Directors & Officers (D&O) insurance covers the organization, board members, directors, executives, spouses and employees from losses related to:
- Breach of contract
- Wrongful interference with a contract
- Unfair trade practices
- Consumer protection violation
- Mismanagement and breach of fiduciary duty
- Securities fraud connected with private placement
- Misrepresentation in the sale of part or all of your company
- Failure to deliver services
- Regulatory actions by agencies such as FDA, FTC, SEC or IRS
- Self-dealing and conflicts of interest
Under the D&O policy, one of the most important components is the description of a Wrongful Act. The most common definition includes: “act, error, omission, misstatement, misleading statement, neglect, or breach of duty committed or attempted by an Individual Insured, Private Company or Individual Insured serving for an Outside Entity”.
In general there are three different types of D&O policies: Non-Profit, For-Profit Private and For-Profit Public.
The main parts of a D&O policy are: Side A, Side B and Side C.
Protects individuals for liability which is not reimbursed by the company.
Protects the company for their indemnification of the directors and officers’ liabilities.
Protects the company itself.
D&O: Common Coverage Gaps
Retroactive Date Gap
When switching from carrier to another, be sure the Retro date is matched by new carrier.
Public Securities Offerings
If your company goes public, you will require a different type of D&O policy than is typically written (i.e. Private For-Profit).
Criminal or Intentional Acts
Most policies exclude criminal acts, but this can leave the entity vulnerable to losses. It is almost impossible to buy coverage for criminal or intentional acts, but we advise buying a policy with very liberal defense coverage.
Most policies also exclude self-dealing claims, but again, you should try to find a policy with broad defense coverage, especially for the sake of the entity. This usually involves wording within the exclusion that allows defense coverage until the “final decision” or something similar.
Ideally, your policy will provide coverage to Insureds for their liability arising from exposure to involvement with entities outside your own.
For example, many executives may sit on boards for other companies or non-profits and this may indirectly benefit their own organization. It is preferable to provide coverage for these outside exposures.
Insured vs Insured
Insureds suing each other are usually not insurable under the D&O policy. The best D&O policies will allow Employees to be considered “Insureds”, but will still allow coverage if they bring suit against other board members, executives or the entity.
Also, minority, non-voting shareholder claims are usually covered – be sure of this if you have this exposure.
Failure to Buy Insurance
Contracts with customers often require the procurement of insurance your organization may not already have or it may require higher limits or certain endorsements. If the organization fails to act on the contractual requirements, the executives and board members can be held liable. It is best to buy a policy that provides coverage for this exposure.
Defense costs can mount very quickly with any type of management liability claim. You have the option to buy a policy with defense costs outside the limit of liability. This is often advisable unless you’re on a very tight budget.
Defense costs on a serious claim can easily reach $500K to $1M which may not leave much for the settlement or judgement if you only carry $1M limit. This could also be an issue if you have more than one claim in a given year.