The Business Insurance Bureau

Directors and Officers Insurance

"Fancy a spell in the pokey?"

What is Directors and Officers Insurance?

We live in a society that seeks to apportion blame. Society is not content with ‘the company’ shouldering the blame, but seeks to hold the individual people to account for a truly breath-taking range of management failure.

If directors and officers do not have insurance to cover management failure, 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

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.

What's Covered?

Insured Persons

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 Indemnity

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.

Main Exclusions

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.

Main Conditions

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.

Let's make it cheaper, by doing it right

Frequently Asked Questions

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.

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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.

Making the small print...BIG

A Fair Presentation of the Risk
At the heart of insurance contracts is an obvious truth: you have an enormous advantage over the insurer. You know all about your business, its history, processes, people and management, but the insurer knows nothing – other than what you tell them.

Your Duties
You have a statutory duty to make a fair presentation of the risk. You must tell the insurer:
• Every material circumstance which you know or ought to know and/or
• Sufficient information that would cause the insurer to make further enquiries, if neccessary, to review those material circumstances

Your Knowledge
• You are deemed to have the knowledge of the company’s senior management.
• You are deemed to have the knowledge of the person arranging the insurance (who is deemed to be a senior manager under statute).
• Anything that can be discovered by a reasonable search.

A failure to make a fair presentation of the risk gives the insurer various remedies, depending upon the nature of the failure, from avoiding the contract and not paying claims to modifying the basis of settlement. 

Examples of Misrepresentation
It is often easier to demonstrate the consequences of risk presentation failure by example rather than theory. Here are some real life examples of typically forgotten or unrevealed material facts which later caused huge problems and repudiated claims:

Fire

Theft

Water

Liability

Motor

General

A reprocessing plant did not reveal a series of small fires during their insurance year.

Following repeated false alarms, a retailer didn’t reveal that Police Response had been withdrawn.

A restaurant omitted to reveal repeated minor floods from an upstairs nightclub.

A construction company didn’t reveal potential employee claims recorded in their accident book.

A company failed to reveal written warnings to an employee over repeated dangerous driving.

A company failed to reveal that it had been ‘struck off’ by Companies House and was trading as a new legal entity under a different designation.

Compiling the Risk Presentation: an ongoing process

The compilation of risk information for presentation to an insurer might be thought to be simply contained in a proposal or risk presentation form, however, such forms are not exhaustive and cannot take account of circumstances which change beyond their
compilation. Moreover, merely referring insurers to your website or dumping data is not making a fair presentation of the risk. ’Fairness’ is a subjective test but it would certainly involve simplicity, clarity and relevant selection.

Ongoing communication is vital, because the duty to disclose material circumstances is ongoing throughout the insurance year and at renewal of the insurances.

It’s important…

It is not possible to overstate the importance of researched, adequate risk presentation – there have been countless legal disputes, repudiated claims, ruined businesses and lives arising from the simple failure to reveal all the facts to an insurer. A failure to present risk adequately is a bigger risk than the risk you present.

It doesn’t matter that the failure is innocent, something overlooked, forgotten or discounted as unimportant – it might be important to the insurer, in which case it must be revealed.

Should there be anything not yet disclosed, or that you are unsure would influence your insurers about this insurance tell your broker/insurer immediately.