This is the first of two posts discussing several major aspects of directors' and officers' liability ("D&O") insurance coverage. Companies approaching a policy renewal deadline, looking to place D&O insurance for the first time, considering increasing the size or structure of an existing D&O insurance program, or otherwise evaluating their overall risk management strategy may find it useful to review some basic features of D&O insurance and potential enhancements.
Why is D&O insurance important?
D&O insurance is an important risk management tool for any company. It functions as a financial backstop for directors and officers by shielding these individuals from personal liability if the company is unable to indemnify them (usually due to a legal prohibition on indemnification or insolvency). D&O insurance also adds value to and financial protection for the company by providing coverage for certain claims asserted against the company—most typically, securities claims—and its management.
Coverage basics
D&O policies typically provide coverage in several parts:
- "Side A" or Insured Person Coverage directly covers Insured Persons—including directors, officers and other individuals defined under the policy—for non-indemnifiable claims made against them.
- "Side B" or Corporate Reimbursement Coverage reimburses the company for amounts paid by the company as indemnification on behalf of Insured Persons for claims made against the Insured Persons.
- "Side C" or Entity Securities Coverage applies in the case of securities claims made against the company as an entity. Some D&O policies issued to private or non-profit companies may provide broader coverage for other types of claims made against the company.
- Additionally, some policies may include "Inquiry" or "Interview" Coverage or other investigative costs coverage for certain non-routine document requests, interviews, and other pre-claim matters involving Insured Persons.
How D&O insurance is triggered
D&O insurance is "claims-made" coverage. This means that D&O policies respond based on the date when a "claim" is deemed first made against an insured. The date when the conduct at issue in the "claim" occurred is generally irrelevant, although particular D&O policies may contain some exclusions or limitations based on date of the conduct that may be relevant to assessing coverage. A "claim" typically includes civil lawsuits, criminal proceedings, written demands for some kind of relief, and, potentially, regulatory investigations (often limited to investigations of an Insured Person) alleging a wrongful act. Thus, D&O coverage could be triggered, for example, when a company is served with a lawsuit alleging that the management made misleading statements about financial data, as well as if a demand letter is received against an individual officer alleging financial fraud.
Our next post will discuss key D&O coverage exclusions, common pitfalls policyholders encounter in attempting to access the benefits of their D&O insurance, and new issues in 2020.
Originally published 29 July, 2020
This article is presented for informational purposes only and is not intended to constitute legal advice.