10 Tips for Reviewing Your Directors and Officers Liability Insurance Policy

You’ve been told your company needs Directors and Officers (D&O) liability insurance, but you don’t completely understand why. You just sign the application and pay the premium.  That is neither an efficient, nor smart way to operate a business.

Here are 10 tips for reviewing and improving your D&O insurance:

1. DECIDE WHAT TO PROTECT

D&O liability policies have coverages for directors and officers individually, the company, which has paid (or is required to pay) for defense and indemnity of directors and officers, and the company itself, usually for securities claims. Coverage will be for a “wrongful act,” whose definition may be broad or narrow. Intellectual property claims may be excluded. Employment Practices Liability Insurance – which covers employment claims such as hiring, firing, discrimination and harassment – and Employee Benefits Coverage – which covers claims relating to the administration of benefits such as health and retirement plans – also are typically part of a package policy.

2. DECIDE WHOM TO PROTECT

D&O insurance helps attract qualified persons to your company who will want protection for individual liabilities. The policy may be drafted to protect various categories of persons:  Current and past inside and outside directors; current and past executive and non-executive officers; in-house general counsel who is not always covered

Beware!

The decision of who to insure affects various provisions, including limits of liability, bases for rescission, exclusions and claims reporting. 

3. DECIDE HOW MUCH PROTECTION

Nearly all D&O policies are “wasting policies,” which means every dollar paid to a lawyer reduces the limit of liability available for settlement or judgment. The limits can be reduced quickly where multiple attorneys represent individual directors and officers. Investigate separate limits for different classes of insureds or purchasing stand-alone Side A Coverage for individual directors and officers.

4. REVIEW + ASK

Review a proposed policy with your broker and ask questions to understand and explore alternatives. Consider retaining an insurance professional, such as a seasoned insurance coverage attorney or insurance consultant, with no financial interest in selling a policy. The investment could save you in the long run.

5. LIMIT BASES FOR RECESSION

Policies vary as to what information an insurer may use to rescind a policy for misrepresentation. Try to limit the bases to statements in the application and the actual knowledge of the person signing the application. Avoid permitting an insurer to rescind for misrepresentations in outside documents such as SEC filings, press releases, prospectuses or for knowledge of any insured. Otherwise, “innocent” insureds will be left with no coverage.This may be accomplished by an appropriate “severability” clause.

6. EXPAND COVERAGE TO GOVERNMENT SUBPOENAS AND INVESTIGATIONS

Most policies do not cover the costs and fees for responding to government subpoenas and regulatory proceedings. You may expand the definition of “claim” to extend to government actions.

Beware!

Broader definitions of “claim” may impact when notice of a “potential claim” must be made or you risk losing coverage entirely.

7. IS YOUR LAWYER ON THE LIST?

Policies frequently require the insured company to select defense counsel from a pre-approved list. Companies should try to get their favored counsel on the list, as that counsel is familiar with the company and has the company’s confidence, rather than a different law firm, no matter how capable and expert it may be.

8. EXPAND DEFINITION OF “LOSS”

D&O policies generally pay for “loss.” Under some definitions certain penalties, such as disgorgement, may not be covered. This may be significant as disgorgement is a frequent remedy.

9. CONSIDER BANKRUPTCY

No company expects to go bankrupt. But, bankruptcy may create coverage problems.The Bankruptcy Trustee may be considered an “insured” and lawsuits between insureds are generally excluded. Absent policy language, the Trustee could treat the policy as an estate asset such that individual directors and officers won’t have access to the coverage in the policy.

10. AVOID ALLOCATION PROVISIONS

Lawsuits typically have some claims that are covered and some that are not. Many D&O policies have “allocation” provisions which, if applied, may leave individual directors and officers – and the company – having to pay thousands of dollars themselves.

Understanding your directors and officers coverage is not a luxury – it is a necessity in a complex and litigious America. There are many markets for D&O policies, so an informed company likely can obtain the right coverage at the right price. All it takes is a little knowledge and the determination to ask. As my mother taught me, “if you don’t ask, the answer is no.”

Garth Gersten is an attorney at Shapiro Bieging Barber Otteson LLP, advises and represents policyholders. He is licensed in California, North Carolina, Illinois and Colorado and recognized by Best Lawyers for Insurance Coverage. Contact him at [email protected] or at 720.963.7540.