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PF&M at a Glance Directors and officers liability insurance Directors and officers liability insurance (D&O) provides financial protection for the directors and/or officers of both public and privately held companies against suits filed against them in conjunction with the performance of their duties as they relate to the company. Most D&O policies also cover the liability of the company itself if the liability arises out of a claim involving the purchase or sale of the company’s securities. The company itself may purchase D&O insurance for many reasons, even when it is for the sole benefit of directors and officers. If it does not, it may not be able to attract and retain skilled, experienced and competent persons to occupy those positions. Most D&O policies offer three primary coverages. Insuring Agreement A, also referred to as “A-Side Coverage,” is direct coverage for directors and officers for claims made against them for their wrongful acts committed in their capacity as a director or officer. Insuring Agreement B, or “B-Side Coverage,” reimburses the company for amounts it spends indemnifying directors and officers for claims against them. However, this coverage does not apply to the company’s own liability. Insuring Agreement C, or “C-Side Coverage,” insures losses sustained by the company itself, regardless of any losses suffered by its directors and officers. Each of these coverages has its own retentions, deductibles and coinsurance percentages, and each may have different exclusions than the others. Other coverages that may be provided in a D&O policy include employment practices liability (EPL), which protects directors, officers, employees and/or the company against employment-related claims brought by employees and specified third parties under certain circumstances. D&O insurance is usually written on a claims-made basis, meaning that coverage applies to a covered claim regardless of when the act or omission giving rise to the claim occurred, as long as the claim is made during the policy period. The coverage provided is also affected by the way certain terms in the policy are defined. As with other types of coverage, provisions and exclusions must be examined carefully to completely understand the scope of coverage. Most D&O policies do not impose a duty to defend on the insurer but do provide coverage for defense costs. However, the insurance company does have the right to associate with the defense and approve defense strategies, expenditures and settlements. The “right to select counsel” provision means that, while D&O insurers may not impose their choice of counsel on the insured, the insured’s choice is still subject to the insurer’s consent. The primary questions that arise with payment of defense costs involve control over the costs incurred and the timing of when defense payments must be made. Some policies have express defense cost advancement provisions and others do not. Most policies provide for reimbursement of only reasonable costs and include a clause stating that, if a director or officer withholds his or her consent to a settlement of an action, the insurer does not cover any part of the loss that is more than the amount for which it could have settled the claim. The same clause also precludes payment of claim costs after the date that the claim could have been settled. Co-payments, retentions and deductibles are the insured’s responsibility. Insurance companies encourage this participation as an incentive for the insured to work with the company to incorporate loss prevention measures and control the amounts paid in settlements. These cost-sharing amounts vary, depending on the size and type of business or operation. The severability clause is very important. It protects innocent directors and officers by allowing coverage on them to continue at the same time that coverage is denied to a director or officer whose fraudulent activities are the basis of the claim. The severability clause can be broad or limited. Naturally, the insured wants the broadest one possible. At one time, only large corporations and businesses purchased D&O coverage. It is now available for small businesses and not-for-profit organizations as well, because individuals are reluctant to participate as officers or board members unless their personal assets are fully protected. While this has led to the availability of a wide range of coverage forms and policies, the differences between them may be significant, and each must be reviewed carefully before recommending one over another. Please note that this is only a brief overview of the coverages available. The PF&M Analysis from The Rough Notes Company, Inc., contains broader and more thorough discussions of these and related subjects. Agency OnLine subscribers can refer to PF&M Section 384.1, Directors and Officers Liability Insurance, for a detailed evaluation, discussion and additional information on this and related subjects. * |
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