Directors and officers (D&O) liability insurance protects the personal assets of directors and officers in the event they are sued for actual or alleged wrongful acts in managing public or private companies or nonprofit organizations. D&O insurance offers some protections for the entity as well and is typically purchased by the company for a group of directors and officers, rather than by the individuals. It’s a necessary form of risk mitigation for most entities.
Why D&O Insurance Is Needed
Organizations of all sizes have officers and directors who can be targeted by litigants over their management of company affairs, in addition to the company itself. Beyond protecting the individuals who lead your company, D&O insurance covers legal fees, settlements and other costs incurred by the company if the officers or directors are sued for a covered event. D&O insurance is necessary to attract qualified, talented directors who should always ensure they have such protection before taking on a director or board role. And companies pursuing venture capital or other funding will likely need D&O coverage.
Directors and officers may be sued in connection with their role in the company or organization by employees, vendors, competitors, investors, customers, government bodies, and others. Allegations may include misrepresentation of company assets, misuse of company funds, breach of fiduciary duty, wrongful termination, harassment/discrimination, fraud, failure to comply with workplace laws, theft of intellectual property, poaching competitors’ customers, lack of corporate governance, securities violations and other charges, and negligence in hiring, supervising or monitoring other members of the organization who commit bad acts.
While Directors & Officers insurance policies provide protection, they contain complex language and exclusions that insurance companies insert to limit their liability. It’s important to drill down into the details of your policy to ensure that it contains the protections that you think you are paying for.
Generally speaking, D&O policies exclude coverage for illegal, dishonest, criminal, malicious or injurious conduct, including actions aimed at gaining illegal profits, such as insider trading. Directors and officers are generally presumed innocent of charges of dishonest or criminal activity, and therefore covered for defense costs until a final court adjudication is made against them or they admit to wrongdoing.
Other common exclusions in D&O policies include risks that are expected to be covered by other types of business insurance. For instance, professional negligence or errors may be excluded inasmuch as it is covered under professional liability or E&O insurance, while bodily injury or property damage may be excluded because it’s covered under a general liability policy.
D&O policies also commonly contain an insured vs. insured exclusion. This exclusion precludes coverage for claims brought by one director or officer against another. Policies with this exclusion may include carve-backs for specific situations in which coverage for insured vs. insured claims is allowed.
D&O Policies Are “Claims Made”
D&O policies also limit coverage based on timing. Certain other types of liability policies are known as “occurrence” policies, which means they provide coverage for events that occur during the policy period, regardless of when the lawsuit is filed. On the other hand, D&O policies are “claims-made” policies, which means they provide coverage for claims made during the policy period. But D&O policies typically have a retroactive coverage date, which means the alleged wrongful acts must have taken place after the date coverage started. So even if the claim was made during the policy term, if the act in question occurred before the retroactive coverage date, the insured will not be covered unless the insured purchased prior acts coverage.
If you have questions about D&O insurance or are involved in a coverage dispute with your insurance company, do not hesitate to call us for assistance. We make insurance companies keep the promises they make to you and your business. Contact us today for a free consultation.
Evan S. Schwartz
Founder of Schwartz, Conroy & Hack