Directors and Officers Liability Insurance

Why Buy Directors and Officers Liability Insurance?

1. Investment Management
   D&O's can be held personally responsible for investment decisions of the company's portfolio of assets. Such negligence can include failure to evaluate properly the credentials of the person responsible, failing to have policies limiting the type and duration of asset purchases, failure to require purchases in excess of certain limits to be approved by the board, etc. Regardless of the reason, D&O's can be brought into a suit for failure of the company's portfolio to perform.
   
   
2. Release of Non-Public Information
   The SEC requires companies to abide by specific procedures as to when and how company information is disseminated to the public. Without a specific written plan, D&O's can be held liable for the effects of releasing such information. The SEC imposed both criminal and civil penalties, depending upon the situation. Even though D&O insurance will not protect an individual for criminal behavior, D&O policies are designed to protect the company's assets and other D&O's in the event of such an occurrence.
   
   
3. Conflicts of Interest
   This is a major area for lawsuit with Directors and Officers. D&O's typically serve on multiple boards and have investment portfolios that may encompass competitive situations. It is common for example in a hospital for large physician groups to have board representation. It can be alleged that these doctors have a conflict of interest when negotiating with other doctors. As another example, it is common for Boards to have their attorney's, accountants, brokers and others on their boards. This is usually a very bad practice, unless such professionals recluse themselves from voting on specific issues and refrain from providing professional services. Companies should adopt formal Conflict of Interest policies to monitor such conflicts. Shareholders and other potential defendants will utilize any angle they can in order to win a verdict.
   
   
4. Hiring and Firing Decisions
   Although most Directors and Officers are not individually involved in hiring and firing decisions of most employees. They maintain ultimate responsibility for ensuring that their company provides a safe and discrimination free work environment. The D&O's approve the company's policies and procedures regarding hiring, firing and promoting employees. They are also responsible for supervising management in the implementation of these procedures. A terminated employee may sue on the grounds that the company should have safeguards in place to ensure a safe environment, provide appropriate feedback in the form of evaluations and that such procedures should be formally documented in the employment manual. Employment Practices Liability Insurance (EPLI) provides protection from actual losses from the company, however, the individual D&O's can also be found liability. Without a properly worded policy, individual D&O's can be held individually liable.

Issues to Consider in Evaluating D&O Coverage

1. Policy Limits
   Standard limits for most small to medium sized organizations start at $1.0 million, but most public companies buy at least $5.0 million in coverage. Companies typically buy and individual claim amount and an aggregate. For example, a minimum policy may be a $1 million/ $2 million policy. This means that the insurer will pay a maximum of $1 million for any one claim, but will pay an aggregate amount of $2 million in the given policy year. The could mean a million dollar claim and 10 $100,000 claims.
   
   
2. Claims Made Coverage
   Almost all polices are written on a claims made basis. However, almost all policies have an extended reporting endorsement meaning when you cancel the policy you may purchase coverage for a period of time at a predetermined rate covering claims that may come in later relating to the expired policy period. That rate can vary from 75% to 250% or more of the expiring premium. Usually, that rate is not negotiable, however, you should evaluate the cost between carriers.
   
   
3. Make Sure the Policy Covers The Company Itself
   Most D&O policies provide coverage for an individual Director or Officer (Usually Coverage Part A) and Coverage for the Company's indemnification of a Director or Officer (Coverage Part B), however, do not cover the actual Company in a D&O suit (Coverage Part C). You should make sure that the Coverage Part C for the "Entity" is included in the policy.
   
   
4. Do Your By-Laws Indemnify the D&O's?
   A D&O policy is triggered by the policy holder's (The Company's) legal obligation to defend a case or pay a settlement. If your D&O's are not indemnified in the Corporate By-Laws, the company has no legal obligation to defend the D&O's and therefore, even though the company may have a policy, no coverage may be available.
   
   
5. Does your Policy Segregate Defendants?
   Most D&O policies will exclude coverage for Fraud or other Criminal Activities. Although, insurance policies should not provide defense for Criminal actions, it should provide defense for the Company and other innocent parties that might be pulled into a lawsuit due to a criminal action on the part of someone else. Without a segregation clause, the other defendants may not be without any coverage if one of the other D&O's or even an employee commits a criminal act.
   
   
6. Does your Policy Cover Fines, Penalties or Punitive Damages?
   The actual settlements for large D&O cases involves not only actual damages, but punitive damages. In a recent case, we noted a $30,000 actual damage verdict with $6.9 million in punitive damages. Most policies specifically exclude punitive damages.
   
   
7. Employment Practices Liability
   Most D&O policies can provide some form of coverage for Employment Practices Liability relatively inexpensively. This coverage is not as comprehensive as a stand alone policy and usually has a high deductible with less actual coverage. You should review your own needs. For a further description of Employment Practices Liability Insurance click here.