Dispelling Common D&O Insurance Misconceptions
Directors and officers insurance is one of the most misunderstood insurance products. These policies are complex, can be written and structured a number of different ways, and contain policy language that varies greatly from insurer to insurer, so it's no wonder that even sophisticated executives are often confused by their terms. It’s also an insurance product that many organizations cannot afford to be without. Below we address some of the more basic misunderstandings policyholders often have when it comes to D&O insurance.
- We’ve ceased operations or have been acquired, so we no longer require coverage: It’s a common request; a company has been acquired, merged with another entity, or terminated its operations. Naturally the directors believe that coverage is no longer necessary and request that their E&O or D&O coverage be cancelled. Most often these requests are made from a place of misunderstanding. Due to the nature of “claims made” policies, coverage must be in place at the time a claim is reported. It’s also important to remember that prior wrongful acts can take a while to give rise to claims. The services your company has provided and/or representations its executives had made months (or years) ago can easily still give rise to lawsuits even after it has been acquired or closed its doors. Cancelling coverage will effectively erase any/all coverage for any future claims that may allege prior wrongful acts. In order to maintain coverage for such claims, directors and officers should instead let the policy run its course and purchase a policy tail/ERP at renewal. Companies undergoing an acquisition are also prone to deal-related litigation which certain D&O policies may provide some degree of coverage for - this is yet another reason to ensure coverage is maintained.
- As a departing director or officer I must no longer be covered: This is a valid concern. As we just briefly touched upon, due to the statute of limitations and due to the fact that lawsuits can allege wrongful acts that were committed months or even years prior, it’s important that coverage is maintained long after departing a seat. Almost all D&O policies provide coverage for “past, future and current” directors and officers, so separate coverage is often not necessary. However, there are specialized policies for particularly concerned officers. Most often retired directors are concerned that; coverage may be eroded by the current board, leaving no coverage remaining, or the organization (or insurer) may non-renew their policy or decrease their policy’s limits or coverage terms. For departed directors/officers interested in guaranteeing their own coverage moving forward, some carriers provide specialized D&O policies in the form of “retired director liability” policies.
- Allegations of fraud are not covered: It’s a common misconception, however D&O policies do in fact provide coverage for litigation alleging fraud. They do so by agreeing to provide defense costs to defend against the underlying action, refusing to provide indemnification for any awarded settlement, and stipulating that they have the right to recoup any defense costs provided, following an adjudication of guilt. Side A DIC (difference in condition) policies often take it one step further and agree to provide affirmative coverage for defense costs with no such recoupment clause. Lastly, we should note, there are many variations of the fraud exclusion which can differ greatly from carrier to carrier. This highlights the importance of working with an experienced broker and/or counsel when reviewing and placing coverage.
- My organization is unable or unwilling to implement adequate D&O so I'm out of options: Most directors and officers will refuse to sit on an uninsured board. Seasoned directors take it one step further and will often insist on specific limits and coverage terms. When organizations are unable to obtain adequate D&O insurance, prospective executives may feel left with no options but to refuse their seat. However there may be a solution in the form of specialized IDL (Independent Director Liability) D&O policies. These policies are essentially D&O policies written for a specific individual. They provide coverage for claims asserted against that scheduled director or officer when the company cannot (or wrongfully refuses to) provide them indemnification. Additionally, these policies can; provide terms that are often broader than the company’s underlying D&O policy, and can provide coverage that will follow that director/officer for any seats on which they may serve. While most directors/officers are best served by ensuring the organization’s D&O program is adequate, there are some situations in which IDL may be the best (or only) option:
- Retired directors seeking to maintain their own insurance
- Directors or officers that sit on multiple boards
- High net worth individuals/celebrities serving on the boards of; high risk or smaller companies that may be unable to obtain adequate coverage
- Individual directors on larger company boards the have concerns over eroding limits or coverage availability
- Without D&O, directors have no coverage: Every so often we receive an inquiry from a prospective insured or client, inquiring about executive liability insurance when the core of their concerns were in fact already covered by a separate policy. Despite its name, directors and officers insurance is not the only product that covers directors and officers. Litigation arising from bodily injury claims or professional service errors do not fall under the scope of D&O policies and can really only by covered by their respective liability, workers compensation or E&O policies, which all include the corporate directors and officers as insureds per the policies’ definitions. D&O insurance can often act as a catch-all for miscellaneous claims not covered elsewhere, which is why it’s often a wise recommendation, however it’s most suited for claims brought by shareholders/investors, competitors, creditors, bankruptcy trustees/equivalents, regulators, and employees (particularly in the context of EPLI).
- D&O will protect the board against internal disputes: Generally speaking, executive liability insurance does not provide coverage for infighting. In order to preclude such claims, all D&O policies contain “insured vs insured” exclusions. It’s also important to note that past/prior directors and officers are also included as “insured persons”, so infighting type claims brought by any ousted or retired executives would also be excluded. There are 2 main exceptions however; claims brought as derivative actions, or whistleblower claims., for which almost all D&O policies carve back coverage. Lastly, some modern D&O policy forms (particularly public company forms) may replace the “insured vs insured” exclusion with an “entity vs insured” exclusion which would likely preserve coverage for such claims.