officer.  In the case of a “volunteer” director on a board, can you imagine explaining to your spouse that your family may face the loss of your home, business, savings, etc. when you have been volunteering for a church, service group, social activity, or other worthwhile cause and are named in a lawsuit?  Absolutely ridiculous!  Correct?  NO!  What about those individuals who served as Directors or Officers in prior years?  Yes, past and future directors can be covered by the insurance policy, as well as current directors.

What is covered by a normal policy?  Legal and Defense Costs (have you recently asked a lawyer who specializes in this area, how much their hourly rates are?), Damages, Settlements and Judgments are normal and, most people will agree, can be quite substantial.  Actual or “alleged” wrongful acts are covered but what will not be covered (nor should it be) are Fines, Penalties and other charges deemed uninsurable (e.g. profits or gains realized due to insider information).

Some of these acts may be “negligent”, “errors”, “omissions”, “misstatements”, “misleading statements”, “neglects or breaches of duty”, etc.  but will NOT cover “acts of bad faith”, “bodily injury or property damage” (that is what other Liability insurance covers), “claims relating to employee pension or welfare plans”, “environmental claims” (again other Liability insurance can be obtained for that), “claims resulting from facts known prior to the inception of coverage”, “failure to maintain insurance:, etc.

Claims can be brought by shareholders, creditors, employees, suppliers, competitors, government bodies, etc. – can you think of anyone who is not included here?

What about the corporation that no longer exists due to wind-up or other reasons?  Yes, the policy can have an “extended reporting period” whereby the insurance company will extend coverage for an additional term for additional premium, usually less than the full term’s cost.

Examples of claims could include any of the following:

  • Class action lawsuits against a Board of Directors for alleged mismanagement – hindsight will definitely be 20/20 so who is to determine that there was actual mismanagement?
  • Damages against various directors and officers of a firm for alleged non-disclosure of financial conditions and performance (I have an example where a bank claimed this from a Borrower);
  • Shareholders questioning whether their interests were adequately represented by the Board of Directors;
  • Corporate Governance issues which have become a major source of concern to the financial markets and to governments;
  • A suit against a group of directors over a dispute about the value paid by one company for another (and the odd item of note, here, was that the D&O insurance did not survive the takeover);
  • A public offering of stock where directors are quoted as touting the prospects where the stock fails to perform in a manner consistent with those statements and shareholders subsequently sue for damages, “alleging that they were induced to buy at an inflated price because of the excessive promotion of the stock by its directors”;
  • A wrongful termination of an employee, whereby an employee argues that a “sales decline was due to a weak economy and failure of the company to keep its prices competitive”;
  • The directors of a struggling company were unaware that management was using Sales Tax collections to finance the day to day operations and when the company took bankruptcy with unremitted tax monies, the government assessed the directors personally for outstanding tax liabilities;
  • Unpaid wages in the event of a bankruptcy;
  • Sexual harassment and discrimination;
  • And the list can go on.

What makes “non-profit” so different from “for-profit”?  Many of the above examples are strictly for profit, right?  Yes, most are but a non-profit organization can have instances of termination, harassment and discrimination, too!

One of the differences is that a non-profit may need and benefit from a “duty to defend” clause in their policy whereby the insurance company is required to defend the lawsuit, as opposed to participating or reimbursing an Insured following a judgment.  Some companies will even cover for administrative errors and omissions and not have a specific exclusion for “failure to maintain adequate insurance” (WOW!).  This may be a small benefit to a non-profit but is an example of a major difference from insuring a “for-profit corporation”.

There will be many other questions that a reader may have but this information should give an overview of Directors’ & Officers’ Liability insurance, the importance of obtaining and some of the differences between the two types of coverage available.

Please feel free to comment or ask further questions.

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