It is not uncommon for executives and board members to be sued in connection with their management of a business or nonprofit organization. Because of this unfortunate reality, many entities purchase directors and officers (D&O) liability insurance, which shields their executives and board members from lawsuits for alleged or actual wrongdoing, while providing some protection for the entity itself. Here are some tips for maximizing recovery under your D&O policy when you face a claim.
What D&O insurance covers
D&O policies provide reimbursement for legal expenses, judgments and settlements for covered claims, up to the policy limits. These policies are typically purchased by an entity, rather than the individuals, and generally provide three types of coverage. A D&O policy protects the personal assets of both current and past directors and officers in the event they are sued in connection with their role with the entity. It also provides reimbursement coverage for the entity for claims in which the entity indemnifies its directors and officers. Additionally, a D&O policy typically safeguards the entity against corporate liability such as securities claims. These policies can be expanded to include optional coverage for civil, criminal, administrative or regulatory investigations by government agencies or authorities, among other potential add-on coverages.
Examples of lawsuits brought against directors and officers
Directors and officers can be sued by various third parties, including investors, employees, vendors and competitors. Common allegations include misuse of company funds, breach of fiduciary duty, harassment/discrimination, wrongful termination, fraud, theft of intellectual property, poaching competitors’ customers, securities violations and negligent hiring, among others.
What constitutes a claim under D&O insurance
When a claim is brought against a director or officer, or a securities claim is brought against the entity itself, courts must first determine whether the underlying action qualifies as a claim under the policy. Individual policies have specific definitions of what constitutes a claim, but claims generally include civil, criminal and administrative proceedings and demands for damages or relief. Once a qualifying claim has been made, the policy covers losses incurred by the directors and officers or by the entity as specified in the policy.
Like other types of insurance, D&O policies have significant exclusions. Generally, these policies contain an “insured vs. insured” exclusion, which bars coverage for claims between covered directors or officers (past or current) or for claims brought by the entity against its own directors or officers. Many policies also exclude coverage for losses arising out of proceedings brought by regulatory agencies, or for claims involving actual or alleged violations of securities laws. D&O policies also typically exclude coverage for illegal, dishonest, criminal, malicious or injurious conduct. However, in these cases, D&O policies generally provide coverage for defense costs, since directors and officers are presumed innocent of charges of dishonest or criminal activity until court adjudication or admission of wrongdoing.
Claims-made policies
D&O policies are typically “claims-made policies,” which means they provide coverage only if the claim is made while the policy period is in effect. Say you took out a D&O policy at the start of this year and you are sued today. The claim can still be covered even if the underlying event that gave rise to the claim happened before the start of the year. However, if you had prior knowledge about or should have known about the potential claim before you took out the policy, it may be excluded from coverage. Further, claims-made policies typically have a retroactive date, which limits how far back the triggering event could have occurred. If you are sued today for something that happened prior to the retroactive date, you will not have coverage.
Providing proper notice of claim
Insurers typically have strict requirements for providing notice of a claim or potential claim, and failure to comply can jeopardize your coverage. Therefore, as soon as you learn of a claim or circumstances that could give rise to a claim, review your policy’s notice provision and notify the insurance company in compliance with the policy. Notice typically must be provided in writing to a proper representative of the insurance company, and it should contain all relevant details that the insurer will need to respond to and investigate the claim, or to determine whether a claim is likely to be asserted against the insured.
If your business insurance company has denied or is challenging your D&O insurance 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.
