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What is Directors and Officers Insurance? By Floyd Arthur (PPT)
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Transcript of What is Directors and Officers Insurance? By Floyd Arthur (PPT)
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What Is Director's and Officer’s Insurance?
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Director’s and officer’s insurance (also known as D&O insurance) is
liability
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insurance that covers directors and officers of a company for claims
arising from
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actions performed while serving in their official capacity. It is similar to
an errors and
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omissions policy in that it covers claims that result from professional
decisions that
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have negative financial consequences. However, it applies
only to decisions and
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actions of board members and C-level management staff.
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What Is Director's and Officer’s Insurance?
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What Does D&O Insurance Cover?
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Many business executives mistakenly believe that D&O insurance is
designed
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specifically for publicly owned companies and provides coverage
only for securities-
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related claims. However, this is not at all true. Although D&O insurance
covers C-
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level employees whose actions result in financial damages to the
company’s
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stockholders (for instance, a sudden drop in the stock price) it offers other
protections
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as well. For example, D&O insurance includes coverage for:
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* Allegations of fraud, such as when a lender claims a senior manager
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misrepresented the company’s ability to repay a loan, and the
company subsequently defaults.
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* Allegations of misconduct, such as a claim alleging that the company’s
officers
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were negligent in failing to notice or report violations of federal
environmental policy,
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resulting in regulatory action by the EPA.
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* Allegations of wrongful termination of a high-level employee
due to the
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improper actions of other C-level executives
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* Customer or client allegations of systematic wrongdoing by the
company that
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board members failed to deter
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* Intellectual property disputes involving the actions of high-ranking
executives
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* Any allegation by a stakeholder that C-level employees or board
members failed
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to perform in a manner that was consistent with their “duty of care”
and loyalty to the organization
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Director’s and officer's’ insurance can be written for most business entities,
including
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educational institutions, non-profits, private for-profit businesses and
publicly owned
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firms. Policy forms for non-profits offer the broadest level of coverage
and typically
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include employment practices liability insurance and coverage for
the organization as a whole
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What Are the Limitations of D&O Insurance?
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D&O insurance is an important adjunct to a commercial general
liability coverage;
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however, it has limitations. These include:
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* Limited Coverage for the Organization: Generally, D&O
coverage forms for
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publicly held companies cover only the actions of the directors and
officers. There is
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limited protection for the company as a whole, and what protections
exist only cover
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securities-related claims. On the other hand, coverage for private
firms is usually
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more comprehensive, and often includes some coverage for the
organization itself.
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* Shrinking Defense Limits: Unlike most commercial general liability
policies, D&O
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insurance is typically written with “shrinking defense limits,” which
means defense
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costs are subtracted from the maximum indemnification the policy
allows. In other
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words, any damages paid by the insurer are reduced by the amount of
litigation costs
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and attorney’s fees. In the event of a lengthy lawsuit, this can mean a
significant
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reduction in the amount the insurer pays on the claim itself.
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* Duty to Pay Versus Duty to Defend: Typically, D&O insurance
policies contain a
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“duty to pay” rather than a “duty-to-defend” clause. Under most CGL
policies, the
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insurer has an explicit duty to defend against any claim, even if it the claim
is
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ultimately denied. This includes the obligation to “assume control” of the
defense
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process, including selecting counsel and paying legal bills. Under the
“duty to pay”
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clause, the insurer is only required to reimburse the insured for his defense
costs.
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* Claims-made Versus Occurrence Trigger: D&O policies are typically
written on
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a “claims made” basis, which means that coverage applies only to claims
that are
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submitted to the insurer during the period the policy was in force. Thus,
if the policy
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term is from Jan. 1, 2016 to Jan. 1 2017, the insured is covered only for
claims
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submitted to the insurer during that year. By contrast, “occurrence-
based” policies
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cover the insured for claims that occur during the policy period,
regardless of when the claim is made.
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Deciding how much and what kind of insurance to purchase for your
business is a
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complex and difficult process. For that reason, many firms wind up
under-insured.
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Don’t let your lack of experience in insurance matters undermine your
firm’s
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financial security. Get a comprehensive business insurance
review today. Our experts
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are available every weekday from 9 a.m. to 6 p.m., so call us at 516-292-
3780 to
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schedule an appointment. Or if you prefer, request a free
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