Directors & Officers Liability (D & O ) – WHAT, WHY, and for WHOM?
D&O cover was first conceived in the late 19th century, and after a long period of its dormancy and unpopularity it was found spreading rapidly throughout the world since the 1980s.
D&O insurance can be purchased by organizations of all shapes and sizes. The primary purpose of coverage is to protect an organization's Directors & Officers. Depending on the organization’s size the policy may also provide benefits to the entity itself.
Directors and officers (D&O) liability insurance protects Directors & Officers from claims improper performance of professional duties. Lawsuits against board members and officers can result in huge awards for which the individuals may be personally liable.
Purchase D&O cover! Why?
An organization is subject to legal claims and suits for financial losses sustained as a result of acts committed by a Director or Officer. Additionally, Directors and Officers can also be sued individually for acts or errors they commit while serving the organization. These individuals may be held personally liable for such acts. If a director or officer is found responsible for a wrongful act, their personal assets may be at risk.
In some cases organizations indemnify (reimburse) officers and directors for damages and expenses they have incurred due to lawsuits. This will, of course, not apply to criminal acts.
Many companies operating in a multinational environment have their investors, trading partners or operations located in jurisdictions all over the world. This means that directors and officers have to keep in mind not only their markets but also compliance regulations, different government bodies, auditors’ opinions and the latest best practices for corporate governance and risk management in numerous locations . This increased complexity in the operating environment puts managers in the firing line.
Who can purchase?
All Business Sectors from local SMEs, charities, voluntary associations and other membership organizations to major international corporations and startups.
Factors leading to increased demand for D & O policies
Aggressive claimant litigation strategies
Severity of claims
Increased regulatory scrutiny
Increase of financial restatements
Evolving corporate governance leading to increased D & O exposures
D & O insurance is a form of errors and omissions insurance. It protects directors and officers from lawsuits filed by shareholders, regulators, state investigators, or other third parties. Companies purchase this coverage in order to attract and retain highly qualified directors and officers.
D&O policies are designed to cover claims based on financial losses only and not bodily injury or property damage.
Main components of D & O Insurance:
Directors and officers liability
This protects executives from claims when corporate indemnification is not available from their organization or the corporate indemnification is not allowed by law.
This coverage plays an important role in protecting individuals when the financial support is not available. It provides an essential defense, ensuring that their assets remain safeguarded from the consequences of personal liability.
For example, consider a board of directors implicated in a claim following an organization’s bankruptcy. As the organization effectively will have no money, it cannot fulfill its corporate indemnification obligations.
As a result, the directors immediately notify their D&O insurer and seek protection under the policy.
This reimburses an organization for the expenses it occurs when defending its management in accordance with its corporate indemnification obligations.
By indemnifying its executives, an organization is responsible for paying all legal expenses and claim settlements on their behalf. The costs of doing this can be impairing for even the largest of organizations and can potentially affect its financial stability. The D & O policy, with the right coverage can step in here.
For example, an executive is named in a formal investigation by regulatory authorities following allegations of wrongful behavior. The organization, as per its indemnification obligations, begins to incur defense costs on behalf of the executive and therefore, lodges a claim with its insurer, requesting reimbursement for these costs.
Entity securities coverage
Some D&O policies also include, amongst other thing like entity securities coverage. This coverage is typically reserved for publicly listed companies and protects the corporate entity from its own liability exposures.
The coverage is limited to claims made against a company as a result of the offer, sale or purchase of its securities; in other words, the shares listed on the stock market available for purchase by investors.
This cover has been developed in response to the increased frequency in which companies become involved in shareholder related disputes. By having this coverage, a company can be protected for the legal and claim settlement costs it incurs whilst defending its own corporate actions.
This is typically offered by insurers as an optional, allowing policyholders to elect this protection for the payment of extra premium. The extra premium is charged to compensate the insurer for the additional claims exposure.
Other coverages available:
Employment practices liability
Employment practices liability insurance (EPL) protects an organization from employment-related claims. EPL ensures that the entity is covered for its own defense and settlement expenses if an employee (or similar party) makes a claim against it.
While EPL is often available to large organizations on a stand-alone basis, it may also be attached to a D&O policy as an optional insuring agreement, for the payment of extra premium.
Management liability insurance (ML) is a type of D&O policy specifically tailored to meet the needs of small and medium enterprises. It is structured as a package-policy and contains a range of broad entity style coverage’s to protect an organization and its managers from a variety of claims.
These entity coverage, typically only available to larger organizations on a stand-alone basis, make this a very cost effective insurance solution. In addition to traditional directors and officer’s liability and corporate reimbursement insuring agreements, it often includes the following:
Employment practices liability
Superannuation trustee liability
Crime: coverage for crime committed against the entity, such as fraud and misappropriation
The time period of coverage
D & O insurance is a claims-made policy, which means that the claims are only covered if the policy is active or within the extended reporting period. Normally a policy will have a retroactive period, covering claims for wrongful acts that took place before the policy’s inception.
The D&O policy will pay for defense costs and financial losses. In addition, extensions to many D&O policies also cover costs for managers generated by administrative and criminal proceedings or in the course of investigations by regulators or criminal prosecutors.
Employment practices & HR issues
Inaccurate or inadequate disclosure (e.g. in company accounts)
Misrepresentation in a prospectus
Decisions exceeding the authority granted to a company officer
Failure to comply with regulations or laws
Common D&O exclusions:
Intentional non-compliant acts
Illegal remuneration or personal profit
Property damage and bodily harm
Legal action already taken
when the policy begins
Claims made under a previous policy
Claims covered by other insurance
Sources of D & O claim:
Company – Self
Other Directors and Officers
Advancement of defense costs
Legal fees and expenses for attendance at any investigation
Outside directorship cover
Automatic Discovery period
Lifetime run-off for retired directors
Special excess protection for non-executive directors which is in excess of aggregate limit of liability
Bail bond and civil bond expenses
Crisis communication extension
Accidental Homicide (Corporate Manslaughter)
By transferring these liabilities to an insurer, an organization can shield itself and its Directors & Officers from claims. This proactive approach to risk management is not only wise from the entity’s point of view but also from the perspective of shareholders, who appreciate the preservation the company’s capital.
Large organizations will acquire D&O coverage to protect their executives and the organization’s interest in defending them. Depending on the size and corporate structure of their particular organization a D&O policy may be able to expand to provide some level of protection for the entity itself.
To get to know more about D & O please keep touch with our dedicated representatives @ 800-GARGASH or visit our website for a live chat.