What Is Director's and Officer’s Insurance?

By Floyd Arthur

Director’s and officer’s insurance (also known as D&O insurance) is

liability

insurance that covers directors and officers of a company for claims

arising from

actions performed while serving in their official capacity. It is similar to

an errors and

omissions policy in that it covers claims that result from professional

decisions that

have negative financial consequences. However, it applies

only to decisions and

actions of board members and C-level management staff.

What Is Director's and Officer’s Insurance?

What Does D&O Insurance Cover?

Many business executives mistakenly believe that D&O insurance is

designed

specifically for publicly owned companies and provides coverage

only for securities-

related claims. However, this is not at all true. Although D&O insurance

covers C-

level employees whose actions result in financial damages to the

company’s

stockholders (for instance, a sudden drop in the stock price) it offers other

protections

as well. For example, D&O insurance includes coverage for:

* Allegations of fraud, such as when a lender claims a senior manager

misrepresented the company’s ability to repay a loan, and the

company subsequently defaults.

* Allegations of misconduct, such as a claim alleging that the company’s

officers

were negligent in failing to notice or report violations of federal

environmental policy,

resulting in regulatory action by the EPA.

* Allegations of wrongful termination of a high-level employee

due to the

improper actions of other C-level executives

* Customer or client allegations of systematic wrongdoing by the

company that

board members failed to deter

* Intellectual property disputes involving the actions of high-ranking

executives

* Any allegation by a stakeholder that C-level employees or board

members failed

to perform in a manner that was consistent with their “duty of care”

and loyalty to the organization

Director’s and officer's’ insurance can be written for most business entities,

including

educational institutions, non-profits, private for-profit businesses and

publicly owned

firms. Policy forms for non-profits offer the broadest level of coverage

and typically

include employment practices liability insurance and coverage for

the organization as a whole

What Are the Limitations of D&O Insurance?

D&O insurance is an important adjunct to a commercial general

liability coverage;

however, it has limitations. These include:

* Limited Coverage for the Organization: Generally, D&O

coverage forms for

publicly held companies cover only the actions of the directors and

officers. There is

limited protection for the company as a whole, and what protections

exist only cover

securities-related claims. On the other hand, coverage for private

firms is usually

more comprehensive, and often includes some coverage for the

organization itself.

* Shrinking Defense Limits: Unlike most commercial general liability

policies, D&O

insurance is typically written with “shrinking defense limits,” which

means defense

costs are subtracted from the maximum indemnification the policy

allows. In other

words, any damages paid by the insurer are reduced by the amount of

litigation costs

and attorney’s fees. In the event of a lengthy lawsuit, this can mean a

significant

reduction in the amount the insurer pays on the claim itself.

* Duty to Pay Versus Duty to Defend: Typically, D&O insurance

policies contain a

“duty to pay” rather than a “duty-to-defend” clause. Under most CGL

policies, the

insurer has an explicit duty to defend against any claim, even if it the claim

is

ultimately denied. This includes the obligation to “assume control” of the

defense

process, including selecting counsel and paying legal bills. Under the

“duty to pay”

clause, the insurer is only required to reimburse the insured for his defense

costs.

* Claims-made Versus Occurrence Trigger: D&O policies are typically

written on

a “claims made” basis, which means that coverage applies only to claims

that are

submitted to the insurer during the period the policy was in force. Thus,

if the policy

term is from Jan. 1, 2016 to Jan. 1 2017, the insured is covered only for

claims

submitted to the insurer during that year. By contrast, “occurrence-

based” policies

cover the insured for claims that occur during the policy period,

regardless of when the claim is made.

Deciding how much and what kind of insurance to purchase for your

business is a

complex and difficult process. For that reason, many firms wind up

under-insured.

Don’t let your lack of experience in insurance matters undermine your

firm’s

financial security. Get a comprehensive business insurance

review today. Our experts

are available every weekday from 9 a.m. to 6 p.m., so call us at 516-292-

3780 to

schedule an appointment. Or if you prefer, request a free

consultation online now.