| Directors and Officers Liability (Part 1) | |||
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Definitions and policy wording "Wrongful Act" definition The definition of "Wrongful Act" should contain two descriptions. It should respond to the conduct of the insured, as well as pertain to the status of the insured. The definition should not be restricted to negligence only. This policy is not designed to provide coverage for such losses as bodily injury or property damage as would be covered by general liability. "Wrongful Act" means any breach of duty, neglect, error, misstatement, misleading statement, omission, or act by the directors or officers of the company in their respective capacities as such, or any matter claimed against them solely by reason of their status as directors or officers of the company. The intent is to respond to financial loss caused to a third party if not excluded from the policy. Covered persons D&O Liability policies should always cover past, present, or future directors and officers, whether elected or appointed. The insuring agreements, wording in the definition of "Wrongful Act", and wording in the definition of "Insured" in D&O Liability Insurance policies typically refer to "Directors and Officers" only. However, the policy may be endorsed to include other positions. High-level managers or supervisors--such as administrators, comptrollers, human resource managers, risk managers, and other employees--may need to be endorsed to the policy, as well as members, donors, etc. Non-profit organizations can include all employees. Furthermore, liability can accrue to heirs, legal representatives, estates upon death or bankruptcy of a director or officer. The policy often is extended to include these vulnerable parties. There is also a marital extension endorsements for spouses. Professional independent directors who sit on several boards of not-for-profit companies may need to purchase coverage if it is available. The insured(s), or "Director(s) or Officer(s)", means any past, present, or future duly elected or appointed directors or officers of the company. Coverage will automatically apply to all new directors or officers after the inception date of a policy. Coverage is provided for directors and officers of the "Company". The "Company" means the named corporation designated in Item 1 of the Declarations and any "Subsidiary" thereof. "Subsidiary" means a corporation of which the named corporation owns on or before the inception of the policy period more than 50% of the issued and outstanding voting stock either directly or indirectly through one or more of its subsidiaries. "Subsidiary" also means any corporation which becomes a subsidiary during the policy period but only upon the condition that within 90 days of its becoming a subsidiary the named corporation shall have provided the insurer with full particulars of the new subsidiary and agreed to any additional premium and/or amendment of the provisions of this policy required by the insurer relating to such new subsidiary. Sometimes there are limitations as to the size of the newly acquired or formed subsidiary. Further, coverage as shall be afforded to the new subsidiary is conditioned upon the named corporation paying, when due, any additional premium required by the insurer relating to such new subsidiary. The Severability Clause provides that knowledge of facts, circumstances, acts, or omissions, by one director or officer shall not be imputed to any other covered person as relates to the coverage or the application. Some insurers will provide severability as to acts, but not to the application since the application is to be made part of the policy, thereby becoming a warranty of facts. Some insurers provide severability as to only certain exclusions in the policy. For example: "The wrongful act of any director or officer shall not be imputed to any other director or officer for the purpose of determining the applicability of the foregoing exclusions 4(a) through 4(d) )." Outside Director Liability coverage may provide automatic blanket coverage for service on boards of not-for-profit companies. Some insurers offer this coverage by endorsement. It may require a written request by the board to serve on an outside board to activate coverage. Outside Director Liability coverage may provide scheduled coverage for service on for-profit company boards, occasionally with corporate indemnity required as primary coverage. Outside Director Liability coverage may exclude outside service, but this will be modified if the outside director or officer is serving at the request of the insured company. Insurers may require a written application for approval. The corporate reimbursement coverage might apply only to Directors and Officers Liability coverage and not apply for Outside Director Liability. Definition of "Loss" "Loss" means damages, judgments, settlements, and defense costs; however, loss shall not include civil or criminal fines or penalties imposed by law, punitive or exemplary damages, the multiplied portion of multiplied damages, taxes, anything for which the insureds are not financially liable or which are without legal recourse to the insureds, or matters which may be deemed uninsurable under the law pursuant to which the policy shall be construed. Defense costs are included in the limit for loss. The policy should pay adjudicate as well as agreed to amounts and costs. Most policies exclude punitive damages; a few allow them where insurable by law. The policy may have an inside limit if allowed, such as $25,000. If the policy is silent on punitive damages, a clarification endorsement should be added to the policy, as some court decisions have concurred with insurers against paying punitive damages when the policy is silent. Punitive damages may be covered in Directors and Officers Liability Insurance, subject to the law. For example, in the state of California, Insurance Code Section 533 renders certain acts uninsurable, and so there would be no punitive damage coverage for such acts. An insurer is not liable for a loss caused by the willful act of the insured; but the insurer is not exonerated by the negligence of the insured, the agents, or others. Favorable jurisdiction wording for punitive damages claims would include the following: Defense "Defense Costs" means reasonable and necessary fees, costs, and expenses consented to by the insurer (including premiums for any appeal bond, attachment bond, or similar bond, but without any obligation to apply for or furnish any such bond) resulting solely from the investigation, adjustment, defense, and appeal of any claim against the insureds, but excluding salaries of officers or employees of the company. Defense--sample language "Under Coverage A, except as hereinafter stated, the insurer shall advance defense costs prior to the final disposition of the claim, unless such defense costs have been advanced by the company. Such advance payments by the insurer shall be repaid to the insurer by the insureds, severally according to their respective interest, in the event and to the extent that the insured shall not be entitled under the terms and conditions of this policy to payment of such loss. Defense costs in accordance with the fullest application of law, common or statutory, or contract, or the charter or by-laws of the company, then the insurer assumes no duty to advance defense costs prior to the final disposition of the claim and the retention amount as stated in Item 5 of the Declarations shall apply to such loss. "Under coverage B, the insurer assumes no duty to reimburse defense costs prior to the final disposition of the claim. The insurer may, in its absolute discretion, reimburse all or any part of such defense costs prior to the final disposition of the claim... "The insurer does not, however, under this policy, assume any duty to defend. The insureds shall not admit or assume any liability, enter into any settlement agreement, stipulate to any judgment, or incur any defense costs without the prior written consent of the insurer... The insurer's consent shall not be unreasonably withheld, provided the insurer shall be entitled to effectively associate in the defense and the negotiation of any settlement of any claim in order to reach a decision as to reasonableness." If the insured feels their professional reputation is at stake, they may not wish to leave settlement decisions in the care of the insurer. Some policies contain a "hammer clause" that limits the insurers responsibility to the settlement clause plus incurred defense costs up to the time the settlement amount has been agreed upon. Historically, Directors and Officers Liability policies have had no duty to defend. Now duty to defend is available in policies for non-profit and closely held/private corporations. Most insurers have a right to consent before costs are expended either for defense or settlement. The policy specifically excludes paying of salaries for those insureds expending time in the defense of the claim. One thing is certain--the defense of Directors and Officers Liability claims is costly. The average cost of defense for D&O claims were just under $540,000, according to the Tillinghast -Towers Perrin Survey Report (2001). Defense may require expensive, experienced attorneys in order to correctly defend the case. The type of allegation and the type of suit determine the type of defense needed. Close litigation management is required. Knowledgeable and proactive claims management can quickly mitigate a loss. There are different approaches that carriers may take to address defense costs in a D&O Liability case. One option is to exclude legal expenses entirely if another insurer has a duty to defend. The carrier could also advance defense costs. The policy may also contain a clause that states repayment will be required on an allocation basis should the claim be determined as not covered. Although the insurer has the right to consent to counsel, defense costs, and settlements, that approval may not be unreasonably withheld. The insurer may pay as billed, providing that the insurer has provided prior consent. A third option would be to build duty to defend into the policy. Essentially, the insurer should make sure the defense response would match the client's needs. Limit of Liability "The Limit of Liability stated in Item 4 of the Declarations is the limit of the insurer's liability for all loss, under Coverage A and Coverage B combined, arising out of all claims first made against the insureds and reported to the insurer during the policy period and the Discovery Period (if applicable); however, the Limit of Liability for the Discovery Period shall be part of, and not in addition to, the Limit of Liability for the policy period. Further, any claim which is made subsequent to the policy period or Discovery Period (if applicable) which pursuant to Clause 8(b) or 8(c) is considered made during the policy period or Discovery Period shall also be subject to the one aggregate Limit of Liability stated in Item 4 of the Declarations." The aggregate is applicable to both parts of the insuring agreement. If entity coverage is endorsed to the policy, the aggregate will include that portion of allocation as well. The aggregate limit is inclusive of defense costs, though in policies for non-profit and private companies, declaring defense to be outside the limit is possible. The aggregate limit also includes those claims under the Discovery Period. Some policies contain a per loss limit. All claims that have interrelated acts of different person still constitutes one loss. A non-cumulating clause is contained in most policies. Only the policy limits in effect at the time the claim is first present in writing to the company shall apply, even if multiple claims result in different policy periods. So how much coverage is enough for defense costs? If defense is inside the limit, will there be enough for the judgment? If the policy was amended to include ERISA, will this further dilute limits available to protect directors? Will entity coverage dilute protection? These are important questions to answer. Cancellation provisions "This policy may be canceled by the named corporation at any time only by mailing written prior notice to the insurer or by surrender of this policy to the insurer or its authorized agent. This policy may also be canceled by or on behalf of the insurer by delivering to the named corporation or by mailing to the named corporation, by registered, certified, or other first class mail, at the named corporation's address as shown in Item 1 of the Declarations, written notice stating when not less then 30 days thereafter, the cancellation shall be effective..." Cancellation can be triggered by 10-day non-payment of premium; however, some states have a mandatory 60-day notice. But bear in mind that in reality, the notice would need to be at least 90 days, due to the length of time necessary to arrange for a new insurer. Be sure time notice applies to non-renewal situations. Discovery Period "If the insurer shall cancel or refuse to renew this policy, the named corporation shall have the right, upon payment of an additional premium of 75% of the full annual premium, to a period of one year following the effective date of such cancellation or nonrenewal (herein referred to as the Discovery Period) in which to give written notice to the insurer of claims first made against the insureds during said one year period for any wrongful act occurring prior to the end of the policy period and otherwise covered by this policy." A Discovery Period applies only if the insurer, not the insured, does not renew the policy. This sample policy allows one year, though many policies allow only a 90-day clause. If the insured wants an extended Discovery Period, the insurer can negotiate a percent for the additional premium. |
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Not only are policy forms, clauses, rules and court decisions constantly changing, but forms vary from company to company and state to state. This material is intended as a general guideline and might not apply to a specific situation. The authors, LunchTimeCE, Inc., CEfreedom, and Insurance Skills Center, and any organization for whom this course is administered will have neither liability nor responsibility to any person or entity with respect to any loss or damage alleged to be caused directly or indirectly as a result of information contained in this course.
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