Directors and officers (D&O) insurance can be confusing. Policies often contain a variety of terms that can be difficult to understand, especially for someone without an insurance background. Understanding what’s in your D&O policy is critical, particularly during the underwriting or renewal process. Prior to meeting with your broker, it’s important for policyholders to review their coverage and exposures. That way, they can come to their broker with specific questions regarding their policy and coverage options.
The following is a list of common D&O terms to keep in mind the next time you meet with your insurance broker:
ALLOCATION—A determination of the portion of a loss that is considered to be covered by an insurance policy when less than 100 per cent of the loss is covered. In some cases, a D&O insurance policy may not cover all of the defendants or entities named in a claim. In other cases, a D&O insurance policy may not cover all of the allegations made in a certain claim. In these instances, allocation would come into play.
CLAIM—In order for the protection of D&O insurance to become active, a claim that falls under the scope of a policy must occur. Most policies define a claim to include any written demand received by an insured, as well as any civil, regulatory or administrative proceeding arising in the line of corporate duties. The definition of claim may also include any criminal proceeding bought against an organization or its managers. Please note, policyholders should always review their policy to find out what qualifies as a claim and if they have any questions to check with their insurance broker.
CLAIMS MADE (AND NOTIFIED)—D&O policies operate on what is known as a claims-made and notified basis. This means that a policy provides coverage for claims made against an insured and notified to the insurer during the period of insurance. In order for a claim to be covered, it must meet the following requirements:
- Management must become aware of a claim during the policy period
- The insurer must be notified of a claim within the policy period
CO-INSURANCE—Co-insurance refers to the percentage of all loss that is the company’s sole responsibility. Co-insurance can either apply only to defence cost or to settlements and judgments. However, it usually applies to all losses under a D&O policy.
CONDUCT EXCLUSIONS—Coverage for certain types of conduct is excluded from D&O policies. The conduct exclusions found in most policies preclude coverage for the following two categories of conduct:
- For claims related to fraudulent or criminal misconduct
- For claims related to illegal profits or wages the insured executive was not legally entitled
CONFIDENTIALITY—D&O policies typically prohibit organizations and their directors and officers from disclosing information about their D&O coverage, such as terms, conditions, policy limits and self-insured retentions (SIRs), to third parties. The purpose of this policy condition is to protect the organization and the insurer from malicious third parties. For example, if a third party gathered information about an organization’s D&O policy, the information could then be used to make unreasonable demands during litigation.
COST ALLOCATION—D&O policies typically contain an allocation clause, which states that an insurer is liable for any losses sustained by the insured and its management to the extent the policy affords coverage. Essentially, insurers only pay for claims they are legally required to, based on the terms of the policy itself.
D&O PROGRAMS—Organizations that require a larger limit of liability must work with an experienced insurance broker to develop a D&O program. These programs allow organizations to acquire their total policy limit of liability from multiple insurers. This is particularly useful when a company’s unique requirements are too much for one insurer.
DUTY OF DILIGENCE—Sometimes referred to as duty of care, this responsibility requires directors and officers to act in good faith. This means that directors and officers must consider all available information before making a decision and act in the same way a reasonable person faced with the same decision and responsibilities would act.
DUTY OF LOYALTY—Directors’ and officers’ duty of loyalty is meant to prevent them from engaging in conduct that would otherwise hurt or take advantage of the company they serve. Through this duty, directors and officers have an obligation to avoid any conflicts of interest.
For more common terms used in D&O insurance policies, check out part 2 and part 3 of this series.
Download a FREE copy of our Guide to Directors and Officers Insurance for more information on how D&O insurance a must for organizations of all sizes.
