Understanding and Evaluating a Policy
Directors and Officers Liability Insurance coverage is an essential part of managing a private or publicly traded company in today’s litigious environment. Directors and Officers are held to a higher standard and have legal responsibilities to shareholders, investors, creditors, employees and others.
These executive management roles have evolved over the past decade into much more than a prestigious title and “rubber stamp” approval of management decisions. The public is increasingly holding them responsible for the day-to-day operations of related companies.
Our Professionals analyze each of our client’s needs and match the benefits of D&O insurance with the risks of managing your business.
Why Buy Directors and Officers Liability Insurance?
Directors and Officers are often held responsible for implementing sound corporate policies and procedures and for monitoring management’s implementation of such procedures. This can include daily decisions such as sound investment management, release of non-public information, conflicts of interest, hiring and firing decisions, corporate policies regarding discrimination, merger and acquisition activity just to name a few.
- 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, they can be brought into a suit for failure of the company’s portfolio to perform.
- 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, these policies are designed to protect the company’s assets and other Directors and Officers in the event of such an occurrence.
- Conflicts of Interest
This is a major area for lawsuit with Directors and Officers who typically serve on multiple boards and have investment portfolios that may encompass competitive situations. For example, it’s common for a hospital or large physician group to have Board representation. It can be alleged that these doctors have a conflict of interest when negotiating with other doctors. It’s also 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 policies to monitor such conflicts of interest. Shareholders and other potential defendants will utilize any angle they can in order to win a verdict.
- Hiring and Firing Decisions
Although most Directors and Officers are not individually involved in hiring and firing decisions of most employees. They 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 choose to sue on grounds that there were lack of safeguards in place to ensure a safe work environment, provide appropriate feedback during evaluations and no formal description of these procedures in an 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
Each insurance carrier specializes in supporting a particular industry and therefore the forms of each company may vary. Our professionals deal with each of these companies and can customize a program specific to each client.
- Policy Limits
Standard limits for most small to medium sized organizations start at $1M, but most public companies buy at least $5M in coverage. Companies typically buy an individual claim amount and an aggregate. For example, a minimum policy may be $1M or $2M. This means that the insurer will pay a maximum of $1M for any one claim, but will pay an aggregate amount of $2M in the given policy year. This could mean one million dollar claim and 10 $100,000 claims.
- 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.
- 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, they typically 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.
- 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.
- 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.
- 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, which most policies specifically exclude.
- 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. For a further description of Employment Practices Liability Insurance click here.
One of our professional liability specialists can discuss these and other issues with you at your convenience. We can customize coverage specifically to meet the needs of your business. Please call us at 201-847-9175 to learn more.