Directors & Officers Liability Insurance: Part One
Directors & Officers Liability Insurance (D&O) covers individuals for claims made against them while serving on a board of directors and/or as an officer of a company.
The D&O contract protectsagainst third-party liabilities incurred as a result of the acts and omissions of the D&O policy's insureds. This type of policy can be written to cover directors and officers of for-profit businesses, privately held firms, not-for-profit organizations and educational instituations.
There are several elements (called "Sides") to coverage under a D&O policy. Here are a few.
Protects a corporation's directors and officers when the company cannot secure them agaist legal responsibility for their actions.
Reimburses the organization when it compensates the individual directors or officers for harm or loss, thus protecting the company's balance sheet.
Also known as "entitiy coverage", this eliminates disputes of coverage (limits) and expense allocation when both the directors and officers and the insured organization are named as co-defendants in a securities lawsuit.
Typical Claim Scenarios
A wide range of claims against a business have the potential to target campany leadership for responsibility and, therefore, liability.
Business leaders can be held responsible for a company's failure to comply with regulations and to provide a safe and secure workplace. Also, if a company is found liable for losses because of operational failures and mismanagement, directors and officers may be exposed to personal liability as well.
Claims the may target company leadership
individually as well as the company typically include:
Shareholder suits over company or stock performance
Creditor or investor suits over mismanagement or dereliction of fiduciary duties
Misrepresentation in a prospectus
Decisions exceeding the authority granted to a company officer
Failure to comply with regulations or laws
Employment practices and HR issues
Pollution and other regulatory-based claims
Insured v. Insured Exclusion
D&O insurance policies are designed and intended to protect senior managers against claims brought by third parties (including investors) who allege that they've suffered harm because of actions taken by the company through its officers and directors.
As a consequence, insurers believe that it is both logical and necessary to have an Insured v. Insured exclusion (I v. I) built into the D&O policy in order to preserve the policy limits for their intended use: to protect against outside threats. the purpose of the exclusion is to prohibit coverage for claims that involve in-fighting or that underwriters feared may be collusive (i.e., claims brought by one Insured against another Insured).
THE ORIGINAL PURPOSE OF THIS EXCULSION WAS TO ELIMINATE COVERAGE FOR FOUR TYPES OF SITUATIONS:
(1) Employment practices claims (2) Internal disputes/in-fighting (3) Claims involving collusion (4) Claims by organizations against their own directors and officers for imprudent business practices.However, the exclusion usually has numerous exceptions that carve-back coverage for certain types of claims. Whether any particular claim is percluded from coverage will depend not only on what is alleged, and by whom and against whom, but also the specific wording of the exclusion.
Claims Trends Always Impact Coverage
Academic literature and D&O insurance practitioners are in genral agreement that the exclusion was first developed in the 1980s as a response to claims asserted by strugging banks against their own officers to access the proceeds of their D&O polices.
The first such claim was asserted after a major U.S. bank acquired a smaller competitor. The major bank became aware that the aquired bank was not as well-run as originally repersented. The purchasing bank filed a lawsuit against the acquiring bank's directors and officers, who were now its own employees- essentaially suing its own executives for negligence.
The carriers and reinsurers involved in the acquiring bank's D&O program quickly realized the major flaw (from their perspective) in their policy wording and, almost overnight, an Insured v. Insured exclusion became standard in the D&O insurance policy.
Avoiding "collusive" lawsuits by a company against its own officals is not, however, the only rationale for the exclusion. Another important and frequently cited purpose is to prevent coverage for boardroom in-fighting.