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Directors & Officers Insurance Policy Definitions


Directors & Officers Insurance Policy DefinitionsReviewing Directors & Officers Insurance Policy Definitions

Directors and Officers (D&O) Liability insurance is needed to provide defense costs and pay for judgments against directors and officers, including board members, who are embroiled in allegations of wrongdoing connected with the business. But D&O policies are not easy, off-the-shelf products and the policy terms, scope of coverage, exclusions and available enhancements should be evaluated with a professional insurance advisor who works in this area. The details in the policy are critical to understanding the extent of the coverage being provided.

To help shed some light on the ins and outs of D&O insurance coverage, we’ve provided several typical policy definitions:

Application Severability. Most D&O policies contain some form of “severability” provision, which limits the attribution of one insured’s knowledge to other insureds. However, many of those provisions afford only partial severability. For example, the knowledge of the person signing the application or the knowledge of certain senior executive officers may be assigned to all insureds. Under this type of provision, coverage for all of the insureds could potentially be rescinded if the individual that signed the application or the designated senior executive officers knew facts that were not truthfully disclosed in the application. One way to address this rescission issue is with express language outlining that fraud or inaccuracies in the application cannot be imputed to innocent directors and officers who had no knowledge of the erroneous or untrue facts contained therein.

Claim: Some policies define claims to include written demands for monetary damages, but may not also include written demands for non-monetary relief, which is preferable. Second, some definitions do not include criminal proceedings, although most policies include coverage for defense costs in a criminal proceeding. Moreover, many policies don’t include formal investigations against an insured prior to those investigations resulting in a formal proceeding. For example, if an insured is the target of an SEC investigation, the policy may not kick in for defense costs incurred prior to the SEC beginning formal proceeding unless the definition of claim specifically includes investigations.

Insured Persons. This typically includes directors and officers and may include non-officer employees with respect to securities claims. Companies should evaluate whether certain management positions should be specifically included in the definition if those positions are not technically officers. Some organizations may want to amend this definition to include as insured persons all employees but only if the non-officer employee is a co-defendant in a claim against directors and officers.

Notice of Claim. Typically D&O policies require insureds to give notice to the insurer of a claim as soon as practicable. This can present issues if a claim is not reported for some time for one reason or another. Coverage can end up being denied if the notice of claim definition is not met. To eliminate the risk of inadvertent delays in reporting a claim, the policy could require notice of a claim only after either the company’s in-house general counsel or risk manager first learns of the claim.

Conduct Exclusions. Standard D&O policies, of course, contain exclusions for fraud, intentional violations of law, and illegal personal profit or remuneration. These exclusion need to be evaluated carefully and how they are specifically worded.

Employment Practices Claim: Coverage for employment-related claims has expanded considerable under D&O insurance over the last several years. D&O policies are now available to cover issues involving actual and alleged wrongful dismissal and discharge, harassment, discrimination, retaliation, employment-related misrepresentation, wrongful failure to employ or promote, wrongful discipline, failure to grant tenure, and a whole host of other employment-related wrongful acts.

There are many other important definitions contained in a D&O policy, which we would be happy to review with you. Our professionals at Axis Insurance Services can also review your existing policy to see if you have the best insurance protection for your specific situation. We are experienced in negotiating terms on behalf of our insureds that will properly protect their assets, executives and organization. Give us a call at (877) 787-5258.

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Blogged on: December 17, 2014 by Mike Smith
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