Executive directors normally have a contract of service and so also have the status of employee. Any director or officer holds a position of trust and responsibility and may be liable to the company, the shareholders, creditors or employees.
Recent incidents involving railway, road transport and chemical industries highlight the need for this cover as the trend towards holding company directors personally responsible continues to grow.
Frequently Asked Questions
If directors and officers do not have insurance, they face a greater risk of not being able to defend themselves against:
disqualification from holding the position of director
civil proceedings which can lead to hefty legal costs and awards for damages
criminal prosecution which can lead to fines and possible imprisonment
When does wrongful conduct have to occur to be covered by a D&O policy?
Typically, most policies cover alleged wrongful acts that have taken place prior to or during the policy period. However, some policies are negotiated to expressly exclude “past acts” coverage, so the actual language of the policy must be closely reviewed. D&O insurance is not intended to be “burning building” insurance.
If a potential insured is aware of an impending claim, it may be too late to go out and get insurance to cover it, unless the potential claim is disclosed and the carrier expressly agrees to take it on. First time D&O purchasers must reveal any information they have regarding known claims or related circumstances in the application process itself. Matters disclosed in the application process will usually be excluded from coverage.
Directors’ and officers’ liability does not cover claims made against your organisation as a whole, only those made against individuals for alleged wrongful acts carried out in their capacity as directors or officers.
The simple answer is that directors and officers are covered under a Directors & Officers Liability policy, but this is not a complete answer. While traditionally only the directors and officers themselves were covered under a D&O policy, today this may be expanded to include managers and other non-executive directors, employees and the company itself. What about the company itself, since it may be a defendant in many claims that could be asserted against directors and officers?
Today, most D&O policies for publicly traded companies also insure the company itself but only for securities claims. Most D&O policies for privately held or not-for-profit organizations include coverage for the company for an array of claims (not limited to securities claims).
Companies generally do indemnify their directors and officers. However, sometimes companies are financially unable to provide this monetary protection or are unwilling to do so for economic or political reasons.
Without corporate indemnity or insurance, directors and officers would be reduced to relying on their own personal assets to pay for the costs of defense and any resulting settlement or judgment against them.
Outside directors (those that are not also employed by the company) are usually very vocal about requiring D&O coverage before agreeing to sit on a corporate board.
Standard exclusions include fraud, personal profiting, accounting of profits, and other illegal compensation exclusions, pending and prior litigation, prior (late) claim notice, bodily injury/property damage, pollution, insured versus insured claims and ERISA (the Employee Retirement Income Security Act of 1974).
Insurers may also include other exclusions based on their own claims payment experience, such as hostile takeover or captive insurance company exclusions. Some exclusions pertain to areas usually covered under some other type of insurance. ERISA violations are usually covered under a Fiduciary Liability policy, property damage may be covered under a General Liability policy, etc.
The definition of a claim varies from policy to policy, and some do not define it at all. Generally, a claim includes any written demand alleging a wrongful act by a director or officer in his or her capacity as a director or officer, seeking monetary or non-monetary damages.
This may be expanded to include investigative orders, grand jury subpoenas in actions that seek to hold the individual liable and other more esoteric events.
If the typical high-tech company wanted to buy $15 million in D&O insurance, it is highly probable that no one insurer would provide all of that coverage at a reasonable rate. Insurers want to make sure that they don’t have too many eggs in one basket. They do so by declining to provide D&O policies with large policy amounts.
If your company wants more insurance than the primary insurer will supply, you will need to buy “excess” layers of insurance. Excess D&O policies typically “follow form” – they have the same terms and conditions as the primary policy. The primary and excess policies together cover the same risk, and the effect of the layers is to allocate the risk among various insurers.
Some layers are necessary; the question is whether layers are a necessary evil. We generally think that fewer layers are better than more layers, but this is something about which reasonable people disagree. Both points of view rest on different conclusions drawn from one observation: the process of persuading any insurer to part with significant sums to fund a settlement will take significant time and effort because the insurer must be persuaded that the risks are real and the settlement amounts are reasonable.
Those who favor more layers focus on the frustration felt by plaintiffs’ lawyers eager to make a settlement. Perhaps they will take less to settle the case because of the difficulty or impossibility of persuading one or more of the excess carriers to fund a settlement. Those who favor fewer layers focus on the same frustration from the perspective of a defendant eager to have its risk resolved with the insurers’ money.
Every insurer’s basic D&O policy form is different. It would be unusual for any insurer to offer coverage pursuant to its basic form without amending it by attaching what are called endorsements.
The basic form offered by most insurers does not contain the normal terms and conditions demanded by knowledgeable purchasers of D&O insurance, and many additional endorsements enhancing the scope of coverage will be added upon request as a matter of course. Nevertheless, most D&O policies have several things in common. All D&O policies:
Contain promises to provide certain insurance to certain covered persons or entities;
Identify the retention per claim;
Identify the maximum pound amount that may be paid pursuant to the policy;
Identify the time period in which claims must be made in order to be covered;
Detail the exclusions limiting the scope of covered claims;
Set forth other conditions and terms that govern the way that the insurer will handle claims.
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The policy covers past (subject to defined discovery period), present or future directors or officers of the company, any employee named as co-defendant with an insured person, persons acting in managerial and supervisory capacity and persons appointed by the company as liquidator.
The cover is for legal liability to pay damages, claimants’ costs and other costs incurred with the insurers consent in respect of claims made during the period of insurance.
Key Features & Extensions
The Policy is claims made but allows an extended reporting period and run off cover for retired directors that is triggered by non renewal. Includes the costs of representation at official investigations and regulatory proceedings. Limited automatic cover for acquired subsidiaries. Company reimbursement applies where the insured person is indemnified by the company.
The company is indemnified against shareholders costs incurred in pursuing an insured person. Employment wrongful acts are covered by an extension. Outside positions cover indemnifies insured persons while acting in outside directorships.
An excess usually applies but may be overridden in respect of claims which are successfully defended. The limit of indemnity is the aggregate for the period and in excess of any excess.
Territorial limits are usually worldwide but there will usually be restrictions in respect of North America.
Profit or advantage accruing to an insured person, to which he had no legal entitlement. Intentional dishonesty, fraud, or wilful violation of any statute or regulation.
Prior official enquiries, litigation or circumstances existing or pending at the time of policy inception. Prior acquisition, i.e., any actions of an insured person prior to becoming a subsidiary of the company.
Mental or emotional distress.
Infringements arising while acting as a pensions scheme trustee.
Any claim or circumstance must be notified immediately or as soon as reasonably practicable. The policy continues if the company or subsidiary goes into liquidation in respect of pre-liquidation risks.
In the event of a change of ownership, the policy only applies to risks prior to the change. Insurers must be advised and cover rearranged as necessary. Any public or private offer of securities must be notified to the insurer, who may amend the policy terms accordingly.
A claims series clause applies
Subrogation applies and the Insurer must be provided with the necessary assistance. Severability, applications for cover are treated as if each insured person makes a separate application. Arbitration, contribution and Contracts (Rights Against Third Parties) Act clauses are included. Insured persons must take all reasonable steps to defend any claim and not prejudice the insurer. Defence costs will be included if incurred with Insurers written consent.
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Which Services will we Provide you with
The Business Insurance Bureau conducts both client and market research to identify solutions to the needs of an almost exclusively business clientele. We will make a recommendation once we have assessed your demands and needs.
All premiums due to insurers must normally be paid by you on or before the date that cover commences. Where alternative methods of payment are available these will be discussed with you so that arrangements can be put in place by the due date.
Confidentiality & Security
We are registered with the Data Protection Registrar. We will ensure that any information obtained from you is treated by us and anyone else involved in arranging, considering to arrange or managing your insurance, as Strictly Private and Confidential. We will not provide your information to anyone else unless we:
have your permission to do so, or -are required to by the FCA, or -are required to do so by law, or -are required to do so in the normal course of arranging or negotiating and maintaining, or renewing financial services products which we may from time to time approve.We take appropriate steps to ensure the security of any money, documents, other property or information handled or held on your behalf.
All information in any form, with the exception of policy documents and certificates issued on behalf of insurers and supplied by us, to you, should be treated as Strictly Private and Confidential and not be released directly or indirectly to any other party, without our explicit consent.
Note: in transacting your insurances with The Business Insurance Bureau, you are deemed to have accepted our Terms of Business. Your accepting of these Terms of Business does not affect your statutory rights.
You must notify us as soon as possible of a claim and circumstances which may give rise to a claim. In the event of a claim you should contact this office and we will promptly advise you and if appropriate, issue you with a claim form and pass all details to your insurer. You should not admit liability or agree to any course of action, other than emergency measures carried out to minimise the loss, until you have an agreement from your insurer. We will remit claims payments to you as soon as possible after they have been received on your behalf. In the event that an insurer becomes insolvent or delays making settlement we do not accept liability for any unpaid amounts.
You would have the right to cancel a policy within 14 days of its inception or upon receipt of the policy documentation whichever is the later. You would as a Consumer and without providing a reason, cancel the policy by confirming this is in writing to the address of our office through which your policy was placed. Any policy documentation and in particular any legal document, i.e. Certificate of Motor Insurance, Employers Liability Certificate, MUST be returned with your instruction to cancel. By exercising your right to cancel the policy, you are withdrawing from the contract of insurance.
Duration & Termination
Our services may be terminated without cause or penalty by giving one months’ notice in writing. In the event that our services are terminated by you other than at the expiry of the policy we will be entitled to retain any fees and all of the brokerage payable. The responsibility for handling claims reported after the date of termination shall in the absence of an express agreement be the responsibility of the party taking over the role.