Directors and officers (D&O) liability insurance provides various types of protection for an entity and its directors and officers. Typically purchased by the entity, a D&O policy safeguards the personal assets of directors and officers in the event they are sued in connection with their role with the business or organization. A D&O policy also provides reimbursement coverage for the entity for claims in which it indemnifies its directors and officers. Further, this type of policy provides coverage for certain types of corporate claims. However, while D&O policies are an important risk mitigation tool for many entities, these policies typically have several notable exclusions. Here are five of the most common exclusions in D&O policies.
Fraud/Dishonesty Exclusion
D&O policies exclude claims arising from or involving the dishonesty or fraudulent actions of an insured director or officer. It is important to note, however, that the exclusion only attaches after a final judgment or other final adjudication establishes that the dishonest or fraudulent acts were, in fact, committed or attempted by the insured person with dishonest intent, and that they were material to the cause of action in question. As directors and officers are generally presumed innocent of charges of dishonest or fraudulent activity until a court decision is made against them or they admit wrongdoing, the insurer must cover defense costs up until that point.
Regulatory Exclusion
D&O policies often exclude coverage for losses arising from actions or proceedings brought by regulatory or government agencies, such as the Securities & Exchange Commission, Federal Deposit Insurance Corporation, or other federal or state agencies. The regulatory exclusion became common in the 1980s, when insurers were overwhelmed by the costs of defending insureds in enforcement actions during the savings and loan crisis.
Securities Law Violation Exclusion
D&O policies may exclude coverage for claims related to actual or alleged violations of securities laws, such as the Securities and Exchange Act of 1934. Directors and officers who manage corporate affairs and control corporate policy concerning the disclosure of information may be targeted with claims related to securities laws brought by disgruntled shareholders. Depending on the wording of the exclusion, if all or part of the claim is based on, attributable to, arising out of, resulting from, or in any manner related to any actual or alleged violation of a securities law, coverage may be barred.
Insured vs. Insured Exclusion
D&O policies typically contain an insured vs. insured exclusion, which applies to claims between covered directors and officers, both past and present, and to claims brought by an insured company against its former executives. The insured vs. insured exclusion became common in D&O policies in the 1980s, when corporations began to view their D&O policies as a way to recoup operational losses. A couple of major banks brought lawsuits against officers who had acted beyond their authority and caused the banks financial harm. The exclusion also became ubiquitous because it allowed insurers to shield themselves from collusive or “friendly” lawsuits, such as when an insured entity sues its directors and officers and both parties seek coverage under the D&O policy.
Prior and Pending Litigation Exclusion
Prior and pending litigation exclusions allow insurers to avoid covering lawsuits or claims that were in motion or known about before the policy began. While policy language varies, wording may state that the insurer will not be liable for losses in connection with any claim made against an insured that was pending, or based upon or arising out of the same or substantially the same facts as any claim pending, prior to a particular date.
It is important for insureds to carefully read their D&O policies in order to understand their coverage and any gaps in protection that may apply.
If your business insurance company has denied or is challenging your claim, contact Schwartz, Conroy and Hack, PC for assistance. We have the expertise and tenacity to make insurance companies keep the promises they make to you and your business.
