Directors & Officers Insurance
Liability Protection for Leaders
Directors and Officers insurance (D&O) is a complex and non-standardized form of liability protection with approximately 100 variables. The current economic climate and litigious environment make understanding D&O timely and its purchase critical.
Defining D&O
D&O insurance is intended to protect the directors and officers of an organization/corporation from liability if a business-related lawsuit or claim of wrongdoing arises. This coverage protects against charges of errors in judgment or failure to fulfill legal obligations. It also serves as a buffer to cover legal costs and protect the personal assets of directors and officers in cases where the organization/corporation suffers a financially devastating event.
In general, there are two types of D&O insurance. The traditional form covers financial- and securities-related liability claims. The second type combines traditional D&O liability with Employment Practices Liability Insurance (EPLI). This added coverage is important because employment practices claims are now the most frequent lawsuits against management.
Why Buy
A recent report indicates public companies experienced 38 percent of their D&O claims for “wrongful termination of employees.” Among private companies surveyed, 44 percent of claims were based on the same allegation.*
Discrimination, harassment, compensation disputes, retaliation, wrongful discipline, mismanagement of assets or failure to provide services are other common claims typically covered by a D&O policy. It is important to note that every insurer and policy has its own definition of coverage.
* “Insurance Purchasing and Claims Trends,” Towers Perrin, 2007.
Almost any company or organization with a board of directors should purchase D&O insurance. D&O insurance not only serves to protect management, but it also helps attract and retain good leadership. Company officers and nonprofit board members may be reluctant to serve without D&O protection.
Lawsuit Targets
Without D&O coverage, organizations/corporations and their leaders are vulnerable. When employees, shareholders, customers, suppliers, regulators, auditors or creditors file suit, they frequently charge individual board members and directors and officers, as well as the organization/corporation, with wrong-doing.
Large public companies face greater risk because of potential shareholder claims. Therefore, their need for and cost of protection may be higher than for private companies. Whether public or private, organizations/corporations that have experienced more lawsuits find themselves in the same situation: greater need, greater cost.
Cost and Limit
In weighing cost against risk, consider the average employee claim typically covered by D&O policy is nearly $150,000 — according to Towers Perrin. The policy buyer should know the aggregate limit (the total amount of protection) because multiple claims — for instance, with harassment charges — can quickly consume coverage.
In addition, buyers should recognize that “cost of defense” for attorney fees and related expenses are often within the policy limit. This decreases the coverage amount and should be taken into account when determining the aggregate limit to purchase.
Exclusions, Definitions, Misunderstandings
The following examples further demonstrate the maze of exclusions, definitions and misunderstandings that affect D&O coverage.
Unlike most other forms of liability insurance, D&O policies pay for lawsuits filed during the policy period. The triggering event might have occurred before the policy was in effect. This retroactive feature is called “claims-made coverage.” Check the policy fine print for a date that limits when the claim “must have occurred by” for the policy to be effective. When a policy-holder replaces or cancels D&O coverage, buying an extension for the reporting period may be advisable.
Although D&O policies are not standardized, they have one thing in common; they do not specify the kind of claims covered. Rather, they provide coverage for “wrongful acts.” Policies vary in definition of “wrongful acts” through exclusions that limit coverage. For broadest coverage, the policy buyer should seek broad language in this area.
Some directors, officers and board members assume they are covered by their personal liability insurance when serving in management positions or on boards — whether in business or as volunteers. They are mistaken. Personal liability insurance provides coverage for property damage or bodily injury. It excludes business activity, but includes property damage or bodily injury that occurs while volunteering.
In Conclusion...
Professional expertise can help buyers navigate the variety of exclusions, definitions and misunderstandings that surround the subject of D&O insurance. These choices are vital to organizations/corporations with boards, directors and officers.
Because there are so many variables with Directors and Officers insurance, the advantages and pitfalls are in the details. Buyers are advised to consult with attorneys or trusted insurance brokers, such as those at Holmes Murphy, who specialize in this field.
This newsletter is from a risk management standpoint and does not necessarily reflect laws applying in specific states. Readers are advised to seek legal counsel or other appropriate expert advice before taking any action based on the information contained in this newsletter.