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Directors & Officers Liability insurance (also referred to as D and O insurance) is a complex, often misunderstood insurance product. However it is also a critical coverage for many organizations, both small and large alike. Below, we have put together a brief guide in order to help companies and their directors better understand the intricacies of (and value provided by) these highly specialized policies.
In its most simple terms, D&O can be viewed as errors and omissions coverage for board-members. It provides defense costs (attorneys fees), damages and settlements, for mistakes and accusations made against executives for their business decisions. Policies are comprised of a number of basic insuring agreements and coverage components:
Directors and officers liability insurance can be structured to the interests of each organization depending on their risk profile and coverage needs. These coverage options require companies to make important decisions when structuring coverages. Some of those considerations include:
Directors and officers insurance policies are mazes of terms, conditions and definitions that require careful review. Policy audits should be performed in order to ensure that its definitions sufficiently align with 1) other policies such as any E&O or cyber insurance policies, 2) appointed directors/officers as defined in the corporate charter, 3) additional entities including any domestic and foreign subsidiaries. It should be noted that, performing a foreign audit and coordinating proper coverage for foreign entities can be a delicate balance requiring careful attention. Often the placement of separate foreign coverage is recommended.
While exclusions can vary significantly from carrier to carrier, most policies contain exclusions for the following claims (among others)
Any company that has investors or manages employees or products has a liability exposure. And just about every company can benefit from a D&O policy. Some companies however operate in a particularly high risk environment compounding the need for directors and officers liability, such as:
D and O insurance terms differ significantly. Some carriers agree to control the defense (taking the burden off of the company and broadening coverage), while others require the company to control the defense. Some policies contain particular exclusions such as “false advertising exclusions” which can severely limit or preclude coverage that is critical for companies like brands and manufacturers. For companies with investors/shareholders, many carriers contain a “majority shareholder exclusion” which precludes coverage for claims brought or maintained by shareholders with more than 5% ownership. These are just a few very simple examples, however there are too many to list. Entire books have been dedicated to the topic of analyzing D&O policies. While these exclusions are typically easy to identify and avoid, much of the exclusionary language is contained deep in the policy language itself, within the terms and definitions. This makes it very difficult for companies to understand what they are purchasing and nearly impossible to perform proper coverage comparisons. It also highlights the importance (and value) of partnering with an experienced broker.
With data breaches occurring on a weekly basis, cyber security has consistently ranked among the top risk concerns for executives over the past few years. And cyber criminals are only becoming more sophisticated with intrusions becoming more frequent. While there is no substitute for a strong cyber framework and security controls, cyber liability insurance often serves as an organizations last line of defense when all else fails. However cyber policies are often misunderstood.
Simply put, cyber risk insurance (also known as data breach insurance) provides protection for cyber risk and cyber related events. Data breaches and theft of personal information are simply one segment of cyber risk, there are many. Cyber policies provide 2 main coverage components. The first component is first party coverage, which is essentially balance sheet protection – the organization suffers financial damage such as lost income, or costs to restore their network and data, and the insurer reimburses the company for those loses. The second coverage component is third party coverage, which provides defense costs (attorney’s fees), damages, and settlements for claims and lawsuits that result from errors and security failures (among other incidents). Cyber policies can either be purchased as a basic endorsement added onto a general liability policy, providing limited coverage, or they can be purchased as a stand-alone policy which provides significantly broader coverage. When purchasing a stand-alone policy, companies can select their coverages of interest in order to match their risk profile. Available insuring agreements include.
Network insurance contains too many variables to outline here. Some provide only third party coverage, where others include full first party coverage. Some contain numerous exclusions where others are more liberal. Exclusions also do not have be explicitly scheduled, often exclusionary language is contained deep within the definitions and conditions of the policy. Below are just a few examples of some of the coverage variables:
Managing employees carries risk - behind every employment decision is a potential lawsuit. Prospective employees that are not hired may believe they were discriminated against, employees working long hours may believe they are not being properly compensated or promoted, and employees that are let go may be believe they were wrongfully terminated. EPL insurance (also known as employment practices liability insurance) provides coverage for defense costs, damages and claim expenses incurred resulting from employment related claims. It also provides a team of specialized attorneys that the organization can consult when making difficult employment decisions, in order to minimize the likelihood of a claim and any resulting damages.
As briefly mentioned above, employment related claims can arise from a broad range of accusations. Depending on the business and its industry, certain claims may be more prevalent than others as demonstrated below.
• 3rd PARTY CLAIMS: Third party EPLI insurance is particularly important for businesses with a large client base and those that deal a lot with the public such as retailers, restaurants and commercial real estate owners. It provides protection against claims asserted by customers, vendors and other 3rd parties. These can range from violations of the ADA act (such as failing to provide wheelchair access) to accusations of sexual harassment to discrimination claims by clients alleging they were discriminated against or did not receive the same level of professional attention.
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