Discover directors and officers liability insurance
An organisation’s management must satisfy a range of directors duties in the performance of their role. These duties represent management’s responsibility to act in the best interest of an organisation, while also considering the interests of its stakeholders. A failure to appropriately consider directors duties can have significant personal consequences.
In this article, we will explore the concept of directors duties, and understand
The D&O application process often surprises many leadership teams. It is complex and requires the disclosure of sensitive information. But with the right help, an organisation’s directors and officers will be adequately protected for years to come.
Organisations seeking D&O coverage must first complete a formal application process. The application is used by insurers to understand an organisation’s operations and is relied on by its underwriters to issue policy pricing and conditions.
To ensure there is no ambiguity in determining what documents comprise of an application, the term is often specifically defined within a policy. Whilst this definition can vary, it generally consists of a proposal form and supporting documents.
A proposal form is the formal application document completed by an organisation’s directors and officers. It is the method in which an organisation provides an insurer with underwriting information, by answering a broad range of questions relating to its operating activities and managerial related risk exposures.
Supporting documents complement the information contained within the proposal form and allow an underwriter to analyse the finer details of an organisation. They generally consist of documents such as:
Quality applications get better results! From an applicant’s perspective, the more relevant and accurate the information provided, the more comfortable an underwriter will be with the risk; possibility leading to more favourable terms.
Insurance contracts are bound by the legal doctrine of urberrima fides, a Latin phrase meaning ‘utmost good faith’. Acting with utmost good faith means that all parties to an insurance contract are under a strict duty to deal open and honestly with each other, disclosing all material facts during the application process. For an organisation and its management, this entails satisfying a duty of disclosure.
A material fact‘ is any piece of knowledge that could influence an underwriter when deciding whether or not to accept a risk. An underwriter relies on the information presented to them to make key judgements on an applicant’s risk profile, and they use this analysis as a basis for determining a policy’s terms and conditions. It is therefore of utmost importance that this information be completely and accurately disclosed.
From a policyholder’s point of view, if material facts are not correctly disclosed and an underwriter is induced to offer coverage for something they would not have done if correct disclosure were made, there can be serious consequences.
An insurer requires that an applicant disclose all prior claims, and any circumstances that may give rise to future liability. All such prior claims and circumstances are then excluded from coverage moving forward.
If an insurer believes that an applicant has knowingly withheld information about the existence of prior claims, it may attempt to avoid covering any claim related to the non-disclosure or omission.
Important! Underwriters take into account an organisation’s disclosure of prior claims when determining a policy’s premium and terms of coverage.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.Satisfying a duty of disclosure isn’t just a once off occurrence. An organisation and its executives are wholly responsible for keeping underwriters advised of accurate information throughout the entire application process.
This means that underwriters should be notified if facts or circumstances change between the initial application and when coverage is eventually bound. Due to the serious implications of non-disclosure, it is in management’s best interest to promote transparency and continuous disclosure of all relevant details.
So, what happens in the event that you miss something?
Non-disclosure and misrepresentation in the application process can have serious consequences for policyholders. If an organisation or its executives fail to disclose relevant information or misrepresents a material fact, an insurer is likely to have one of three legal remedies available:
If non-disclosure or misrepresentation occurs during the application process, an insurer may have grounds to avoid the insurance contract. This is especially relevant in situations involving fraudulent non-disclosure or misrepresentation, such as when an executive deliberately lies or alters supporting documents in order to induce an underwriter to offer coverage.
By avoiding the contract, the insurer is entitled to treat the policy as if it never existed. This will result in the policy being cancelled effective from the date of the application. The cancellation of a policy means that all existing claims will be declined, as well as effectively eliminating coverage for any claims or circumstances which arise in the future.
When an innocent non-disclosure or misrepresentation is made, rather than avoiding the contract completely an insurer may elect to reduce its liability by arguing that its position has been prejudiced by the non-disclosure or misrepresentation.
By reducing its liability, an insurer can attempt to limit the level of coverage available for a particular claim. This remedy aims to place the insurer in the same position it would have been in if disclosure were made correctly. A reduction in liability may also comprise of an insurer imposing certain conditions or sub-limits, which would have been in effect had proper disclosure occurred.
If the non-disclosure or misrepresentation would not have affected an underwriter’s decision to accept the risk, for the same premium, terms and conditions, full coverage may still apply.
The representations clause identifies whose knowledge of a non-disclosed or misrepresented material fact can affect the D&O coverage of an organisation. In other words, it outlines who is responsible for speaking on behalf of the organisational entity during the application process.
For example, consider a D&O application completed by the CEO of an organisation. If a department manager has failed to inform him of a material fact, which would have affected the terms of insurance issued to the organisation, will the organisation’s coverage be affected by CEO’s non-disclosure, even though he honestly thought that all relevant information was provided to the underwriter?
Many policies account for these challenges by outlining which executives within an organisation are responsible for satisfying an organisation’s disclosure requirements. Because of the serious implications of non-disclosure and misrepresentation, the list of personnel whose knowledge can affect an organisation’s coverage is usually small, consisting only of high-level managers such as the CEO, CFO and general counsel.
Severability, in the context of D&O, relates to how instances of non-disclosure and misrepresentation by one executive, affects another. It outlines whether the knowledge of one executive will be imputed onto other executives or the organisation. In other words, how is the coverage for an innocent individual affected when another person makes a critical non-disclosure or misrepresentation?
In other words, how is the coverage for an innocent individual affected when another person makes a critical non-disclosure or misrepresentation?
As noted in the representations clause, usually only senior management’s knowledge will be imputed onto the coverage of an organisation. For individuals, many policies are now constructed to be fully severable.
Severability means that the knowledge of each person is separated from the knowledge of others. Therefore, non-disclosure or misrepresentation by one executive won’t affect the coverage applying to anyone else; provided, of course, that they are not aware of the misrepresentation.
Some insurers are willing to promise that once an application for coverage has been approved and a policy is in place, that coverage is non-rescindable. This means that an active policy cannot be revoked or cancelled, even after the discovery of a non-disclosure or misrepresentation.
If a policy is not completely non-rescindable, it may be at least partly non-rescindable; usually in relation to Side-A coverage. In this case, if an insurer has grounds to cancel a policy, Side-A coverage will remain in place to ensure that management remains protected in instances where indemnification is not available from their organisation.
D&O, like many forms of financial lines coverage, is non-renewable in the sense that a policy cannot be simply renewed or ‘rolled-over’ into the next insurance period. Instead, as a D&O policy approaches expiry it must be reapplied for, in a similar manner to its original application. Then, before expiration, a replacement policy must be effected for the following year.
This ‘renewal’ process is almost identical to the application process, requiring the completion of proposal documents and submission of supporting documents. For smaller and less risky accounts, an underwriter may provide a faster ‘express’ renewal option to policyholders, by asking them to complete a short declaration, allowing them to note any substantial changes to its business activities or turnover.
As you can see, applying for D&O coverage isn’t necessarily a straightforward process. It takes a little time and patience, and justifies the need for experienced underwriters, brokers and risk managers to assist organisations in navigating some of the common pitfalls.
We all buy insurance hoping we’ll never need to use it. However, there will come a time where you’ll have to notify your D&O insurer of a claim, or at least, a situation which may materialise into one. Below, we explore the things you need to know.
One of the most important concepts of D&O surrounds the notification of claims. D&O provides coverage on a claims-made and notified basis, which requires that a policyholder notifies its insurer at first knowledge of a claim or circumstance that may lead to a claim, for that incident to be covered.
In a practical sense, D&O policies require claims and circumstances to be notified to an insurer as soon as practical. This requirement is complicated by the fact that policies require a claim or circumstance to be notified in the same period of insurance, in which management first became aware of the incident, for that claim to be covered.
Important! If an executive believes that a certain action or event is likely to materialise into a claim sometime in the future, they should notify their insurer immediately. As long as this is done, an insurer is obligated to cover the incident, even if it doesn’t mature into fully-fledged claim until after the policy has expired.
Insurers may provide some leeway and allow for a claim notification to be accepted beyond the period of insurance in which it should have been notified. This may occur in situations where an organisation’s D&O policy has an extended reporting period or other benefit permitting late notification, such as continuous coverage.
Failing to promptly notify an insurer of a claim or circumstance can affect coverage, even if an insurer has not been prejudiced by the delay. If a notification is made late and there is no provision for late notifications, any subsequent claim may be declined.
Alternatively, if late notifications are permitted, but it is not made within a reasonable timeframe, an insurer may argue that its rights have been prejudiced and attempt to reduce its liability or deny acceptance of the claim on that basis.
Important! Since the notification of claims and circumstances is solely within the control of those insured by a policy, it is their obligation to ensure that it is done so in a timely manner.
Now that we understand how a claim should be correctly notified, what exactly is a claim or circumstance? While the definition varies from policy to policy, it generally includes any written demand, writ, summons or other legal proceeding made against the policyholder.
Some policies may even consider a verbal allegation of wrongful behaviour, enough to warrant a notification. To be sure, directors and officers should refer to their policy’s wording, for the definition applicable to their situation.
For more information on the definition of a claim, you might like to take a look at this post.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.As opposed to many general liability and professional indemnity policies, D&O insurance does not generally impose a duty on the insurer to defend the underlying claim against an insured.
Instead, a policy binds an insurer to indemnify an insured; that is, pay the financial losses incurred by – or pay on behalf of – a policyholder defending a claim. This arrangement is commonly known as a non-duty to defend provision and is found in many stand-alone D&O policies.
Having a policy with non-duty to defend provisions means that it is the insured’s responsibility, and not the insurers, to obtain assistance from legal counsel. However, as an insurer also has a financial interest in reaching a successful outcome, the policyholder is required to obtain its consent before proceeding with their selected defence.
Did you know? As small and medium enterprises are often considered less sophisticated in respect to their risk management practices, many management liability policies impose a duty on the insurer to defend the underlying claim against an insured. This means that it becomes an insurer’s responsibility to appoint lawyers and arrange a defence for those insured.
As legal expenses contribute to the cost of a claim and also erode the limit of liability, both the insurer and policyholder require claims to be defended in an efficient and cost-effective manner.
This often leads insurers to allow an insured to proceed with their preferred defence counsel, provided they have a clear grasp of the issues at hand. This being said, if there is any dispute over the fees or qualifications of the counsel selected, an insurer may insist the use of its panel lawyers.
Important! To minimise the chances of disputes when appointing legal counsel, policyholders should notify an insurer of their intentions as early as possible.
Once a claim is underway, an insured has an obligation to cooperate with their insurer. The cooperation clause exists to ensure that a policyholder takes steps to support the defence of a claim, and refrains from interfering with it.
A policy may not explicitly state what constitutes cooperation, however, it is expected that directors and officers provide all information and assistance requested by the insurer, and assist in mitigating further losses where possible. This usually entails being forthcoming with key documents and ensuring that proper disclosure is made regarding the ongoing matters of a claim.
From a policyholder’s perspective, cooperation is the best way to ensure a smooth claims resolution. It allows an insurer to quickly and accurately assess the potential liability of a claim and take proactive steps to help an insured settle it before losses begin to mount.
If an insured fails to cooperate, it can be a source of friction and may contribute to an insurer being tardy in fulfilling its payment obligations. In cases of serious non-cooperation by an insured, an insurer may even be released from its obligations under the policy.
An insurer will typically insist on being proactively involved in a claim’s proceedings. In addition to the financing they provide, insurers play a key role in working with an insured and their legal counsel to devise an effective defence and settlement strategy.
Additionally, it’s important to note that a policyholder must first obtain their insurers agreement before a claim can be settled. If there are multiple insurers involved, as is often the case with large D&O programmes, all interested insurers are required to sign off their approval, before settlement can be finalised.
If a policyholder fails to keep an insurer informed of a claim’s progress, this may lead to issues with gaining settlement authority. For example, if an insurer is informed of a significant increase in a claim’s quantum at the last minute, there may be delays in arranging settlement while the necessary authority is sought.
When a director or officer is involved in a claim, they often encounter a range of insurance professionals. An insurance broker represents the policyholder’s interest and attempts to guide them through the claims process. They will also have a lawyer, either appointed by themselves or the insurer, to defend the claim on their behalf. Finally, a claims officer represents the interests of the insurer, assessing the claim and interpreting policy coverage.
In much the same way that an insured must obtain an insurers approval to settle a claim, an insurer must also seek the permission of an insured. However, if an insurer believes that a settlement is in the best interests of both parties, and the insured does not approve the recommended course of action, the insurer may invoke a protective clause referred to as the hammer clause.
By enacting the hammer clause, an insurer limits its liability to the amount that the claim could have been settled for, plus defence costs incurred to the date of the proposed settlement. If a claim ends up costing more than the recommended settlement value, the insurer will not bear any part of the additional cost.
Whenever a D&O insurer indemnifies a policyholder from a covered claim, they automatically inherit the right to subrogate against others. Subrogation permits an insurer to assume the rights of the insured and to recover damages from any party who may be ultimately responsible for causing a loss.
An example of where subrogation may apply is when management relies on inaccurate advice provided by a third party. If this information is used as the basis of an action, which is later proved to be wrongful, and an insurer incurs losses defending the executives involved, the insurer may attempt to recoup its losses from the third party.
Knowing how to correctly report claims and circumstances to an insurer is imperative to the effectiveness of a D&O policy. There are many factors to be considered, however, ultimately it will be the terms of your specific policy and your underwriter relationships that will eventually determine the right process for you.
Every insurance policy has conditions which apply to its function and in this respect, D&O is no different. A policy’s conditions lay out everything that an organisation and its management need to consider for coverage to apply.
D&O insurance protects executives for their current actions, as well as providing ongoing coverage for decisions undertaken in the future. Additionally, D&O is somewhat unique as it also provides retrospective coverage for claims that arise from actions committed in the past.
The retrospective coverage afforded by D&O is typically unlimited. This means that there is no time limitation on how long ago a wrongful act occurred, as long as an insured has satisfied their notification obligations, by reporting the claim or circumstance in the policy period in which it was received.
In some circumstances, however, a limitation may be placed on retrospective coverage through the use of a retroactive date. A retroactive date removes coverage for claims, arising as a result of actions committed before the specified date.
If any retroactive date exists, it is usually specified within an organisation’s policy schedule. For the most part, they are manually applied by an underwriter on a case-by-case basis and are used when the underwriter believes that an applicant’s past risk exposures are too great.
They are most commonly placed when an organisation that has been operating for many years without a D&O policy, first applies for coverage.
The territorial and jurisdictional limits of a D&O policy are an important consideration for organisations with international operations. Jurisdictional limits refer to the jurisdictional region in which the insurer will respond with coverage, should a legal action arise. Territorial limits refer to the geographical area from which a claim can originate.
Many policies provide worldwide territorial coverage, but may limit the jurisdictional coverage available for regions that are considered highly litigious, such as the United States, Canada or those subject to trade sanction. This means that a policy will cover a claim that originates from these countries, but will not cover any litigation occurring in or relating to their legal systems.
For example, consider a company based in the United Kingdom has a D&O policy with worldwide territorial coverage and jurisdictional coverage of worldwide excluding North America.
If the company’s United States subsidiary is investigated by U.S. authorities, this claim is likely to be declined as coverage is excluded in the U.S. jurisdiction. If the company is investigated by European Union authorities over financial statements, including those related to activities conducted in the U.S., there will be coverage.
Directors and officers are required to refrain from disclosing information about their D&O insurance coverage. This ensures that the details of their insurance terms and conditions, policy limits and self-insured retentions aren’t revealed to third parties, who may otherwise take advantage of this knowledge.
If an executive reveals this information, a claimant may be encouraged to proceed with an unreasonable demand, knowing that an organisation has ‘deep pockets’, by way of insurer backing. These confidentiality clauses intend to protect the interests of the insurer and prevent abusing the existence of D&O coverage.
Many D&O policies contain an exclusion severability provision. Exclusion severability means that an exclusion applying to one executive’s behaviour won’t affect the coverage afforded to another. In other words, an innocent individual will continue to be protected, even if other managers have been found to be acting outside the boundaries of a policy.
For example, if a claim is brought against a board of directors for the deliberate and illegal actions of one executive, such as fraud, a policy exclusion may be triggered. With exclusion severability in place, instead of coverage being excluded for the entire board, the exclusion will only apply to the offending executive.
To begin to describe the presumptive indemnification clause, it may help to explain the problem it was introduced to solve. There was a time where organisations discovered that by wrongfully withholding corporate indemnification from its managers, they could avoid paying the Side-B self-insured retention. The theory was that a manager could then state he was not indemnified by the organisation and claim under Side-A, where no retention existed. (Pretty cheeky right?)
The theory was that a manager could then state he was not indemnified by the organisation and claim under Side-A, where no retention existed. (Pretty cheeky right?)
Very quickly, presumptive indemnification clauses were introduced, stating that an organisation was presumed to indemnify its directors and officers to the fullest extent as permitted by law, whether in fact it did so. Now, if an organisation wrongfully withheld indemnification, the responsibly of paying the Side-B retention was passed onto the individual. Not surprisingly, this did a good job in preventing organisations from shirking their obligations.
Not surprisingly, this did a good job in preventing organisations from shirking their obligations.
Despite the effectiveness of presumptive indemnification clauses, some insurers may choose not include them. However, this is far from an invitation to try and avoid the Side-B SIR. Instead, if an organisation attempts to push a Side-B claim onto Side-A through the means of wrongful non-indemnification, the insurer may elect to subrogate directly against the organisation to recover the SIR applicable.
For example, let’s say a marketing executive has a defamation claim bought against her for making inappropriate comments on national radio. The executive’s organisation, wishing to distance itself from the incident, decides to wrongfully withhold indemnification, leading the executive to seek protection directly from their D&O insurer.
Because the organisation is contractually obliged to indemnify the executive but chose not to, the insurer then moves to enforce the indemnification contract by seeking recovery of the self-insured retention directly from the organisation.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.The policy interpretation clause specifies the jurisdiction in which a policy will be governed. In most cases, this will be the laws of the country that the policy is issued. To ensure that all parties to the contract are clear, the applicable jurisdiction is listed within the policy wording. That way, should there be any dispute relating to the interpretation of coverage, those interested understand the laws that will apply.
The allocation clause outlines that an insurer is liable for losses sustained by an insured organisation and its management, only to the extent that the policy affords coverage. In other words, the insurer will only pay for claims it is legally required to under the terms of the policy.
Allocation typically arises in situations where there are two or more defendants facing the same claim and not all are covered by the same policy. For example, this can occur if an executive and the company they represent are both named in a lawsuit, and the organisation is not insured for entity coverage.
In this case, the insurer will protect the executive according to the terms of the policy, including reimbursing the organisation for expenses incurred on the executive’s behalf.
However, as no entity coverage exists, the insurer won’t cover the organisation for its own liability. Instead, it will negotiate directly with the corporate entity, as an uninsured party, to determine its contribution to the cost of the claim relative to its share of liability.
Any alteration to an organisation’s ownership, either relating to the addition or removal of corporate entities, or a change in composition of the board of directors, has flow on effects for the risks faced by directors, officers, and therefore, insurers.
D&O policies contain a change in control provision, which automatically ceases coverage for a policyholder following a transaction that alters its ownership structure. Whilst the definition of a transaction varies, it generally includes any situation where:
Following a change in control, an organisation’s D&O policy will automatically convert into run-off. Run-off is when a policy remains in force, but will only cover claims materialising from actions that have occurred prior to the date of a transaction.
Did you know? Having a policy that automatically converts into run-off is great benefit for policyholders, as any claims or circumstances that materialise from past actions can be notified under the existing policy until the end of the insurance period.
Following a change in control and beyond the period of insurance, an organisation should carefully consider acquiring run-off coverage. Run-off coverage provides directors and officers with an extended reporting period to notify their insurer of claims which arise in the future.
By extending the duration of their policy, management will remain covered, even if a claim or circumstance doesn’t arise until many years after the change in control actually occurred.
Important! Run-off coverage is an important risk management tool, as without it, directors and officers are effectively uninsured for actions and decisions made in their past roles.
D&O liability risks remain long after a corporate restructure. The statute of limitations applying to each jurisdiction largely determines the timeframe for which management is exposed. Claims can be made against directors and officers many years after they are no longer involved in an organisation’s operations.
In Australia, for example, executives can be held accountable up to 7 years after the discovery of their wrongful behaviour, while in some parts of the United States the statue of limitations is 10 years.
These long tail exposures mean that executives should make conservative decisions about their requirements for run-off coverage, so they are not caught out uninsured years down the track.
Insurers have the ability to provide a range of options for run-off coverage. Policies can be effected for anywhere between one and seven years, however, it is generally recommended that coverage be sought for as long as possible. This way, executives are protected until the likelihood of receiving a claim no longer exists.
Run-off premiums are calculated using a range of methods, but all typically reflect the diminishing risk of receiving new claims over time. Run off policies are generally purchased in a one off transaction, with insurers offering discounted rates to organisations that purchase multiple years of coverage up front.
For example, an organisation paying an annual premium of $5,000 per year could be offered the following run-off coverage options:
When an organisation is subject to a transaction, run-off coverage is generally purchased for the previous operation. Following a change in control, if an organisation continues to operate in its altered form, a new D&O policy must be established to protect directors and officers for their ongoing managerial activities.
In this post, we’ve outlined the major conditions of a D&O policy. As you can see, there are many of them, ranging from the scope of jurisdictional coverage through to what happens if there’s a change in management. Because of their complexity, directors and officers should maintain a close relationship with experienced brokers and underwriters to ensure that all conditions are compiled with.
Risk retention is something we deal with in all kinds of insurance. In D&O matters, a self-insured retention ensures that an organisation’s policy is ready to respond when it’s needed most.
The self-insured retention (SIR) is an important component of a D&O policy. It represents the amount of risk an organisation is willing to absorb before its insurance policy will respond.
A SIR plays a similar role to an excess or deductible used in other classes of insurance. The main difference is that instead of being paid at the beginning of a claim or being deducted at the end, the SIR is the value of loss that must be first incurred by an organisation before its insurer will contribute.
A SIR involves an organisation paying the initial costs of a claim, such as early-stage legal expenses and settlements, until the level of retention is reached. Once this occurs, the policy will respond and the insurer will pay for all further expenses until the claim is finalised, up to the limit of liability.
If a claim is small, and can be settled for a amount less than the retention, an organisation’s D&O policy may not be required to respond at all.
To understand the function of a SIR it helps to revisit the original intention of insurance. Insurance exists to indemnify an insured from significant or catastrophic loss.
If insurance companies were to cover losses of all values, an account could quickly become unprofitable. By insisting that an organisation retain some risk, its insurance coverage is reserved for larger, more significant claims.
From an organisation’s perspective, the benefit of a SIR is that it protects its D&O loss history from claims contamination. Claims contamination means that an organisation can appear unattractive to prospective insurers if it has too many losses on its account.
By managing costs and paying for its own claims under the self-insured retention, an organisation will maintain a cleaner claims history, and reap the rewards of being a higher quality risk, such as better quality terms of coverage and reduced premiums.
A SIR generally applies to each and every claim. This means that for each separate claim, an organisation must pay for losses up to the level of retention. However, many policies treat multiple claims, arising out of the same wrongful act, as a single claim; and therefore, only attracting one SIR.
An example of this is when an executive is sued by multiple claimants, following a single misdemeanour. In this situation, the costs of all claims against the executive for this incident are likely to contribute to one SIR amount, as the claims are related.
Each insuring clause of a D&O policy is subject to a separate level of self-insured retention. Below is an outline of how retention is applied.
Side-A coverage is typically not subject to self-insured retention. This means that directors and officers, who have not been indemnified by an organisation, can seek protection from an insurer without incurring any costs whatsoever.
The reason why executives do not have to contribute to claim costs relates back to the original purpose of D&O; to protect personal assets. Because executives seeking indemnity under insurance coverage are usually doing so as a matter of last resort, it is unlikely that they have the resources to incur any effective amount of SIR.
As a result, the absence of retention allows them to defend themselves without out-of-pocket expense.
Side-B coverage is generally subject to a moderate level of self-insured retention. This is because an organisation is viewed as having the financial resources to contribute to the cost of claim, when defending directors and officers.
When an organisation indemnifies its executives in accordance with its indemnification provisions, it is responsible for incurring costs up to the level of self-insured retention. Only then will an insurer reimburse the organisation for its expenses.
Any entity coverage contained within a D&O is subject to self-insured retention. As with Side-B, an organisation with entity coverage generally uses such protection as part of a broader risk management strategy. As a result, it is expected that the organisation can afford to contribute to its own claim costs, thereby sharing some of the risk with its insurer.
The main difference between the SIR applying to Side-B and entity coverage, is its size. Because an organisation is inherently more prone to litigation than its directors and officers, most entity coverage attracts a relatively high level of retention.
This is especially true of Side-C coverage, which is exposed to large class action claims, and employment practices liability, which attracts frequent claimants.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.A range of factors must be considered when selecting the level of self-insured retention. For the most part, these focus on an organisation’s ability to bear the costs of claims, but also on its general risk appetite.
If a self-insured retention is too high, an organisation may not be able to afford to finance claims to that level, especially if it is defending multiple claims at the same time.
On the other hand, if retention is set too low, the policy may respond too frequently, leading to underwriting losses for the insurer and a poor claims history for the organisation.
For an organisation with consistent cash flows and sound financials, electing a high SIR makes a lot of sense. As with other policy classes, underwriters generally provide discounted premiums for organisations willing to retain a higher level of risk.
However, sometimes organisations do not have a choice, as high retentions are often imposed on risky accounts and frequently claimed policy sections.
Important! An organisation considering a high level of SIR should consider all possible scenarios, as what might appear reasonable in good times can create problems if circumstances change. This is in line with the common observation that claims are more likely to occur when an organisation is performing poorly, which is precisely when there are fewer funds available for contributing to a SIR.
An organisation’s level of SIR is usually relative to the size of its asset base. Minimum retention levels for Side-B coverage, for example, start at around $5,000 for small organisations. While for large organisations it’s not uncommon to see self-insured retentions of $100,000 or more.
At the end of the day, common sense should prevail. An organisation should consider its own ability to meet retention obligations, and select the highest level it can comfortably afford.
Self-insured retention is a necessary evil of carrying D&O coverage. While many may become frustrated when claims fall within the policy retention, it has its purpose. By selecting a SIR appropriate for an organisations risk environment and financial condition, management will ensure that its insurance coverage is reserved for when it needs it most.
Understanding the function of the limit of liability, as well as selecting an appropriate level of coverage, is a difficult decision for many organisations. Read on to learn more about how it works and what options are available.
The limit of liability specifies the amount of insurance coverage available to a policyholder, for the payment of claims in any one policy period. It sets the maximum value that an insurer is prepared to spend defending and settling claims, on behalf of an organisation and its management.
The limit of liability applies to each individual claim, as well as all claims in the aggregate. This means it is possible to exhaust a limit by incurring a single large loss or many smaller losses aggregated throughout the period of insurance.
Whichever the case, once the limit is reached, the policy is cancelled and coverage ceases to exist for any additional claims.
To help minimise the effects of claim aggregation, the limit of liability often sits in excess of a self-insured retention. Whether retention applies to a specific claim or not, depends on the insuring clause involved.
Many D&O policy limits are inclusive of defence costs. This means that the fees of lawyers engaged to defend a claim, contribute to the overall policy limit. In other words, as a claim is defended the limit of liability is eroded, leaving less funds available for settling the claim at hand as well as paying for any future claims.
For example, if a D&O policy has a $1 million limit of liability and $150,000 is spent on defending and settling a particular claim, $850,000 remains for the defence and settlement of claims occurring throughout the remainder of the policy period.
Defence costs are not always included in the limit of liability, as some policies, particularly management liability policies, provide coverage on a defence costs exclusive basis. This means that the defence costs are in addition to the limit of liability, thereby reserving the entire policy limit for the settlement of claims.
Important! A defence costs exclusive policy limit, where available, is an advantageous arrangement for any policyholder.
Selecting a limit of liability is a challenging task for many organisations. The level of coverage selected can be the difference between being comfortably protected and facing financial ruin.
But what limit of liability can be considered adequate? And how does an organisation decide how much coverage to carry? Unfortunately, selecting a limit of liability is not an exact science, and it depends on a range of factors.
Described below are seven things that should be considered:
An organisation’s ownership structure plays a significant role in determining the level of coverage required. While both public and private organisations face risks with varying complexity, it is public companies that are exposed to the most severe claims. As a result, they typically require much higher policy limits, with many carrying coverage of $100 million or more.
The risk exposures faced by an organisation and its management are directly related to its size. The size of an organisation can be measured in a number of ways, such as:
In short, large organisations experience larger and more frequent claims. By comparison, small organisations are generally less risky and have been known to comfortably carry policy limits of as little as $1-5 million.
Did you know? Underwriters may not offer higher levels of coverage where the limit of liability is larger than the total value of the organisation itself. This way, the policy is less likely to be abused as an ‘asset’ of the organisation.
For example, a private company with annual revenues of $2 million, may not be permitted to acquire any more than, say, $5 million of coverage, as this may encourage misuse.
The number of executives requiring protection from a single D&O policy has a significant effect on the level of coverage required. When defending claims, each executive may not have the same interests and therefore, may require their own separate legal counsel.
A limit of liability should take this into account, whilst also reserving enough funds for potential settlements.
The geographical location of an organisation’s operations and commercial interests should be considered. Organisations operating in foreign markets may face a higher risk of claims due to relative unfamiliarity with local laws and increased compliance obligations.
Additionally, organisations operating in highly litigious jurisdictions, such as the United States and Canada, should pay special attention and consider raising policy limits to account for the additional risk that this brings.
A popular method of determining policy limits is benchmarking an organisation’s requirements against the purchasing trends of other similar organisations, in terms of both industry and size.
Whilst comparative information provided by brokers and underwriters is certainly helpful, directors and officers should ensure that their D&O coverage is adequate for their own circumstances.
After considering peer benchmarks, it makes sense to take into account claims trends within the D&O market. A lot of insight can be gained by simply staying informed of litigation trends reported in the media. However, many insurers, industry publications and intelligence services such as Advisen, are also an excellent source of claims related data.
Finally, most organisations will need to take into account the cost of acquiring coverage. While an ideal world would provide unlimited resources for purchasing D&O insurance, budgetary constraints are often considered.
Despite cost often being an important factor, especially for smaller operations, executives may be able to reduce these overheads by altering their coverage or the level of self-insured retention.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.By including entity coverage within a D&O policy, the operation of the limit of liability is altered. It can have a positive effect by aligning the interests of an organisation and its insurer, but may also impact negatively by infringing on the protection available to executives when they need it most.
The inclusion of entity coverage removes the tedious issue of costs allocation. In the absence of entity coverage, there is potential for a diversion of interests when an insurer, which is paying on behalf of executives, and an organisation, which is paying for itself, attempt to divide the costs of litigation.
With entity coverage in place, management and the organisation are insured under the same policy. Therefore, the interests of all parties are more closely aligned with the interests of the insurer, possibly leading to a simpler and more straightforward resolution.
Despite the benefits of incorporating entity coverage into a D&O policy, there can be negative implications. One of the main downsides is how claims against the entity affect the limit of liability.
The limit of liability is typically shared across all sections of a policy. This means that any costs incurred in defending the entity from a claim affects the overall policy limit.
This impact can be significant, as the coverage available to management is effectively reduced while an organisation defends its own interests. In a worst-case scenario, the limit of liability can be eroded to the point of exhaustion, leaving individuals without further coverage for claims.
Ironically, by sharing the policy limit, executives can end up being exposed to the very claims which the purchase of D&O was intended to prevent. Hence, the inclusion of entity coverage must be carefully considered, so not to leave management unprotected in situations where an organisation cannot indemnify them.
In recent times, a few solutions have been developed to overcome the issues created by including entity coverage within a D&O policy:
By electing not to insure Side-C or EPL coverage, an organisation removes the issues of a shared limit altogether. By doing this, the entire policy limit is preserved for the use of directors and officers (Side-A) and reimbursing the organisation when indemnifying them (Side-B).
For employment practices liability and other entity insurances such as crime and statutory liability, an organisation may have the option of removing these coverages from its D&O policy, and instead insuring them on a stand-alone basis.
While this often a more expensive option, it prevents entity claims from contaminating the D&O policy limit.
When an SME acquires management liability coverage, it may have the option of electing separate towers for each insuring agreement. By isolating each section of coverage, each one gets its own limit of liability. Therefore, say, in the event that the corporate liability coverage applying to the protection to the entity is exhausted, this will not affect the other insuring agreements, which remain intact.
Many insurers offer stand-alone Side-A coverage to compliment their traditional ‘primary’ D&O policies. Stand-alone Side-A, purchased alongside a primary D&O policy, provides a higher level of Side-A coverage over and above the policy limits of the primary policy.
Stand-alone Side-A coverage ensures that directors and officers remain protected, even if the primary D&O limit is exhausted. Its benefits are often two-fold:
Note: Many stand-alone Side-A policies include the benefits of both difference-in-limit (DIL) and difference-in-conditions (DIC).
Any organisation requiring a large limit of liability will work with an experienced broker to develop a D&O programme. D&O programmes are constructed to allow an organisation to acquire its total policy limit from multiple insurers when its requirements are too high for any one insurer to satisfy.
The panel of insurers that make up a programme are headed-up by the lead insurer. The lead insurer is typically experienced with D&O liability issues and is responsible for issuing the policy wording and handling claims. It is responsible for issuing the first layer of coverage, the primary layer, which means it is also the first insurer to pay out when claims arise.
Following the lead insurer, excess layers of coverage are acquired from other insurers and are stacked on top until the desired limit is reached. Excess layers are typically follow-form, in that they are subject to the same terms and conditions of the primary layer.
Any claims lodged against a D&O programme erode the limit liability from the bottom up. Once a claim exceeds the self-insured retention, the primary layer of coverage is eroded until the first excess layer is reached. The first excess insurer then pays up until to the second excess layer. This continues until the total programme limit is exhausted or the end of the policy period, whichever occurs first.
In practice, the lead insurer will usually incur the majority of losses, and is responsible for paying claim settlement and defence costs on its own. The excess layers often play a secondary role, existing for the purposes of covering claims that are large or that have aggregated to a significant level.
In relation to the underwriting of a programme, the lead insurer also invests the most time into negotiating the terms and conditions of coverage. As a result, it receives a much larger share of the premium than excess layer insurers. The amount of premium allocated to each excess layer insurers reduces as the overall programme limit increases; as higher layers are less likely to incur claims.
An alternative programme structure to layering is proportionate co-insurance. Co-insurance requires that a panel of insurers share the risk equally, by agreeing to pay the same percentage of any claim made against a policy. In this arrangement, each insurer receives an equal split of the premium, because they all effectively share the same risk.
Selecting a limit of liability is arguably one of the most important insurance decisions for an organisation’s management. It’s a difficult process and it’s certainly not made any easier by the fact there are no hard and fast rules. Each organisation is different and will require different requirements for D&O policy limits, programme structures and executive protection products.
D&O policies include a range of exclusions for risks that an insurer does not wish to cover. Close attention should be paid to these excluded circumstances and events, so you aren’t caught out in the rain without a jacket.
D&O is designed to provide broad and thorough protection for policyholders. However, it doesn’t cover everything.
Policies contain a range of exclusions for situations and types of losses that insurers consider unfavourable, and do not wish to cover. Some are commonplace and exist in all policies, whilst others may only appear occasionally.
Some are commonplace and exist in all policies, whilst others may only appear occasionally. Below we outline the various forms of exclusions which exist in the marketplace.
Due to the claims-made and notified’ nature of D&O a policy will not cover known claims and circumstances; in other words, claims that should have been notified in past policy periods. For this reason, all claims and circumstances which directors and officers are aware of prior to the inception of a policy, are excluded.
By definition, insurance aims to protect policyholders from unforeseen risk. Hence, there is no reason for an insurer to cover a loss or potential loss which will certainly occur. This is clearly understandable from an insurer’s perspective, as they do not wish to issue coverage and receive their premium, only to then to immediately pay it back out in claims.
For example, if a new D&O policy is incepted today, it will not cover a potential employment dispute that an organisation’s management was aware of prior to today. In this scenario, the employment dispute in question will have to be covered under a past D&O policy, or not be covered at all.
A prior or pending litigation exclusion removes coverage for a claim if that claim has commenced before the prior or pending litigation date. This date is specified in the policy schedule and usually represents the date an organisation first acquired D&O coverage or most recently transferred insurers.
The purpose of a prior or pending date is to exclude cover for claims that may have already commenced and therefore, should have been notified under a past policy. It takes the form of an absolute exclusion, meaning that a claim will be not covered if it has commenced in any respect – even if management aren’t aware of it – prior to the specified date.
A typical example of where prior or pending litigation issues arise is when an older lawsuit against the organisational entity is later amended to implicate its management, after the prior or pending date. Policyholders can also be exposed if a lawsuit is filed with courts before the prior or pending date, but management don’t find out about it until afterwards.
Both these instances would see a claim be excluded, as the litigation proceedings technically began before the prior or pending litigation date.
D&O does not intend to cover risks which can be covered by other classes of insurance. These types of exclusions have two objectives; firstly, so underwriters can accurately measure the potential exposures of D&O liability, and secondly, so the chances of double insurance are minimised.
For example, any professional services provided by an organisation, such as accounting services provided by an accounting firm or engineering services provided by a civil engineer, are generally not covered as professional indemnity insurance is designed specifically for this purpose.
Other common exposures not covered by D&O are those relating to personal injury and property damage; as most organisations carry general liability and workers compensation insurance to cover these risks.
There may be some occasional exceptions to this, however, particularly in relation to employment claims involving mental anguish, humiliation and emotional distress; where some coverage may be added back in using a coverage carve-back.
D&O policies are likely to exclude hazards that are deemed to be catastrophic for an insurer’s own financial position. A catastrophic hazard is a situation considered so destructive, that an insurer could not realistically cover the cost of payouts in the event that it occurred.
Examples include losses resulting from nuclear events, war, terrorism and instances of environmental damage. While some more modern policies may not explicitly exclude some of these risks, the existence of catastrophic loss exclusions are not just limited to D&O policies. In fact, they often appear in other insurance classes too!
When catastrophic hazard exclusions are included, some, particularly those related to environmental damage, also include a carve-back to add back in Side-A coverage for the benefit of executives. In these situations, despite environment-related coverage not existing for Side-B and Side-C claims, individuals will remain protected if indemnification from the organisation is not available.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.Insurers are legally prohibited from covering criminal or fraudulent conduct, because any attempt to do so would undermine the fundamental principals of the law. Dishonest acts by any individual, resulting in illegal profit or remuneration such as those generated by insider trading or embezzlement, are excluded.
While conduct exclusions aim to discourage inappropriate behaviour, it’s important to note that an insurer will generally advance defence costs to an individual accused of these offences. This is done so on the presumption of innocence, as a formal court ruling or admission of guilt is required to decline coverage completely.
D&O traditionally excludes claims brought against directors and officers by others insured under the same policy. This discourages infighting among senior management by removing an insurer’s backing and also removes any incentive for collusive behaviour.
While this behaviour is generally uncommon, directors or officers have been known to concoct claims against themselves in order to recover losses resulting from an organisation’s poor performance.
Insured vs. insured exclusions are for the most part, standard. However, there are a range of common carve-backs. These include adding coverage back in for derivative claims, cross-claims, bankruptcy claims and employment-related claims.
Modern policies may contain a more favourable consensual claims exclusion, which only excludes claims when it can be ascertained that management has deliberately invited or solicited litigation, rather than excluding all claims that are brought by those who are also insured.
Another type of exclusion, that is a slightly different take on the insured vs. insured exclusion, is the major shareholder exclusion. The major shareholder exclusion aims to exclude coverage for any claims by a claimant who owns more than a certain percentage of a company, typically 10-15%.
The rationale behind this form of exclusion is to remove any incentive for collusion and infighting between shareholders and management. It also encourages shareholders who hold a significant stake in a business, to take a proactive approach in staying informed of their investments.
During the underwriting process, an insurer may identify a specific circumstance, event, or risk, which they are not willing to accept. As a result, they may offer coverage to an organisation on a restricted basis.
Often referred to as laser exclusions, specific exclusions are applied on a case-by-case basis and refer to any risk that an underwriter wishes to avoid, such as excluding coverage for specific entities, individuals, events, activities, or jurisdictions.
Specific exclusions may also be used where an organisation has disclosed a serious claim or circumstance occurring in a past policy period. Although any claim that materialises out of this notification will automatically be excluded by any new policy (because it is a known claim), an underwriter may prefer to explicitly state this fact. That way, the insurer’s intention is clear for all parties involved.
That way, the insurer’s intention is clear for all parties involved.
Important! Specific exclusions are reasonably common, but if possible, an organisation should attempt to acquire D&O coverage without them.
The insurers of private D&O policies do not intend to cover the risks associated with public companies. Public companies are generally higher risk as they attract larger and more frequent claims. Private organisations, on the other hand, have simpler structures and therefore, their policies typically exclude capital raisings and the public trading of securities.
If a private organisation wishes to raise funds by undertaking an initial public offering (IPO), additional coverage must be applied for. An organisation will need to provide specific details of the offering, such as how many shares are available, to whom, and the type of prospectus documents involved. Based on this information an underwriter can add coverage by endorsement, provided that an extra premium is paid to account for the increased risk.
Based on this information an underwriter can add coverage by endorsement, provided that an extra premium is paid to account for the increased risk.
In addition to those listed above, there are other more unusual types of exclusions. Three of the most common include the failure to maintain insurance exclusion, the commissions exclusion and exclusions relating to bump-up costs. A summary of each is included below:
Failure to maintain insurance: The failure to maintain insurance exclusion excludes any claim which alleges the mismanagement of an organisation’s insurance programme.
Commissions: The commissions exclusion eliminates coverage for any directors or officers who are found to have made financial payments to employees or representatives of foreign governments.
Bump-up costs: In claims involving mergers & acquisitions, bump-up related expenses are excluded. Shareholders may claim bump-up costs when they believe that management has undervalued the value of their investment in a transaction. The ‘bump-up’ represents the claimed difference between the transaction price and the alleged fair price of a company’s shares.
As you can see, despite the broad coverage offered by D&O insurance policies, not all risks are covered. While many may consider this to be a downside of acquiring coverage, each exclusion has a specific purpose and for the most part, they intend to discourage any deliberate, immoral or illegal behaviour.
A D&O policy’s insuring agreements, along with its coverage extensions, make up the total protection available to a policyholder. Below we outline the most common extensions found in the market.
Coverage extensions provide an organisation with protection in addition to what is offered by a D&O policy’s insuring agreements. They exist because insuring agreements, despite their broad construction, cannot always address all management exposures adequately. Extensions attempt to bridge this gap, providing coverage for situations which would otherwise not be enough to trigger a policy to respond.
In addition to their practical nature, extensions are offered by insurers to strengthen their product offering. They are created to solve a wide range of problems and are continually being improved to address the changing landscape of D&O liability. While many extensions are considered standard, others may be tailored to the needs of the policyholder. Outlined below are some of the most common coverage extensions in found in the market.
The advancement of defence costs extension compels an insurer to forward defence costs to an insured as they are incurred throughout a claim. Most commonly, it requires an insurer to settle an insured’s legal expenses within a defined period of time.
Without this extension, an organisation or its executives may be required to fund their own defence costs until an insurer can assess their claim and reimburse them at a later date, which may take some time. Most policyholders consider this coverage to be essential, as legal costs can be expensive and not everyone has the resources to pay for these services up-front.
Importantly, however, if it is eventually determined that a claim is not covered – i.e. because it is explicitly excluded by the policy – any defence costs that have been advanced by the insurer must be repaid.
According to the claims-made and notified provisions of D&O, an organisation must have an active policy at the time a claim is received for it to be covered. As some incidents may take many years to materialise into a form that resembles a claim, if a policy is not renewed, an organisation’s retired directors and officers can be left unexpectedly exposed.
This is a relevant concern for retired executives, as once they have departed an organisation they have no control of its ongoing insurance programme. Therefore, they cannot guarantee that their former organisation will continue to purchase the insurance, which is required for their future well-being.
As a solution, insurers often agree to automatically protect retired directors and officers for a defined period of time, by providing them with an extended reporting period. An extended reporting period allows retired executives to report claims to an insurer after their departure, even if the organisation that they served no longer carries an active policy.
Many insurers extend the coverage of a policy to protect directors and officers while they participate on the boards of external non-profit organisations. This coverage enhancement has evolved out of the common practice of experienced managers occupying non-profit leadership positions pro bono.
Provided that both the insurer and the insured organisation agree, outside directorship coverage protects managers over and above the indemnification and insurance protections carried by the non-profit itself. This provides executives with the comfort of knowing that they will remain protected in the event that their non-profit’s insurances are insufficient or completely exhausted.
This provides executives with the comfort of knowing that they will remain protected in the event that their non-profit’s insurances are insufficient or completely exhausted.
The new subsidiaries extension automatically covers any new subsidiaries acquired by an insured organisation during the period of insurance. This extension ensures that any new subsidiaries receive the same protection as their parent organisation, providing essential coverage to the directors and officers of these acquired operations.
For new subsidiaries seeking protection under this extension, it’s important to note that coverage commences from the date of acquisition, and only covers acts that are committed after this date.
Additionally, the automatic coverage provided is usually subject to the relative size of the acquired entity. Subsidiaries exceeding 10-20% of the parent organisation’s value will typically require approval by endorsement.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.When confronted with an impending claim, some directors and officers may consider transferring ownership of their assets to a friendly third party, such as a husband, wife or legal guardian.
In doing this, their assets can be placed out of reach from a claimant’s demands. And while in some cases this may be a sensible legal strategy, it may also result in a friendly party being implicated in the same claim.
The spouses, heirs & representatives extension ensures that any related party who may be dragged into a claim, due to their ownership or control of an executive’s assets, is protected. The cover provided by this extension is generally very handy, but its scope is limited; as it will protect them from the consequences of an executive’s actions, but not their own.
Continuity of coverage allows a claim notification to be accepted late, as long as the policyholder has held uninterrupted D&O coverage over a period of time. Continuity of cover is generally available to organisations with existing D&O coverage and it creates a strong incentive for an organisation to remain loyal to its insurer each renewal.
A late notification is a claim notification which should have been made in a previous policy period but wasn’t. Perhaps an organisation didn’t think that a particular circumstance warranted notification at the time, or maybe the notification failed to occur by mistake. Whichever the case, the continuity of cover extension allows a policyholder to successfully lodge a late notification with an insurer, which would otherwise be declined on this basis.
Whichever the case, the continuity of cover extension allows a policyholder to successfully lodge a late notification with an insurer, which would otherwise be declined on this basis.
For example, consider an organisation that has renewed its D&O policy for another year, but realises that it failed to notify its insurer of a claim (or circumstance which could lead to a claim) in the previous policy period. If it has renewed its coverage with the holding insurer, and the policy contains a continuous coverage benefit, the late notification may be accepted.
Now, instead of this circumstance being excluded due to its late notification, as the current policy excludes known claims and circumstances, the insurer may accept the notification provided the claim has not been prejudiced as a result.
Important! While continuity of coverage is a nice benefit to have, it shouldn’t be relied on as a substitute for prompt claims notification.
While not as frequent as those listed above, the following extensions may also be available to policyholders:
Coverage extensions provide an organisation and its management with a greater level of protection, over and above a policy’s insuring agreements. They are considered to be the ‘bells and whistles’ of D&O, and ensure that a policy will respond to circumstances and situations which would otherwise not be enough to trigger coverage.
The insuring clauses of a D&O policy perform a pivotal role in laying out coverage for an insured organisation and its management team. Below we take a look at the key terms which define the scope of a policy’s protection.
The insuring agreements of a D&O policy specify the scope of its coverage. Each one outlines the promise of the insurer to protect the policyholder, also known as an ‘insured’, in accordance with the terms and conditions of the policy.
While the exact structure of insuring agreements varies between policies, they typically follow a common format; covering an insured from loss arising from claims-made alleging wrongful acts during the policy period.
For a real-world example of what this may look like, consider the insuring clause for individuals on page 6 of AIG UK’s CorporateGuard policy:
The insurer shall pay the loss of each insured person except to the extent that the insured person has been indemnified by the company for such loss.
While this example doesn’t follow our template exactly, a quick look into the definitions of ‘loss’ and ‘insured person’ show that our highlighted terms eventually play a very important role.
A D&O policy usually includes separate insuring clauses for Side-A and Side-B coverage, as well as any entity coverage that may apply; such as Side-C, employment practices liability, or management liability.
Because insuring agreements are at the core of a policy’s function, it’s important to understand how to read and interpret them correctly. This is not only essential for placing cover but also handling claims, as they are often the subject of much scrutiny when determining whether an incident shall be covered or not.
Outlined below are the main components of an insuring agreement. In practice, these should be read in conjunction with coverage extensions, exclusions and conditions.
D&O insurance, like other policy classes, relies on a range of key terms with special meaning. These terms are contained within the policy wording and play an important role in determining how a policy will respond to any specific claim or circumstance.
To assist with a policy’s interpretation, key terms are generally denoted throughout the document with bold, underlined or capitalised text. In AIG’s policy mentioned above, they are italicised.
Despite there being literally dozens of key terms scattered throughout a policy, none receive more attention than those within the insuring agreements; the definitions of insured, loss, claim, claims-made and wrongful act.
The definition of an ‘insured’ determines who is covered by a policy. For any individual or organisation seeking coverage for a claim, they must first fall within this predefined description.
The definition is usually broadly drafted, to ensure all those within an organisation who are exposed to managerial risks, are protected. A typical definition includes all directors, officers and corporate entities of the named insured.
Coverage is generally extended to protect the directors and officers of an organisation’s subsidiaries as well, provided that the parent entity has controlling ownership.
As some incidents can take years to materialise into a claim, all past, present and future directors and officers of an organisation are automatically covered. This retrospective coverage ensures that former managers remain protected for actions undertaken during their period of service, as long as their organisation continues to purchase ongoing D&O coverage.
For the actions of a person to be covered by a D&O policy, they must have been acting in their status and capacity as director or officer of the insured organisation. To satisfy this requirement, they must have been elected or appointed to their position, and been acting in their official capacity at the time of the alleged offence.
To ensure that adequate coverage exists for all managerial personnel, many policies broaden the insured person definition to include middle and front-line managers, as well as employees with supervisory functions.
If there is any uncertainty about whether a particular individual falls within this description, they may also be specifically noted on the policy as insured.
The definition of loss specifies what claim costs will be paid for by a policy. As D&O is a form of liability insurance, it intends to indemnify the policyholder from the financial implication of claims, which would otherwise be incurred by an organisation or the individuals themselves.
The definition of loss usually includes many of the typical expenses faced by defendants when involved in litigation, including investigation costs, legal fees, and the costs of settling any claim to make the whole thing go away.
It is also likely to include court awarded judgements such as damages, as well as civil fines and penalties as long as there has not been any intentional, deliberate or reckless breach of the law.
It’s important to note, however, that not all claim costs are covered. Of course, each policy is different, but many of the typical costs that are not included in the definition of loss include:
In order for an insurer to indemnify an insured from a loss, the complaint against them must first fall within the definition of a claim. A typical definition will include any written demand received by an insured, as well as any civil, regulatory or administrative proceeding arising in the line of their corporate duties.
The definition of claim is also likely to include any criminal proceeding brought against an organisation or its managers, which may occur on its own, or alongside any pre-existing civil litigation.
And while any fines or penalties resulting from criminal prosecution cannot be covered, D&O will provide a policyholder with the resources to contest the allegations.
Allegations against an insured must generally be formal in nature to be covered, such as physically receiving a letter of demand from an aggravated third party claimant. However, some informal proceedings may also be included.
These slightly more informal claims may comprise of investigations, examinations, inquiries and formal hearings by regulatory authorities, including official requests for documentation. They can also involve mitigation processes to reduce the chance of a claim arising in the future, such as mediation, arbitration, and other forms of alternative dispute resolution.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.D&O policies operate on what is known as a ‘claims-made and notified basis’. This means that a policy provides coverage for claims that are made against an insured and notified to the insurer during the period of insurance. Therefore, for a claim to be covered it must satisfy the following requirements:
As most policies provide some form of retroactive coverage, it may not be so important exactly when the alleged act took place, as long as the insurer is notified as soon as management become aware that a claim may materialise sometime in the future.
In practice, this means that a claim or circumstance is likely to be covered by the policy active at the time management become aware of the incident, and not necessarily policy period in which the alleged wrongful behaviour occurred.
For more information on claims-made reporting, I recommend taking a look at this post.
The definition of a wrongful act specifies what type actions by an insured person will be covered by a policy. Once again, this term is often broadly defined to ensure that directors and officers are protected against the myriad of potential claims in existence.
Generally speaking, a wrongful act is considered to be any actual or alleged:
The ability for a D&O policy to cover alleged acts, in addition to actions that are known to have occurred, ensures that management has protection for even the most obscure situations. This is important because claims often feature many details, recounts of actions, opinions and conflicting interests, for which the true position of liability is unclear.
The function of a policy’s insuring clauses is central to the operation of D&O insurance. A policy wording contains dozens of terms that have special meaning, including those terms which are absolutely critical to the interpretation of the insuring clause; insured, loss, claim, claims-made and wrongful act.
D&O insurance is purchased by organisations of all shapes and sizes. While the primary purpose of coverage is to protect individuals, depending on the organisation’s size a policy may also provide some benefit to the entity itself.
The coverage afforded by D&O insurance has evolved over time, with many improvements occurring in recent years. As more insurers have entered the market, increased competition has lead to broader coverage and reduced premiums, making D&O a valuable risk management solution for many organisations.
As the exposures faced by directors and officers are continually changing, insurers’ policies are regularly updated to address their needs. As new features are added, they become a point of difference for a while, before eventually being adopted by the market as a whole.
D&O provides an organisation and its management with coverage on many fronts. While no two policies are the same, a typical policy provides three forms of protection as standard, as outlined in its insuring agreements; Side-A, Side-B and Side-C.
Side-A, also known as directors and officers liability, is the first insuring agreement of a D&O policy. Side-A protects executives from claims when corporate indemnification is not available from their organisation.
As non-indemnification can occur for many reasons, Side-A coverage plays an important role in protecting individuals when this financial support is not available. It provides an essential last line of defence, 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 organisation’s bankruptcy. As the organisation effectively has no money, it cannot fulfil its corporate indemnification obligations.
As a result, the directors immediately notify their D&O insurer and seek protection under the Side-A insuring agreement. The insurer is now responsible for financing the costs of their defence and any subsequent claims settlement.
Side-B, also known as corporate reimbursement, is the second insuring agreement of a D&O policy. Side-B reimburses an organisation for the expenses it occurs when defending its management in accordance with its corporate indemnification obligations.
By indemnifying its executives, an organisation 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 organisations and can potentially affect its financial stability. Side-B coverage, therefore, supports an organisation financially when it is, in turn, supporting its management.
Take, for example, an executive who is named in a formal investigation by regulatory authorities following allegations of wrongful behaviour. The organisation, as per its indemnification obligations, begins to incur defence costs on behalf of the executive and therefore, lodges a claim with its insurer under the Side-B insuring agreement, requesting reimbursement for these costs.
Important! Side-B is only intended to cover the costs incurred on behalf of directors and officers, and will not protect an organisation from claims made directly against it.
Some D&O policies also include a third insuring agreement, Side-C, also known as entity securities coverage. Side-C coverage is typically reserved for publicly listed companies and protects the corporate entity from its own liability exposures.
The coverage provided by Side-C 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 stockmarket available for purchase by investors.
Side-C has been developed in response to the increased frequency in which companies become involved in shareholder related disputes. By electing Side-C coverage, a company can be protected for the legal and claim settlement costs it incurs whilst defending its own corporate actions.
Side-C is typically offered by insurers as an optional insuring agreement, 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 that Side-C brings.
Let’s consider that a company and its management are named in a securities-related lawsuit. The company indemnifies its managers according to its corporate indemnification obligations. In turn, the company makes a claim under Side-B for reimbursement of the costs incurred in defending management.
In addition to the claim against management, the company is also required to defend its own interests, and therefore, makes a claim under Side-C for the costs specifically related to the defence and settlement of the claim against the entity.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.As well as the benefits it provides to public companies, D&O has become an increasingly popular risk management solution for private companies and non-profits. As a result, many insurers have developed policies specifically to meet the needs of these privately owned, unlisted organisations.
The differences between the D&O coverage available to private organisations, and that of their public counterparts, generally relates to the breadth of coverage available for the entity.
While it is certainly possible for the managers of private organisations to be implicated in a claim, more often than not, it is the entity that is targeted. To account for this and to ensure that an organisation’s assets are adequately protected, many private D&O policies include broader entity coverage than traditionally offered.
The theory behind this expanded coverage is that the personal wealth of private company managers is often closely tied to the organisation’s financial health. Many executives have a significant shareholding in the organisations they operate, so therefore, any loss incurred by the entity is likely to affect their personal net worth as well.
In addition to Side-C, the two most common forms of entity coverage available include employment practices liability and management liability.
Employment practices liability insurance (EPL) protects an organisation from employment-related claims. EPL ensures that the entity is covered for its own defence and settlement expenses if an employee (or similar party) makes a claim against it.
While EPL is often available to large organisations 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 coverages to protect an organisation and its managers from a variety of claims.
These entity coverages, typically only available to larger organisations on a stand-alone basis, make ML a very cost effective insurance solution. In addition to traditional directors and officers liability and corporate reimbursement insuring agreements, it often includes the following:
Entity coverage provides an organisation with peace of mind during difficult times. Without this protection, an organisation is potentially exposed to hardship whilst honouring its indemnification obligations and whilst defending claims made directly against it.
By transferring these liabilities to an insurer, an organisation can shield itself 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.
As we’ve shown, large organisations will acquire D&O coverage to protect their executives and the organisation’s interest in defending them. Depending on the size and corporate structure of their particular organisation a D&O policy may be able to expand to provide some level of protection for the entity itself. While this is not the primary reason for acquiring D&O, it is certainly beneficial.
Directors and officers inherit a great deal of responsibility and with that, we want to make sure that they’re protected. Corporate indemification and D&O insurance allow them to get on with the job without putting their personal assets on the line.
As we’ve seen from some of our previous posts, occupying a position of management has many underlying risks. Not surprisingly, these risks are often a major consideration when contemplating such roles.
A person is likely to question if the monetary and career rewards of becoming a director or officer are worth it, when weighed up against the potential for personal liability and its serious implications.
For some, the risks are enough to deter them from stepping into management. While, for others it’s a risk that can be tolerated, provided they have access to adequate protection.
Many organisations recognise that personal liability is a strong deterrent, so over time, a number of defence mechanisms have been developed to encourage the best and brightest leaders to step into the ranks of management.
These safeguards have a strong influence on the recruitment of talented leaders and generally come in two forms, corporate indemnification and directors and officers liability insurance.
The first line of protection for directors and officers is corporate indemnification. Corporate indemnification is an agreement between an organisation and its executives, whereby the organisation agrees to protect or ‘indemnify’ each individual from personal liabilities arising from the performance of their managerial duties.
This promise of indemnity is often stipulated in an organisation’s constitutional documents as well as a contractual agreement known as a deed of indemnity. Many corporate officers may also find that an indemnification clause is built into their employment contract.
A deed of indemnity is usually drafted with the assistance of specialist lawyers and aims to indemnify an individual to the ‘maximum extent as permitted by law’. A deed will typically state that should an executive be implicated in a claim, the organisation will step in to protect them.
This protection generally comes in the form of financial support, whereby an organisation agrees to incur any costs associated with defending and settling claims made against them.
While corporate indemnification provides directors and officers with some comfort that they will be supported during times of difficulty, it has become common practice to arrange a second line of protection, directors and officers liability insurance; often known simply as D&O.
D&O, like corporate indemnification, plays an important role in protecting management from personal liability, albeit in slightly different circumstances; in instances of non-indemnification, whereby management is unable to obtain indemnification from their organisation as promised.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.Without the support of their organisation, non-indemnification leaves executives personally exposed to the consequences of litigation. This presents executives with the very real threat of facing the full brunt of personal liability on their own, as their organisation cannot adhere to its indemnification obligations.
An organisation may not be able to indemnify its directors and officers due to one of three reasons:
An organisation may not be able to indemnify an individual because it is legally prohibited from doing so. For example, if an executive is deliberately involved in fraud or other criminal activity, it may be unlawful for an organisation to indemnify them from any subsequent litigation.
In some situations, an organisation may be unwilling to extend indemnification to management. For example, in a derivative shareholder lawsuit, an organisation may decide not to indemnify an executive because it is technically the organisation itself that is suing them. In this situation, it would not make sense for an organisation to indemnify the same person that it is litigating against.
Directors and officers may not be able to be indemnified because an organisation cannot afford to do so. This is probably the most common scenario of non-indemnification and usually occurs when an organisation is in severe financial difficulty or is insolvent – which is, ironically, when directors and officers are most at risk.
Modern directors and officers liability insurance has become more than just personal protection for an organisation’s management. As corporate indemnification provisions have expanded to protect executives, organisations are now also exposed to the financial implications of claims whilst fulfilling their indemnification obligations.
When an organisation indemnifies its directors and officers, it becomes responsible for their defence expenses. These costs, along with associated fines, penalties, settlements and court awarded judgements can have a serious impact on the financial health of even the largest of organisations.
As a result, today’s insurance market has evolved to offer policies that provide an organisation with support too, when fulfilling its indemnification obligations as well as personally protecting executives when it cannot. D&O has therefore become an important component of an organisation’s own risk management programme, in addition to the benefits it provides to executives.
For many companies and non-profits, the use of corporate indemnification and D&O insurance is a tried and tested method of protecting their leadership teams from the threat of expensive lawsuits. The combination of these two risk management strategies can ensure that managers go to work each day, without constantly worrying about the personal implications of their decisions.
Some managers can go through their entire career without so much of a mild disagreement. Unfortunately, many others won’t be so lucky and may encounter the full brunt of an investigation or lawsuit. Below, we take a look at what it feels like to be held personally liable for your actions.
When discussing directors and officers liability, insurance professionals are often quick to point out the importance of being protected by a good insurance policy. Conversations generally focus on how claims arise, how much it can cost to defend them, and why purchasing D&O insurance is an ideal solution.
While there is certainly nothing wrong about this line of discussion, often the personal implications of D&O litigation aren’t conveyed very well. That is, what being held personally liable means for an executive and their family, and how such a situation will affect their life.
Because the reality is, that if an executive is confronted with an investigation into their actions or a fully-fledged lawsuit, the journey is likely to be one of the most stressful experiences of their professional career.
So what does it feel like to confronted by a claim? As an executive is guided through the legal process of defending a claim, they are likely to experience months (or years) of uncertainty, anxiety and fear, as sleepless nights become the norm.
They will work closely with lawyers to recount their version of events, spending countless hours responding to queries and providing documentation to support their position, all to explain how and why they made the decisions they did.
Whether they believe that they are guilty of the allegations made against them or not, executives are required to undertake the necessary and often expensive steps to defend and settle any claim made against them. Unfortunately, this may also include claims that they believe are unfounded or frivolous, as these incidents must be treated with the same seriousness as those with merit.
While not too many company executives speak publicly about their experiences, there have been a few people that have described the process in a commercial setting. Internet expert, Neil Patel, posted about what it’s like to face a class action, while Matt Warren, the owner of an online retailer, was interviewed about how it felt to be sued by some of the world’s largest watch companies.
Either way, it’s certainly not a pleasant experience. Even if you’ve been given tips on how to cope with it.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.The claim process will take its toll financially and emotionally, on the organisation and the executives involved. As a claim is defended, legal expenses will begin to mount. Even moderate claims can involve thousands of dollars of fees, per executive involved.
Lawyers are required to be paid throughout the duration of a claim. If an executive is lucky, these costs may be passed onto their organisation or an insurance company. Otherwise, the funds will need to be sourced through personal means.
If an executive has no financial support, their personal assets are at risk, as they draw down on private resources to fund the costs associated with defending and settling a claim. This leaves an their wealth exposed to the outcome of proceedings, which adds stress to an already unpleasant experience.
In these situations, once personal savings have been depleted, an executive will need to consider other forms of financing and necessary sacrifices. To fund proceedings, they may cut back on discretionary spending, take out a loan, or even consider selling personal assets such as the family home.
While the financial implications of personal liability are certainly nothing to shirk at, the emotional effects can be just as devastating. Being at the centre of a claim places an executive in an extremely difficult position, and the subsequent challenges will be felt throughout their daily life.
Personal and professionals relationships will be strained, as executives lean on the people around them for support. Additionally, due to their involvement in a dispute, they may suffer reputational damage, especially if the details of the incident receive unwanted media attention.
By the time a claim reaches conclusion, either through successful defence or by reaching an agreed settlement, the entire process may have taken years. As many grievances are resolved through mediation and other methods of dispute resolution, the claim may never see the inside of a courtroom.
If a claim requires court adjudication the process will be longer and even more expensive; probably adding an extra year or two of grief, and a few more zeros to the overall cost of the claim.
In addition to external risk exposures, claims can also arise from within an organisation and its management ranks. These claims, while somewhat less common, are often of quite a personal nature.
In addition to sources of claims which exist externally to an organisation and its management, claims can arise from within. Internal sources of claims typically arise either as a result of one director or officer suing another, or the organisation itself bringing a claims against the same executives trusted with its management.
In Part 2 of ‘Where do claims come from?’, we take a look at what exactly these internal sources of claims are.
When an organisation becomes insolvent, an administrator is appointed to take over its operation in place of management. An administrator’s primary role is to evaluate the financial prospects of the organisation and determine whether it is in a position to trade out of insolvency, or if it’s assets are to be liquidated.
If it is decided that an organisation is to be wound up, a liquidator, during the process of selling off assets, may undertake an investigation into the circumstances surrounding the bankruptcy. If it appears that an organisation’s directors and officers have allowed it to continue trading and incurring debt while insolvent, they may be held accountable.
In these situations, a liquidator may assume the position of the organisation and sue the responsible executives for their breach of duty. By doing this, a liquidator can attempt to recover monies to assist in repaying outstanding debts owed to stakeholders.
More often than not, it is these stakeholders who encourage liquidators to pursue legal avenues of recovery against directors and officers. However, even if liquidators choose not to investigate their actions, they are by no means discharged of liability – as many jurisdictions permit individual creditors to then seek recovery instead.
The directors and officers of a parent organisation can be exposed to claims by its subsidiaries. This can occur when a subsidiary becomes bankrupt and its creditors, or a liquidator on their behalf, commences subrogation against the parent organisation’s management in an attempt to recover outstanding debts.
In these situations, executives can be held accountable by a subsidiary and its stakeholders for their breach of duty, and subsequent contribution to the insolvency. In addition to claims from subsidiaries, management can also be exposed to litigation from joint venture partners.
When organisations enter into a joint venture, its executives must comply with their corporate duties by acting in the best interest of the joint venture, not director or officer acts in a way that is deemed inappropriate, they may be held personally liable.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.In certain situations, directors and officers may face claims brought against them by the organisation in which they represent. These claims generally occur due to an alleged breach in duty, whereby their actions have resulted in financial losses or their behaviour is not considered to be in the organisation’s best interests.
In addition to derivative actions, these claims often arise following mergers or acquisitions, a change in ownership, or alteration in the composition of the board of directors. A change in an organisation’s management personnel may uncover decisions made by past executives, which are considered to be negligent or wrongful.
If a subsequent investigation finds that they have acted inappropriately, the organisation, led by the new board, may bring a claim against those responsible – even if they have since moved on from the organisation.
Directors and officers are occasionally exposed to claims made by other directors and officers. This can occur because although executives are generally reasonable and considered when performing their duties, boardroom tensions have been known to rise during moments of critical decision making.
While emotionally charged discussion and disagreements between managers rarely lead to threats of litigation, it certainly has been known to happen. And while being implicated in a claim from a colleague is obviously undesirable, it is entirely possible if someone feels as if they have been discriminated, abused or violated during the performance of their official duties.
Common allegations include:
Internal sources of claims against directors and officers can be just as threating as those that exist externally. At the very least, these claims can quickly become very personal, as executives are forced to defend themselves from allegations against the same trusted parties which appointed them to leadership in the first place.
Management is exposed to claims from a variety of sources on a daily basis. Each source provides its own level of threat, and therefore, a different set of challenges for executives who seek to mitigate them.
The type, size and frequency of claims faced by directors and officers largely depend on how their decisions affect an organisation’s stakeholders. Stakeholders generally have a broad range of interests and are often prepared to hold management responsible for any mistakes or reckless behaviour. As a result, directors and officers can have claims brought against them from a range of internal and external sources.
In Part 1 of ‘Where do claims come from?’, we explore the sources of claims which exist externally to the organisational entity and its management. These consist of an organisation’s shareholders, employees, customers, suppliers, competition, the beneficiaries of its employee retirement funds, government and regulatory authorities, as well as its creditors.
Shareholders are an integral part of an organisation’s corporate structure. As part owners, they provide it with capital to maintain and expand operations. Due to their significant financial investment, shareholders have an incentive to monitor ongoing performance and ensure that directors and officers are acting with the organisation’s best interests in mind.
Shareholders vary in size and sophistication, ranging from large organisations, banks and fund managers, through to high-net-worth individuals and ‘mum and dad investors’. In return for their investment, they expect to receive a benefit, such as a regular dividend payments and/or capital growth. With potentially large sums of money at stake, if shareholders are not pleased with an organisation’s direction, they may take drastic measures to protect the value of their investment.
If it appears that management has breached their duties to the detriment of an organisation, shareholders may bring a claim against those responsible. This can leave directors and officers exposed to claims for any number of offences, such as:
If shareholders wish to bring a claim against executives for any of these infringements, legal proceedings are usually commenced in one of two ways:
In a direct action lawsuit, a shareholder or group of shareholders, called a class action, bring a claim against management for damages in their interests as shareholders, with shareholders being the benefactor of any financial settlement.
In derivative proceedings shareholders effectively ‘step into the shoes’ of the organisation, and sue the directors and officers on behalf of the organisation. In this form of litigation shareholders generally claim for damage caused to the organisation, with the beneficiary of any settlement being the organisation itself. As a result, shareholders only benefit indirectly, through the improved strength of their investment.
For example, News Corp. was sued by investors in the aftermath of the News of the World phone-hacking scandal. The newspaper was found guilty of engaging in phone-hacking and police bribery, which resulted in its advertisers withdrawing support and eventually closure of the publication.
In response, shareholders of the parent company launched derivative action against the board of directors for failing to investigate the allegations of inappropriate behaviour, rumoured years before. To settle the claim, the board agreed to pay the company $139 million without any admission of wrongdoing.
Employees present a challenging risk exposure for an organisation and its management. Directors, officers, and the employees they manage interact on a daily basis, working together to achieve a common goal. For the most part, they forge successful working relationships. However, from time to time the dynamic can change, with a breakdown in communication leading to frustration and strained relationships.
An organisation engaging labour in any capacity faces the prospect of an employment-related claim. Directors and officers are responsible for ensuring that all employees have access to a safe and culturally sensitive workplace, free of harassment and bullying. Therefore, it is not only full and part-time staff that present an exposure, as third-party contractors and volunteers have rights to the same working conditions.
If an employee feels mistreated during any phase of their employment, from initial recruitment through to termination, they may address their concerns to the organisation and executives involved. If they feel that their concerns have been not been acknowledged as expected, they may become disgruntled and see a claim as a means of rectifying their grievance.
Claims can be instigated by an individual, a class action, or by an employee representative group, such as a trade union. Common claims can include allegations of:
Employment liability exposures exist in organisations of all sizes. However, it is often smaller organisations, lacking the skill and experience of a dedicated human resources department, which are caught out infringing on their workplace obligations. While many organisations find that workplace issues can be mitigated through the use of sensible policies and procedures, this isn’t always the case.
Finally, it is important to note that employment claims often attract opportunistic claimants. Unfortunately, this means that directors and officers may be drawn into claims, which have little or no legal merit. In these situations, even frivolous allegations may be difficult to disprove, often leading to an out of court settlement.
With ambitious goals of bringing new products and services to market, the trading practices of an organisation can sometimes appear to step beyond what is considered fair and reasonable. Creative marketing strategies and aggressive distribution methods can place management at risk of claims from an organisation’s customers if they feel unfairly sold or lied to.
Disgruntled customers can range from individuals consumers and other businesses, through to consumer advocacy groups and class actions. Allegations of misconduct may arise from the way a product or service is displayed, demonstrated, advertised, or in relation to its quality and the terms and conditions surrounding its use. Additionally, claims may come in the form of contract disputes, allegations of misleading and deceptive conduct, as well as a host of other wrongful behaviour, including:
An organisation relies on its suppliers to deliver it with goods and services so it can conduct its own day-to-day business. Organisations require their suppliers to provide anything from raw materials and production inputs through to manufacturing, wholesale or transport services. While white-collar services, such as accounting, banking, insurance and information technology, are required by almost all organisations.
The relationship between an organisation and its suppliers can be sensitive. On one hand, an organisation relies on the prompt supply of goods and services to operate its business, while on the other, to ensure profitability they actively seek competitive deals. Negotiations with suppliers can be fierce, as management attempt to strike a balance between reducing expenses and agreeing to contract terms that suit all parties.
If a supply agreement does not turn out as expected, a supplier may attempt to hold directors and officers personally accountable for behaviour deemed to be unreasonable, unfair or illegal. Common claims include:
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.An organisation is required to conduct its business activities within the boundaries of competition law, which specifies what is expected of it within the marketplace. These rules outline what is considered fair and reasonable behaviour, allowing all organisations to compete on a level playing field.
As an organisation attempts to grow its market share, management must ensure that this is done using honest and competitive practices. If an organisation’s competitors believe that they have been disadvantaged by dishonest or wrongful behaviour, management may be held personally responsible.
Claims against directors and officers can range from breaches of intellectual property and misappropriation of trade secrets, through to allegations of collusion and anti-competitive behaviour. Managers may also be held liable for actions that are perceived as misleading or defamatory, with claimants seeking damages for their perceived losses.
For example, consider the claim brought against the CEO of family-owned sporting goods business, who allegedly disguised himself as a manager of a competitor’s store in order to steal trade secrets. The CEO, who had previously starred in an episode of Undercover Boss, may have got a little bit carried away this time, when he persuaded employees to show him around the store’s private back areas and answer questions about store operations.
In many jurisdictions, the directors and officers of an organisation are responsible for administering the retirement schemes of its employees. Retirement schemes, known as superannuation in Australia or 401k in the United States, allow employees to make regular contributions into an investment fund for the purposes of financing their retirement. If management fails to adequately manage this process, they can be exposed to claims alleging breach of duty or breach of trust.
Depending on the specific requirements of a jurisdiction, executives may be responsible for registering employees into approved schemes, managing accurate records, and ensuring that timely contributions are made. Administration of these schemes is generally subject to heavy regulation, with stringent monitoring potentially exposing executives to liability in the event of a discrepancy.
Common claims by retirement fund beneficiaries include:
Government and regulatory authorities establish and monitor the legal environment in which all organisations operate. They are present in each jurisdiction and ensure that directors, officers and the organisations they control, conduct their activities in a lawful and socially acceptable manner.
Government and regulatory authorities oversee an organisation’s compliance with the rules and regulations governing corporate behaviour. From management’s perspective, the enforcement powers held by these supervisory agencies present a real and significant personal liability exposure.
Regulators often take a proactive approach to their administrative duties, by aggressively investigating alleged breaches. If they discover that wrongful conduct is likely to have occurred, they have the ability to pursue the executives involved. Government and regulatory authorities typically monitor a broad range of laws, such as:
Directors and officers are required to stay informed of the particulars of each of these laws, or risk facing the consequences of a breach. Additionally, in many jurisdictions executives can be held personally accountable for breaches made by the organisational entity itself. A failure to meet these standards can result in severe civil, criminal or administrative penalties for individuals, including monetary fines, suspension, or even imprisonment.
As legislation is complex and forever changing, understanding and complying with it can consume significant resources. This can be particularly onerous for organisations operating internationally, as they are required to comply with laws in every jurisdiction of their presence. Without sufficient diligence an organisation, and in turn its management, can be exposed to accidental infringements.
A great example of a claim involving regulators can be found in the aftermath of the 2008 financial crisis, when the SEC brought a civil lawsuit against a former Procter & Gamble director for passing inside information to a hedge fund manager. Once the regulators were on his trail, criminal charges were eventually laid, ultimately resulting in a guilty verdict for insider trading and a two-year prison sentence.
When an organisation becomes insolvent it often leaves many stakeholders, particularly creditors, owed outstanding money. A creditor is a party that has provided goods, services or finances to an organisation without receiving immediate payment. An organisation’s employees, who are owed unpaid wages and other entitlements, may also be considered creditors.
The management of an organisation has a responsibility to stay informed of its true financial position, and its ability to meet debts as they become due. If an organisation becomes insolvent, creditors will often scrutinise the actions of managers to see if they can be held personally responsible.
actions on creditors, particularly when entering the zone of insolvency. If this duty has been ignored, or errors have been made, and debts are left unpaid when an organisation goes into liquidation, creditors can pursue executives personally in an attempt to recover outstanding funds. Common allegations by creditors include:
As you can see, directors and officers face a broad range of claims from sources external to the organisational entity and its management. In Part 2 of ‘Where do claims come from?’, we take a look at the personal liability exposures which arise from internal claim sources.
Directors and officers inherit a great deal of responsibility in their role of leaders. For all benefits and prestige that this brings, it also means they can be held personally accountable for their actions when things don’t fall their way.
Directors and officers are responsible for making decisions which are often complex and difficult. They use the information available at the time, to make calculated calls on important matters. For the most part they understand the duties imposed on them, have the best intentions and do a pretty good job in taking everything into consideration.
But what happens when things don’t quite go to plan? Because the reality is, that despite years of education and experience, sometimes directors and officers get things wrong, open their mouth when they shouldn’t, and don’t necessarily have all the answers. After all, they’re human and like the rest of us, they make mistakes.
There is, however, a difference between the management of an organisation and the rest of us. That is, that they are bound to their corporate duties by law and often have some very interested onlookers, in the form of stakeholders, keeping tabs on their performance.
With these challenges and the often-serious implications of their decisions, it’s easy to understand how even the most honest of mistakes can land directors and officers in trouble. In this context, ‘trouble’ represents the possibility of a director or officer being held personally liable for their actions.
Personal liability arises out of an executive’s failure or alleged failure, to adequately perform their duties as required by law. It imposes accountability on an executive for their behaviour, which if deemed to be wrongful, can expose them personally to the implications of litigation.
If a stakeholder believes that they have been adversely affected by the actions of an organisation or its management, many jurisdictions may allow them to make a claim against those responsible. At the very least, this may result in a formal investigation into the alleged behaviour, with the possibility of it evolving into a fully-fledged lawsuit.
The list of possible offences alleged to have been committed by directors and officers are extensive, ranging from a breach of duty or trust, through to any error, omission, misstatement or misleading statement made in their managerial capacity.
While these issues can be enough to worry even the most prudent manager, there is also a slew of civil, criminal and statutory laws that can apply to the actions of executives and the organisations they control.
From a claimant’s perspective, the purpose of bringing a claim against management is to seek a remedy for losses, financial or otherwise, incurred as a result of management’s wrongful behaviour. Demands for compensation or the enforcement of penalties, aim to right the wrongs of offending executives by holding them personally accountable for their actions.
The types of remedies sought by claimants vary depending on the extent of an alleged infraction, but are likely to include one or more of the following:
Damages consists of the payment of money by an offending party to the claimant, and generally falls into one of two categories:
An injunction is a remedy issued by a court that requires directors and officers to perform, or refrain from performing, specific acts. If they subsequently fail to comply with the injunction granted they may face civil or criminal penalties, such as monetary fines or even imprisonment.
If management enters into a contract, which is unjust or where there is an undisclosed interest, a claimant can demand that the transaction be unwound. By doing this, the agreement is effectively reversed, bringing the parties of the contact back into the position they were before the agreement.
If a director or officer receives an unwarranted financial payment, and profits as a result – e.g. receiving personal payments from leasing out an organisation’s assets – a claimant can attempt to recover these funds. By similar means, if an executive unjustly holds any of an organisation’s property this can be claimed back also.
If a director or officer fails to meet their legal responsibilities, and their conduct is deemed unfit, they can be disqualified from occupying a position of directorship. Examples of unfit behaviour include a failure to keep proper accounting records, a failure to pay tax, or allowing an organisation to trade whilst insolvent.
If directors or officers breach criminal laws they are likely to face a range of sanctions, including the possibility of being sent to prison. In the United Kingdom, for example, a company director has recently been sentenced to two years in prison, after being found guilty of price fixing and cartel offences under the Enterprise Act 2002.
If a claim is made against management, the executives involved are required to defend themselves. In the eyes of the law, actual and alleged behaviour is treated with the same integrity, and as a result, all claims must be addressed with sincerity – even if it is believed that the allegations are frivolous and do not carry any merit.
Any claim that is made against directors and officers requires a thorough investigation into the circumstances surrounding the incident. This usually consists of the collection and analysis of key documentation relating to the allegation, such as emails, letters, memos, internal correspondence, financial statements, prospectus documents, and the like.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.Before contesting a claim, directors and officers generally seek the assistance of legal counsel for professional advice. The role of lawyers in this respect is to gain an understanding of a claim by interpreting the allegations, reviewing documentation and collecting an executive’s account of events. Through this, they help guide the executive through the claim process and use the information available to construct a robust defence.
Lawyers are usually responsible for responding formally to a claimant on the executive’s behalf, using legal principals to support their position. The strategies applied to constructing a defence can be varied, however, their objective is generally to reduce the extent of an executive’s liability, and if possible, rebut the claim altogether.
Directors and officers don’t need to be flawless in their decision making, however, they must do their best to comply with their corporate duties. If a decision is later proved to be a mistake, an executive is presumed to have satisfied their basic duties if the business judgement rule applies.
Business judgement is available in many jurisdictions, and its application means that courts will not second-guess the quality or wisdom of a decision, provided that reasonable procedures were followed. It will not apply, however, if no actual business judgement has been exercised, such as where an executive has failed to act.
With lawyers acting as intermediaries, claims can be and often are, settled before a matter ever reaches court. In many cases, a negotiated settlement is preferred to litigation, as battling a claim through courts and tribunals is an expensive, drawn out, and uncertain process, for all involved.
If initial negotiations are not successful, you’ll find that the majority of claims are resolved by means of alternative dispute resolution, such as mediation and non-binding arbitration.
If a claimant’s demands cannot be satisfied using alternative dispute resolution, or an executive faces criminal prosecution, it may be necessary for a claim to be heard in a court of law. In these situations, lawyers on both sides have a chance to put forward their arguments, before having a judgement handed down to them.
Whether a claim is settled with or without court intervention, the legal process is likely to be long and tedious. It is not unusual for claims against directors and officers to last for many years, even if an allegation is eventually withdrawn or dismissed.
No one has ever said that being a director or officer is easy. As you can see, they have a great deal of responsibility and can be held personally accountable by stakeholders when things don’t turn out as planned. Facing claims is certainly not a nice experience, but is a realistic risk faced by leaders in organisations of all shapes and sizes.
The management of an organisation has a range of responsibilities bestowed on them. Below we take a look at the systems and laws that are in place to ensure that directors and officers are accountable in their role as leaders.
Directors and officers are appointed to manage all aspects of an organisation’s operations. In this respect, they have an obligation to ensure that it operates with the highest possible standards, complies with relevant legislation, and attends to appropriate housekeeping.
The importance of this is demonstrated in the recent Volkswagen diesel emissions scandal, whereby a third of the value of the company was wiped in a matter of days after it publicly announced that its cars were deliberately programmed cheat statutory environmental protection tests. This incident, in particular, has highlighted the potentially catastrophic consequences of directors and officers failing to stay informed of important matters by not adhering to robust reporting and compliance procedures.
This incident is obviously quite a special situation but it helps us to understand why management has formal responsibilities, beginning firstly with corporate governance.
Directors and officers oversee the management of an organisation by using a system of rules, practices and processes broadly known as corporate governance. Corporate governance ensures that directors and officers are fair, transparent and accountable in their dealings with an organisation’s stakeholders.
Corporate governance is important because stakeholders, by definition, are affected by an organisation’s activities, and therefore, are interested in the way it is managed. From an organisation’s perspective, effective corporate governance goes a long way to ensure that its management team is well informed about ongoing operations and that they are considering the effects of their actions on others.
One of the underlining principals of corporate governance is the fiduciary relationship that exists between the management of an organisation and the organisation itself. In this respect, directors and officers are appointed to make decisions on behalf of an organisation, and therefore, have a fiduciary duty to act and in the sole interests of the organisation.
A classic example of a fiduciary relationship is that between a lawyer and their client. A person engages a lawyer because they require advice on the law, a subject in which they are unfamiliar. A lawyer is considered to be an expert in matters of the law, and therefore, their client relies that the advice provided be accurate, free of bias and conflict of interest.
In much the same way, directors and officers owe a fiduciary duty to organisations they manage and are required to place the interests of the organisation ahead of their own.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.When managing the affairs of an organisation, directors and officers are required to perform their role with the greatest standard of care. In addition to fulfilling their fiduciary duties, the responsibilities inherited by management are often formalised in common law, civil law, socialist law and sometimes religious law.
These laws typically outline a director’s duties, as being a series of obligations for which all directors and officers must comply. Directors’ duties aim to provide leaders with a clear framework of what is expected of them, by an organisation and its stakeholders. The specific duties imposed on directors and officers vary between jurisdictions, however, a number of common themes exist.
In essence, the following core responsibilities must be fulfilled:
Directors and officers are required to use reasonable care, skill and diligence in carrying out their duties. A basic level of managerial competence is required from all executives while a higher standard of care is expected from individuals with special skill or experience.
Executives must act in good faith and perform their duties in a way that best promotes the success of an organisation. By acting in good faith, directors and officers are required to operate with sincere and honest intentions, and for a proper purpose.
Directors and officers are required to act in accordance with an organisation’s constitution and should not act outside their authority or use their powers for purposes for which they were not intended.
Directors and officers must not place themselves in a position where there is a conflict, or possible conflict, between the duty they owe to an organisation and their own interests. Specifically, this applies to any situation where an executive could personally benefit (or profit) from exploiting property, information or other opportunities relating to an organisation’s activities.
Dealing with conflicts of interest: While obviously not ideal, conflicts of interest do arise from time to time. In these situations, the affected executive is required disclose their conflict of interest to the board of directors, who will then take this information into consideration when making their decisions.
Directors and officers have a duty not to share confidential information that they acquire as a result of their position. Information may be regarded as confidential when it is not in the public domain, is considered worthy of protection, and that the disclosure of such information could be to the detriment of the organisation or its stakeholders.
Directors and officers are required to place themselves in a position where they can make informed and independent judgement. In this, they must remind themselves that they exist to represent the interests of the organisation, and not just one, or even a group, of like-minded stakeholders.
Management must have a complete understanding of an organisation’s financial position, and ensure that it does not trade whilst insolvent. To satisfy this, directors and officers must not allow an organisation to continue to trade, or incur further debts, with the knowledge that the debts cannot be paid when they become due.
To ensure the successful operation of an organisation, management is required to abide by its corporate governance standards, as well as fulfilling their fiduciary and directors’ duties. A failure to comply with these responsibilities can result in unhappy stakeholders, and leave directors and officers facing the risk of being held personally accountable for their actions.
Management has an important job. It’s their responsibility to run the organisations which make the world go round. Their work is often glamorised, sometimes controversial, but never easy. Let’s take a look at what their role really involves.
Directors and officers are an integral part of each and every business. They are responsible for managing an organisation’s operations and monitoring its ongoing performance. You may encounter them in your own workplace. Or at the very least, you’ve read about them in the paper or seen them on TV.
At the top end of town, they are the men and women who make important announcements for large corporations and the high-flying entrepreneurs that influence the world we live in. People like Microsoft’s Bill Gates, Amazon’s Jeff Bezos, and investing legend Warren Buffett are some of the biggest names that come to mind. At the grass roots level, they can be anyone who owns or manages one of the thousands of small and medium enterprises that are at the cornerstone of each and every industry.
Directors and officers are in charge of planning, organising and directing an organisation’s financial and human resources to ensure that its business objectives are met. Just like the conductor of an orchestra, they make sure that each area of an organisation’s operations plays together in tune, to ensure a successful performance.
Directors and officers, also often referred to as ‘managers’ or ‘executives’, are relied on for controlling organisations with a broad range of corporate structures, such as:
As the goals and objectives of every organisation is different, the managerial abilities of its directors and officers are applied according to the purpose of its function. A company, for example, exists to deliver a profit to its shareholders, while a non-profit organisation may focus on creating positive outcomes for the community.
Whichever the case, it is the directors and officers of these organisations that drive them forward and who are ultimately responsible for their success, or in some cases, failure.
Appointed to a position of leadership, directors and officers provide inspiration and guidance to the people around them. They encourage employees to contribute their best abilities and provide a guiding hand to their efforts. Generally accomplished professionals in their own right, managers bring years of knowledge and practical experience to an organisation’s operations.
An example of an experienced manager is John Borghetti, the CEO of airline Virgin Australia, who famously began his career in the mailroom of Qantas. Another is Mark Zuckerburg, who despite his young age, founded Facebook from the modest confines of his college dorm room and grew it into the worlds largest social network, and second most popular website on the internet.
All organisations, from airlines through to abattoirs, present their leaders with unique challenges. Some are large and have clearly defined roles for its managers, while others may be smaller and require executives to ‘wear many hats’; blending many management roles into one. Nevertheless, it’s important to understand that directors and officers do, at least in theory, have separate and distinct purposes. Below, we look at each and provide a brief overview of their role.
A director is a person who is appointed as a member of the board of directors. The board of directors, or ‘the board’ as it is commonly known, is the highest management authority of an organisation. The board is a group of experienced leaders who are entrusted with governing an organisation, and providing it with strategic direction. The board is delegated its authority by an organisation’s constitutional documents and aims to represent the interests of shareholders.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.In their position of senior leadership, the board of directors establish broad policies surrounding corporate governance and make decisions on major organisational issues. While the specific responsibilities of directors vary depending on the type of organisation they control, their tasks often include:
An organisation’s corporate structure typically determines how its directors are appointed to the board. An organisation with shareholders, such as a public company, requires its shareholders to elect the individuals they believe to be most qualified for the position. Private companies and non-profit organisations, on the other hand, may permit more flexibility in the selection process, often allowing the board to appoint and remove members at its own discretion.
To ensure that the board provides balanced and capable leadership, two types of members are considered:
Executive directors are members of the board who are also employed within an organisation as corporate officers. They are involved in an organisation’s day-to-day activities and oversee the management of its employees. Through their intimate knowledge of an organisation’s operations, executive directors aim to ensure that the information presented to the board provides a true reflection of its affairs.
Non-executive directors, by contrast, are not involved in the day-to-day management of an organisation and instead act as external advisors. Their role is to independently monitor the board’s operation, and provide impartial judgement on strategy and performance. As such, non-executive directors usually consist of industry experts and experienced leaders from the community.
Corporate officers, often known simply as ‘officers’, are employed by an organisation to manage its day-to-day activities. They are responsible for all aspects of an organisation’s physical operations, including the management of its employees.
Corporate officers are generally experienced in a specific area of an organisation’s operations, such as finance, accounting, technology, supply chain, marketing or sales. Their position is considered to be more ‘hands on’ than that of directors, however, they are often required to make decisions on both a macro and micro level; the degree of which depending on the scope of their role.
Corporate officers are delegated their authority by the board of directors, with responsibilities ranging from top-level management through to front-line positions. The highest ranks of corporate office are often referred to as the C-Suite, consisting of the Chief Executive Officer, Chief Financial Officer (CFO), Chief Operations Officer (COO) and other similar positions. In the United States, these roles are sometimes referred to as Presidents or Vice-Presidents.
In addition to traditional C-Suite positions, corporate officers also exist in middle and front-line management. Middle management generally focuses on implementing an organisation’s strategy and reporting the results to senior executives. These positions include roles such as general managers, branch managers and divisional managers.
Finally, at the bottom of the chain of command, reporting to middle management, are various forms of front-line managers. These lower leadership positions often consist of department leaders, supervisors and foremen, who are directly responsible for coordinating the efforts of an organisation’s employees.
The protection afforded by D&O policies on the market can vary significantly, however, most follow a common structure. A standardised format means that policies can be easily read, understood, and compared by policyholders and their brokers. Outlined below are the typical components of a D&O policy:
Insuring clauses specify the degree of coverage afforded by a policy. They summerise the promise by the insurer to indemnify the policyholder from losses incurred from an insurable event or circumstance. A standard D&O policy generally has two primary insuring clauses, Side-A and Side-B, with an optional third, Side-C:
Directors & officers coverage, commonly known as Side A, protects directors and officers for claims made personally against them, when the company cannot provide indemnity.
Company reimbursement coverage, often referred to as Side B, reimburses an organisation for expenses incurred in indemnifing its directors and officers from claims made personally against them.
Entity securities coverage, or Side C, protects an organisation when a claim is made directly against the entity as a result of the offer, sale or purchase of its securities.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.Policy extensions broaden a policy’s coverage out from its standard insuring clauses, providing additional benefit and protection for the policyholder. Many extensions are automatically included, while some such as employment practices liability, are optional.
D&O policies contain a range of exclusions to limit the insurer’s exposure to undesirable claims. The risk of covering a particular event may be too great for an insurer, or against the intention of the policy. For example, an insurer will not cover an executive for deliberate illegal conduct.
Key terms used within a policy wording are defined to allow clear interpretation of the insurance coverage. Definitions are relied by all parties of an insurance policy to reduce the ambiguity of key terms, and are often highlighted within the policy document for ease of reference.
Policy conditions outline the intended operation of a insurance contract. They address the parameters of cover, and identify the requirements and claims processes relevant for an policyholder seeking indemnity under the policy.
D&O insurance is an important consideration for most organisations. It can be the difference between successfully defending a claim, and leaving an organisation and its executives in financial ruin. However, as the size and structure of organisations vary, its important to have a clear understanding of who is covered.
The primary intention of D&O insurance, is to protect directors and officers if they are implicated in a claim. Within a D&O policy, an insurer specifically outlines who is covered through its definition of an “insured person”. Although this definition varies between policies, it is generally constructed to protect anyone who occupies a position of management, or has decision-making capability. This typically includes any past, present, or future:
Individuals falling within this definition are covered by the Side-A insuring clause. While organisations often agree to indemnify these individuals from liability, Side-A coverage will step in and protect them if an organisation cannot fulfil its corporate reimbursment obligations.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.An organisations may also be covered by a D&O policy when it indemnifies its managment from a claim. When protecting executives according to its corporate indemification obligations, an organistaion will often incur legal and claim settlement costs on their behalf.
A D&O policy’s Side-B insuring clause accounts for these situations, by reimbursing an organisation for any expenses incurred while defending directors and officers. Side-B coverage provides an organisation with balance sheet protection, ensuring that its financial health is not significantly effected by claims.
As the intention of directors and officers insurance is to protect the assets of individuals, a policy will not generally respond to claims made directly against a company entity. Despite this, D&O can be tailored to cover claims made directly against a company in some circumstances. Entity Securities Coverage, or Side-C, can be elected by public companies to protect an organisation from claims made by investors with respect to the sale, purchase or ownership of the company’s securities.
Another common form of entity coverage is Employment Practices Liability, which covers the company when it is named in an employment related action by disgruntled staff. Even broader entity coverage may be available for companies who purchase Management Liability insurance, a D&O product developed specifically for small and medium businesses.
Directors and officers liability insurance has become an essential risk management solution for corporations, private companies and non-profit organisations across the world.
Despite its global footprint, the evolution of D&O has largely been influenced by the highly litigious operating environment of the United States. From humble beginnings, coverage has expanded beyond basic executive protection to also include indirect, and sometimes direct coverage for organisations.
As the risk exposures of organisations and management teams expand, D&O coverage continues to evolve to meet their requirements.
In the wake of the Great Depression in the 1930’s, personal financial protection insurance, as it was called then, was developed in response to significant reforms in the U.S. financial system – namely, the U.S. Securities Act (1933 & 1934) and the Investment Company Act (1940).
At the time, organisations were not permitted to indemnify their directors and officers from claims, and as a result, Lloyds of London was the first market to introduce an insurance policy designed to protect them.
Despite the additional responsibility this new legislation imposed, the general consensus among executives was that their personal risk was negligible. Therefore, the uptake of this new insurance coverage was minimal.
It wasn’t until the 1940’s and 1950’s that state laws in America were passed allowing directors and officers to be indemnified by organisations. This effectively transferred the cost of defending management onto the organisations which appointed them. According to surveys conducted at the time, by 1965 only 10 percent of public companies carried personal protection insurance for their executives.
However, significant M&A activity during this period, and the fact that executive claim costs were being bankrolled by organsations, induced further litigation against boards. Following this, the uptake of personal protection insurance increased throughout the late 1960’s, as executives realised that they remained exposed when indemnification from their organisation was not available.
The increasing demand for executive protection saw more insurers enter the market, with policies now being offered by insurers outside of Lloyds of London. As competition in this space increased, policies with broader coverage became available as insurers sought to differentiate their products from their competitors. A typical D&O policy structure now provided two distinct forms of insurance:
By the mid-1980’s, despite the majority of public companies having D&O coverage, the insurance market found itself in serious difficulty. A number of large company failures in the banking and oil industries, along with the stock market crash of 1987, resulted in the cost of D&O claims increasing by over 50 percent – placing significant strain on the profitability of insurers.
This, combined with a shortage of reinsurance capacity, saw eight of the top ten insurers leave the D&O market, leaving only Lloyds of London, AIG and Chubb remaining. Many organisations were faced with significant challenges when renewing their D&O coverage; including premium increases of over 200 percent, ultra-high self-insured retention levels, and limits of liability often reduced by half.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.High premiums, restricted policy coverage, and improved economic conditions, attracted significant capacity back into the D&O insurance market, with the addition of several new insurers, including ACE and XL. The next few years witnessed two events that had a significant impact on the way D&O insurance responded to securities litigation:
During the landmark case of Nordstrom Inc. v Chubb & Son Inc. in 1995, the U.S. Court of Appeal rejected the insurers argument that the Nordstrom company entity (not insured by the policy) should be allocated part of the liability, because it was listed as a co-defendant in the claim. As a result, the insurer was responsible for paying the entire $7.5 million settlement. This judgment had enormous implications for insurers, as they realised that they potentially had far larger exposures than previously accounted for – and would either have to revise their policy pricing or coverage to accurately reflect the risk.
Later that year, insurers celebrated the introduction of PSLRA (1995) legislation, which was established to reduce the amount of frivolous securities litigation occurring at the time. This tort reform was successful in reducing securities claims by 45 percent over the next two years. Improved underwriting profits encouraged more insurers into the market, which bought about reduced premiums for policyholders and the development of entity securities coverage, or Side-C, which was designed not only to protect the organisation entity, but also solve liability allocation issues of the past.
The D&O industry as a whole has been susceptible to the peaks and troughs of the economic cycle, with securities litigation having a significant contribution to the difficult market conditions of 2001, following the collapse of Enron and the dot-com bubble, and then again in 2007 in the wake of the financial crisis. Insurance and reinsurance capacity generally remains strong, and due to sensible underwriting practices, the market is unlikely to see catastrophic changes in pricing and conditions – as experienced in the 1980’s.
Recent times have seen an increased uptake of D&O by private companies and non-profit organisations, with approximately 80 percent now carrying some form of management liability coverage. While the basic D&O policy structure remains unchanged, other coverage provisions have evolved to benefit executives, such as conditions surrounding financial adjudication and application severability.
The modern legal landscape has organisations facing increasing claim costs each year. Entity coverages, such as Side-C and employment practices liability, has created a range of challenges for executive protection and continues to lead to the development of new products. Of these products, Side-A DIC, has become the most common additional coverage for publicly listed companies.
The importance of management’s duty of disclosure, and the consequences of non-disclosure and misrepresentation cannot be understated.
In a world full of commercial uncertainty, organisations should undertake prudent steps to ensure that their D&O coverage is as effective as possible.
Luckily, this can be as simple as understanding the concept of utmost good faith in an insurance context, and being aware of the disclosure requirements when applying for coverage.
And while making appropriate disclosure can be tedious at times, its relevance should not be understated as a failure to do so, often finds itself in the centre of coverage disputes.
The parties to an insurance contract, i.e. the insurer and the policyholder, are bound by the legal doctrine of uberrima fides, a latin phrase meaning ‘utmost good faith’.
Acting with utmost good faith means that all parties are under a strict duty to deal fully and frankly with each other, disclosing all ‘material facts’ during the application process.
Because an insurance company decides to issue coverage based on the information provided by an organisation, directors and officers must reveal the exact nature and potential of the risks intended to be transferred to the insurer.
After all, the management of an organisation knows their business better than anyone else.
The issue of non-disclosure and misrepresentation should be treated seriously by D&O policyholders, as it is frequently the main offender in contentious and disputed claims.
As a part of the application process executives are required to complete an insurance proposal, which contains a range of questions prepared by the insurer to capture the information necessary to measure D&O exposures.
To fulfil their duty of disclosure, management must answer all questions accurately, honestly and to the best of their knowledge, disclosing all relevant ‘material facts’.
In general terms, a material fact is a piece of information which would influence an underwriter when deciding whether to accept an organisation’s risk. And if so, assist in determining the terms and conditions that will apply to the coverage put forth.
In the context of directors and officers liability insurance, this includes details regarding the organisation’s type of operations, its size, previous mergers & acquisitions, the experience of its leaders, along with any details of past claims, whether or not they were covered by insurance.
Satisfying a duty of disclosure isn’t just a once off occurrence. An organisation and its executives are wholly responsible for keeping underwriters advised of accurate information throughout the entire application process.
If information alters between the time of application and the policy being issued, insurers should be notified of any changes to ensure the duty of utmost good faith is maintained.
Due to the serious implication of non-disclosure, it is in management’s best interest to promote transparency and continuous disclosure of all relevant information.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.If a company or its executives fail to disclose, or misrepresent a material fact, and this induces an underwriter to accept the risk, it can have significant consequences for which a range of legal remedies are available to the insurer.
If the non-disclosure or misrepresentation was made fraudulently, the insurer may avoid the contract. This means that the insurer is entitled to treat the policy as if it never existed, and the policy will be cancelled effective from the date of inception.
If the insurer cannot avoid the contract, it may attempt to reduce its liability to an amount that would place it in the position it would have been, if the disclosure had been made correctly. For example, an underwriter may argue that had the material fact been disclosed, a particular sub-limit or exclusion would have applied, thereby reducing the insurers liability.
Full coverage may apply if the non-disclosure or misrepresentation would have not affected the underwriter’s decision to accept the risk for the same premium, terms, and conditions.
So, when applying for D&O coverage how does an management know what details are relevant to an insurer?
While there is no definitive list of suggested disclosures, the insurance proposal supplied by underwriters provide a useful guide as to the nature of information required.
However, despite an insurers best effort to ask the appropriate questions, the proposal may not address all the disclosure requirements. Therefore, it is important that applicants apply common sense and seek advice from a qualified broker, to ensure they submit an acceptable level of detail.
For example, some questions may only allow a yes or no answer. If this does not adequately address the question, executives should consider providing additional detail for underwriter’s consideration in an attaching document.
For directors and officers in doubt as to whether to disclose something to an insurer or not, as a general rule, the best option is to be conservative and disclose.
It may take a little more time and effort to find out the relevant facts and figures, but it could save you a lot of headache in the long run.
From a risk management perspective, the relative costs involved in making adequate disclosure is insignificant, compared with potential consequences of a having a policy rescinded due to non-disclosure.
As a final caveat for organisations considering changing insurers at renewal. Management should pay special attention the ensure that all information is disclosed to their new insurer, including details from operations, activities and claim occurring in past policy periods.
Many organisations find purchasing D&O insurance challenging enough. But without understanding the purpose of insurance in the bigger picture, a company will not derive the full benefit from having executive protection in place. The reality is that D&O coverage only plays a part in the risk management process, as it is reserved for claims which exceed the self-insured retention.
By implementing appropriate risk retention into the structure of a policy, companies can ensure that their insurance will operate effectively, for not only them, but also the insurers who protect them. Below, we investigate the concept of self-insured retention, its application to D&O insurance policies, and the key considerations for management when electing them.
When we begin to discuss the concept of self-insured retention, to provide perspective, it’s always best to revisit the original intention of insurance. Insurance is the process of transferring the risk of financial loss, which would be catastrophic for a business or individual, to an insurer for the payment of an annual premium. The theory is, that through the payment of premium to an insurer, the policyholder is assuming a guaranteed, relatively small financial loss, in return for protection from the uncertainty of a large one.
Insurers seek accounts that will deliver them an underwriting profit, therefore insurance solutions are generally not effective for companies with high frequency losses, and instead are more suitable for organisations with exposure to infrequent losses of severe value. Insurance companies affect this preference for low frequency, high value losses by imposing a self-insured retention on the organisations they insure.
Also sometimes referred to as a deductible, the self-insured retention is a value of a claim, which must be first incurred by the insured company, before the policy will respond; thereby permitting the insurer to pay for claims costs exceeding the level of retention. The affect of risk retention is that it allows a company to absorb losses of relatively low value, ensuring that their use of insurance is for claims that could seriously impact the financial health of the entity, or it’s directors and officers.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.Directors and officers relying on the Side-A insuring clause, generally do so because they have not received indemnity from the organisation they represent. Considering that the intention of D&O insurance is to protect the financial assets of executives, Side-A coverage is not generally subject to retention. However, as the majority of claims against executives result in indemnification by an organisation, insurers insist that self-insured retention apply to the company reimbursement insuring clause, Side-B. That being said, it is recommended that directors and officers review the presumptive indemnification clauses of a policy to understand their position if indemnity is wrongfully withheld by their company.
The level of retention on Side-B coverage will depend on the size of the organisation being insured, and can often be of substantial value. A typical retention can range anywhere from $5,000-$20,000 for small & medium businesses, to hundreds of thousands of dollars for large corporations. Self-insured retention applies separately to each and every claim on a policy, however multiple claims arising out of the same wrongful act are generally treated as a single claim, and therefore subject to only one retention. Companies should also be aware that if some part of a claim is not covered by insurance, and is subject to allocation, the total retention will apply only to the portion of loss covered by the policy.
Because self-insured retention is the amount of loss covered by a policy, which a company must first incur before an insurance policy responds, management must consider a range of factors when selecting its value. The strength of a company’s balance sheet and its ability to bear the costs of claims, play a significant role in determining how much risk a company should retain. Set the retention too high and a company may not be able to afford to fund costs to that level, especially if there is multiple on-going claims. Set the retention to low and the insurance will respond too frequently, leading an underwriting loss for the insurer and poor claims experience for the organisation. To put this into a practical situation, it would be unwise for a small business, turning over a only few million dollars, to elect a relatively high retention such as $100,000, as they would be unlikely to have the financial capacity to incur costs up to that value. A lower, retention of, say, $10,000 may be more appropriate.
For companies with solid cash flow and sound financials, higher retentions make a lot of sense, as insurers will often provide a discount on annual premiums. However, management should keep in mind that what can appear reasonable in good times, may create problems if troubles arise, e.g. poor company performance can impact cash flow and increase executive exposures at the same time. Further to this, insurers may impose a higher level of retention on particularly severe or frequent claim sources, such as those involving listed securities or employment practices.
Overall, when managing a company’s level of risk, common sense should prevail. Management should seek advice from an experienced insurance broker to guide them through the process of selecting an adequate level of retention, to ensure their company’s D&O program provides effective protection, not only for directors and officers, but also the company itself.
In this day and age, acquiring D&O coverage is becoming a priority for many organisations. But when you know you need it, where can you buy it?
The world of D&O insurance can be a confusing experience for first-timers. If you’ve identified a need for directors and officers protection, but don’t know where to begin, your not the only one.
Below I outline the most effective method of acquiring a D&O policy, the importance of having a broker, and where you can find one.
D&O is a form of personal liability insurance, designed specifically for the protection of directors and officers. It is purchased by an organisation on behalf of its management, and generally forms a relatively small but essential part of its overall insurance programme.
Because of its complex nature, D&O is considered to be a ‘wholesale’ class of product. Wholesale products are made available to more sophisticated buyers, and therefore shouldn’t confused with ‘retail’ insurances designed for the general public, such as automotive or household policies.
As a result, D&O is not a product you’ll ever see advertised on TV or sold through a call centre. There is a whole industry of professionals devoted to identifying and measuring the exposures of company executives, and also those who have the expertise to design and structure special insurances to protect them.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.While some insurance companies offer D&O directly to buyers, the majority of coverage is purchased through a broker. A broker operates as an intermediary, working on behalf of their client (an organisation and its management) to advise, arrange and oversee all facets of their D&O policy.
As insurance companies and their underwriters prefer to deal with an experienced counter-party, in most instances they elect to communicate with an organisation’s broker, rather than communicating with an organisation directly.
Brokers are familiar with the D&O application process and will arrange for an organisation to submit the required proposal forms, financial records and executive profiles, in order to acquire the required coverage.
Brokers are primarily office based, where much of their communication with clients and insurers is completed via email and phone. However, when involved with larger or more difficult accounts, brokers are likely to meet both parties face to face; to better understand the risk, and negotiate terms more effectively.
Insurance brokers come in all shapes and sizes, and range from one-man suburban operations, through to corporate broking and risk advisory firms, employing thousands of staff worldwide.
While all brokers have the ability to arrange D&O coverage, some brokerages have more experience than others. Organisations operating within complex industries may find benefits in dealing with a large or specialised brokerage, as they are more likely to have the expertise to advise on management risk, particularly for publicly listed companies.
When engaging a broker, an organisation should consider its own requirements and customer service expectations, as well as the capabilities of the broker.
For example, a large company with international operations may prefer a broker with global capability, and access to insurers in foreign markets. On the flip-side, a domestic business could easily be serviced by a local broker, providing a more personal touch.
Organisations that already have a broker should direct any queries to their existing account manager, who will be in the best position to advise on possible D&O solutions.
If you don’t already have a broker, you could try obtaining a recommendation from your friends or family. Or, depending on where your business is based you might consider contacting a professional association such as NIBA in Australia, BIBA in the United Kingdom, or the Independent Insurance Agents and Brokers of America in the United States.
Large, more established organisations will often follow a more formal process; tendering the management of their insurance programme our to a panel of brokers for a fixed period of time. The type of brokers involved at this level are likely to be one of the ‘internationals’, such as Marsh, Aon, Willis or Jardine Lloyd Thompson.
If after this you still don’t have any luck, try looking through the local classified or run a quick search on Google. I’d be surprised if you don’t find something before too long.
Selecting a limit of liability is arguably one of the most important considerations for management when arranging directors and officers insurance. So important in fact, that most executives find the thought of not having enough coverage, almost as frightening as not having any at all. Below we discuss the limit of liability, why it matters, and what management should be taking into consideration when electing one.
The limit of liability is the maximum amount of money that an insurer has agreed to pay up to, on behalf of a policyholder in any one year, for claims made against them.Put simply, it represents the level of protection a company and its executives have against claims resulting from a wrongful act, during the course of performing their corporate duties.
The limit of liability is available for the payment of legal defence costs, settlements and court awarded judgements, which would be otherwise payable by a company or its executives. The policy limit generally operates on an aggregate basis, and is in addition to the initial deducible or retention paid by the policyholder. Whether there is one claim or a thousand claims against policy in any one year, an insurer is only responsible for costs up to the limit of liability; any costs exceeding the limit will not be covered by insurance.
The limit of liability is selected by the policyholder when applying for coverage, and will vary depending on the individual requirements of the organisation. The premium of a policy is directly related to the limit of liability selected; therefore the higher the level of coverage, the more expensive the policy.
When selecting the limit of liability for a D&O policy, it certainly isn’t a case of one size fits all. Every company is different, not only in the scope of its operations, but also the type and number of stakeholders affected by the actions of directors. Employees, shareholders and executives all contribute to the exposures associated with occupying management positions, and in general terms, larger and more sophisticated businesses have a higher degree of risk.
From a director’s perspective, they need to consider a company’s ability to fulfil its indemnification obligations, because any shortfall, without the support of insurance, will leave them exposed. For example, if an organisation was to become bankrupt and company indemnification not available, would the limit of liability be sufficient to cover executives if a claim was to arise? Businesses operating within volatile and litigious industries need to take this into account, and set policy limits high enough to cover worse case scenarios, whilst also applying a sensible deductible strategy. Finally, what is the future prospect and expected growth of an organisation? If a company intends to undertake any significant merger, acquisition or capital raising, executives may consider higher limits, as these are considered riskier activities.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.As the limit of liability is typically inclusive of defence costs, companies must ensure that they consider these expenses, in addition to the cost associated with settling claims. It is not uncommon for the entire (or at least a significant portion) of the policy limit to be consumed by defence costs, particularly when claims involving securities class action occur. Management should also keep in mind that the limit of liability is available to all those insured by a policy, and can be quickly eroded in instances when directors and officers involved in a common claim, require their own separate legal representation. For example, a situation where three directors are sued and each requires a lawyer to represent their own interest. Take into consideration that an average D&O claim can span two or three years, and the costs of settling the claim; a million dollar limit would be eroded in no time.
Also consider that the limit of liability is aggregated, therefore must satisfy all claims in a policy period. If the limit of liability is exhausted, a company and its executives can be left without financial support, leading to catastrophic losses and financial ruin. To put this in perspective, a director or officer without access to the protection of insurance may have to sell their family home and other investments assets, to fund the costs of a legal defence.
Unfortunately there is no simple answer to this question, as ultimately directors and officers are required to make a decision on a range of factors specific to their situation. In addition to the considerations discussed above, the coverage limit and deductible selected will often be determined by a company’s financial strength (how much it can afford) and its tolerance of risk. For example, a small organisation with revenues of a few million dollars may only require coverage of $1m or $2m. Whilst it would not be uncommon to find larger private companies seeking a limit of $5m or $10m, to accommodate for their higher degree of risk.
Public listed companies, on the other hand, often look to acquire coverage of $50m or more, with many larger and more volatile businesses acquiring coverage of hundreds of millions, often involving multiple insurers. While it may not be possible to provide a clean cut guide, executives should take an active interest in the selection of D&O coverage, and ensure they are consulting with experienced insurance brokers and legal advisors, who can assist them through the process.
Directors and officers insurance is a coverage sort after by some of the biggest institutions in the world. However, as regulatory systems have become more litigious, smaller private companies have begun to realise the benefits of having a competent D&O insurer. Insurers have refined their underwriting practices over time, to ensure that they remain profitable, building rating systems which reward proactive risk management by the organisations they cover. Below we outline nine rating indicators used by underwriters to prepare D&O insurance policy pricing and conditions:
An insurance underwriter will typically require a copy of a company’s audited financial statements in order to determine it’s financial health. They will use this information to calculate a range of financial ratios, which can used to benchmark similar companies within industry. A company with stronger financials, operating within an industry with positive economic outlook, will be looked upon favourably.
Often the industry of a company will contribute significantly to an insurers perception of D&O risk. For example, companies that operate within speculative markets, such as mining and technology, will present a higher risk than a more traditional industry such as, manufacturing or consumer retail. When forming an opinion of a potential new client, insurers will often take into consideration any recent litigation reported in the media, along with their own underwriting experience of companies in that sector.
Insurers will analyse the formal qualifications and professional experience of a company’s board of directors. Directors with high public profiles or a history associated with troubled organisations will be carefully considered, as this can be seen to increase the risk inherited with an executive position. Smaller private businesses may not be required to provide a comprehensive profile on the experience of its directors, particularly if they have been with involved with a organisation since its inception, the company is of solid financial condition, and has been operating for many years.
Generally, executive risk is lower for organisations that concentrate their efforts on one core business activity. Underwriters may look unfavourably on companies who are involved in too many unrelated areas, where the directors don’t have expertise in them. For example, the management of a furniture manufacturer is unlikely to have the experience required to successfully develop software for the pharmaceutical industry.
As far as insurance companies are concerned, the longer an organisation has been operating within industry, the better the risk. While proof of a successful track record is ideal, underwriters will make inquiries into any recent significant changes affecting the business; i.e. mergers or acquisitions, alterations to shareholdings, and changes to the company’s financial position. Companies seeking insolvency coverage for their executives will typically be required to produce two years of audited financials, or budgeted financials at the very least.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.If a company has been involved in any significant takeovers, mergers or acquisitions, insurers will treat this with caution. An underwriter will investigate the reasons for these transactions to gain an understanding of its associated risk. For example, a hostile takeover may carry a higher exposure to executives than a friendly one. Depending on these specific details, an underwriter may impose certain restrictions (i.e. charging a higher premium or removing retroactive/insolvency protection), or choose to decline the risk altogether.
Of all companies, those listed on the stock market present the highest risk to insurers. Publicly listed entities have greater obligations and responsibilities than their private counterparts, and are subject to a range of compliance and regulatory monitoring. Additionally, they are exposed to many external factors that can impact the operations of the business, for which management cannot control. In comparison, non-profit charitable organisations generally present a much lower risk, due to their community and social system based objectives.
Companies that operate in international markets face a high degree of risk, primarily due to the onerous management compliance requirements that exist in each jurisdiction. Underwriters are also careful to review any business’ which operate in and around trade sanction restricted regions. For companies based outside North America, insurers will be wary of any business conducted within the USA/Canada, as litigation in this area has been proven to be very expensive. In situations where North American exposures exist, underwriters may offer coverage with certain limitations, i.e. protection from claims bought in US jurisdiction sub-limited, excluded, or included for additional premium.
Insurers, by their nature, look to acquire profitable business. Therefore, any past claims or circumstances previously notified by a company will be reviewed and carefully considered by an underwriter. They will generally request a full description of the event, and the amount that is expected to be paid, also referred to as the ‘quantum’ of a claim. Insurers view a history of frequent claims as undesirable, and may decline to offer cover to a company if they have frequency issues, or any other severe claim pending, for that matter.
Directors and officers insurance is designed to protect the executives of an organisation from the management exposures they face on a daily basis. It’s application is broad, to ensure that they have coverage for legal claims which can arise from many sources. Increasing competition within the D&O market means that coverage offered by insurers is continually expanding. But for all its intention, a D&O policy won’t cover everything; certain events and occurrences can be excluded from cover for many reasons. We explore some of these instances below:
The very principle of insurance is to offer protection for unforeseeable events, and in this regard directors and officers and insurance is no exception. A D&O insurance policy will not provide cover for any circumstance that management is aware of, or claim that is underway, prior to the inception of the policy. From an insurers perspective, there is no incentive to insure anybody who is guaranteed to suffer a loss, because this would result in acquiring unprofitable business.
D&O is designed to provide protection to the directors and officers from decisions made during the performance of their official duties. A policy will not cover fraudulent, dishonest or criminal conduct, or any action that results in an executive gaining illegal profit, or remuneration that they are not entitled to. Before denying indemnity to an executive, an insurer requires adjudication from a formal authority or admission from the offending party. As a general rule, an insurer will defend an executive on the basis that they are innocent until proven guilty. Depending on the severability provisions of a policy, fraud and dishonesty exclusions can have a significant affect when non-offending executives are implicated in a claim.
D&O policies intend to cover management related exposures, and are developed on the basis that they are only part of a policyholder’s overall insurance program. As a result, they will not cover losses that would be best covered under another class of insurance. For example, risks such as property damage, bodily injury and errors in professional advice, would not likely be covered as these can be insured separately.
D&O provides executives the comfort of knowing they have the experience and financial security of an insurance company behind them, should they face a claim. However, D&O has traditionally excluded claims by a company against its own directors and officers, or by one insured against another. The rationale behind this is it removes the incentive for an executive to concoct an action by the company against themselves, in order to recover company losses as a result of their mismanagement. In recent times, rather than excluding all claims bought by an insured party, insurers are broadening cover to only exclude consensual claims, in situations where an executive has invited or solicited litigation.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.D&O insurance was originally developed initially for the sole use of directors and officers, however coverage has since expanded to cover costs incurred by a company in defending its executives. Insurance is not generally for the use of claims made against the company, except for instances of securities and employment practices litigation. Another exception to this is management liability products developed for small and medium business, which may offer the ability to combine a range of insurances to protect the company entity.
Insurers will often choose to limit their exposure to catastrophic situations, as the financial fallout of these events would be almost impossible to estimate. This may include risk relating to nuclear events, environmental damage and war. In the context of directors and officers insurance, coverage may be written back in for claims of environmental damage, when the company is unable to indemnify executives.
Unfortunately insurance cannot guarantee coverage for claim expenses in all situations, due to various legal regulations placed on insurers and the executives they protect. An insurer may not be able to pay criminal fines or penalties issued to a director or officer, as some jurisdictions prohibit insurance to cover such damages. Some regions forbid payment from foreign insurers all together; therefore, an insurer may not be able to assist an executive unless the policy has been admitted locally. Further to this, many insurers are affected by economic sanctions imposed by governments, which do not permit an insurer to fund litigation resulting from operations conducted within a sanctioned country.
Modern companies are increasingly becoming aware of the risks faced by directors and officers, and as a result, are purchasing D&O insurance to protect them.Companies operate in a dynamic marketplace, where they carry out their business in varying economic conditions. As a company trades through the peaks and troughs of the business cycle, it may engage in a range of transactions that can alter its structure and future trading arrangements.
A company may identify an opportunity to undertake merger or acquisition activity, by either purchasing another business or selling its own. Alternatively, in times of underperformance or financial hardship, a company may be placed in administration or be at risk of bankruptcy. Any of these events often lead to significant changes in a company’s corporate structure, which has flow on affects for the challenges and exposures faced by its directors and officers, and their respective insurers. So how does a D&O policy respond to changes in the structure of a business, and when does management need to consider run-off insurance to ensure they have ongoing protection?
An insurance contract is established on the information disclosed to the insurer at the time of application. As a result, when a company undertakes an activity that significantly alters its corporate structure, it will impact the coverage afforded by their existing policy. Most D&O policies contain a ‘change in control’ clause, which automatically ceases coverage for the directors and officers of a company, following a business transaction which affects its corporate structure. Whilst the definition of a change in control will vary between policies, it typically includes the following situations:
If a change in control occurs during a period of insurance, the policy remains active, however it will provide a limited scope of coverage – only protecting executives for wrongful acts that occurred prior to the ‘change in control’. In other words, any decisions or actions undertaken by directors after a change in control will not be covered by the existing policy.
Following a change in corporate structure, the directors and officers of a company may believe that they are no longer at risk of being held accountable for decisions made in their former role. The reality is, that even after control of a company has transferred to a new board or trustee, the former executives remain exposed to allegations, legal claims and personal liability, long after their formal responsibilities have ended. For example, following the sale of a company, its shareholders may allege that the directors who approved the transaction breached their fiduciary duty by acting in their own interests, and not in the interests of the company.
In the situation of a distressed company, creditors can sue directors and officers personally in an attempt to recoup losses, and liquidators will often seek recovery against the company’s own executives for financial mismanagement and insolvent trading. Following a merger, acquisition or change in corporate structure, director’s indemnity agreements cease to exist; therefore it is critical that ongoing insurance protection is established. Without it, the personal assets of directors and officers are exposed to losses as a result of their past actions.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.Due to the ‘claims made and notified’ nature of D&O, a policy must be active at the time an executive becomes aware of a circumstance which could lead to a claim, in order to notify the insurer and for that claim to be covered. If insurance coverage is allowed to lapse, a notification cannot be lodged with any insurer and any subsequent claim will not be covered, even if a policy was active at the time that the alleged wrongful act occurred.
Following a change in control but before the expiry of an existing D&O policy, ‘run-off’ coverage can be negotiated with an insurer to provide ongoing protection to company executives. Run-off insurance is designed to provide former directors and officers with cover for claims, which may arise years after an alleged wrongful act has taken place.
A policy will only indemnify management for alleged acts that have occured prior to a change in control, but it allows executives to notify the insurer of circumstances and be covered against new claims until the policy’s expiry. Without run-off cover in place, directors and officers are left virtually uninsured against the decisions made in their past roles, and are vulnerable to claims made personally against them.
The legal exposures for directors and officers long remain after a corporate restructure. Stakeholders affected by the actions of executives can take time to quantify their loss and launch legal action against those responsible. The timeframe that management remains at risk of litigation is largely determined by the statute of limitations applicable to the jurisdiction in which an action is brought.
Claims made against executives can be made up to seven years after a wrongful act in some regions, and can be extended further when the limitation period commences from the discovery date of a financial loss. Insurers usually have the ability to provide a range of duration options to companies seeking run-off, however it is recommended coverage be sought for as long as possible, to ensure that executives are protected until the likelihood of receiving a claim no longer exists.
Run-off premiums are calculated using a range of methods, but all typically reflect the diminishing risk of executives receiving new claims over time. A run-off policy is generally purchased in a one off transaction, with insurers offering discounted rates to companies who purchase multiple years of coverage.
Despite traditionally being developed for publicly listed companies, many private and non-profit organisation now choose to carry D&O insurance coverage. As commercial environments become increasingly litigious, the leaders of all organisations are exposed to directors and officers liability. The question has clearly shifted from ‘can we afford D&O?’ to ‘can we afford not to?’
Here are 11 reasons why every organisation should have D&O insurance coverage:
Organisations actively seek the best management team to lead their business. However, the market for sourcing quality directors and officers is very competitive.
Even with formal corporate indemnification agreements in place, any experienced candidate will also insist that the organisation obtain D&O insurance cover prior to their commencement, to ensure that their personal assets are not at risk.
Organisations planning future expansion often require financing assistance from venture capital and other forms of private equity. These external sources of funding take a significant risk in their investments, often taking substantial ownership and interest in the performance of the organisation.
Investors may require a degree of security over their investment in the form of D&O insurance, to provide them with a right of recourse against executives should they fail to manage its operations with the required care, skill and diligence.
When an organisation indemnifies its management according to its corporate indemnification provisions, it can incur significant financial losses. These losses are reflected on its balance sheet, and can have a lasting impact on the organisation’s performance long after a claim is settled.
Company reimbursement coverage, also known as Side-B, effectively refunds an organisation for costs incurred in defending its directors and officers, thereby shielding it from the potentially catastrophic effects of D&O claims.
Organisations who operate with D&O insurance coverage are much better prepared when problems arise. By comparison, organisations without a dedicated risk and compliance department are reactive to the legal exposures faced by management on a daily basis.
The ‘claims made and notified’ reporting conditions of D&O insurance formalises the risk management process, thereby developing a proactive approach to claims mitigation.
Corporate indemnification agreements are intended to limit an executive’s personal liability from their performance as director or officer. Unfortunately, these agreements do not always respond as required, leaving management exposed in instances of non-indemnification.
Directors and officers coverage, also known as Side-A, protects the personal assets of executives when an organisation is unwilling, unable or legally prohibited from extending indemnity to its executives.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.As a private company matures into a successful business, management may see an opportunity to ‘go public’. In this case, listing the company on a stock exchange will require D&O insurance coverage for the risks associated with an initial public offering (IPO).
An organisation with an already existing relationship with insurers, and a history of purchasing D&O insurance, has a distinct advantage in sourcing the coverage required.
For many firms, D&O related claims aren’t an everyday occurrence and the issues involved can be complex. If an organisation is not already seeking legal advice, they can request that an insurer appoint panel legal representation.
Legal counsel appointed by an insurer will typically have a deep understanding of D&O litigation, and have experience in guiding an organisation and its management through the process of defending a claim.
With the welfare of so many stakeholders resting in the hands of company management, it’s not surprising that executives can become preoccupied with the potential consequences of their decisions.
Whilst remaining accountable for their actions, D&O insurance allows management to focus their attention on making the best possible decisions for a company, instead of being overwhelmed by the exposures of their role.
Understanding the application of each policy can be challenging for management, especially for those organisationss maintaining insurance programs with multiple lines of coverage. To put it simply, the risk exposures covered by D&O insurance are not covered by any other policy classes.
An organisation’s general liability, professional indemnity, workers compensation and other classes of insurance certainly have their purpose. However, the only policy that is solely dedicated to protecting management is directors and officers liability insurance.
The severity of litigation bought against directors and officers can vary, from a small one off allegation by an employee to a large class action claim by an organisation’s shareholders. Without appropriate coverage in place, an organisation is at risk of suffering catastrophic financial losses.
D&O insurance provides an organisation with the ability to mitigate its management related exposures by electing a self-insured retention, which effectivly sets out the the maximum value of loss it will incur in the event of a claim.
Large organisations operating in multinational environments often arrange a master D&O insurance policy. A master policy is designed to provide worldwide coverage for the executives of an organisation’s international subsidiaries.
Despite its benefits, however, a master policy may not always provide adequate protection for local directors and officers, or comply with local regulations. In these situations, a locally admitted D&O policy can provide more robust protection for local subsidiaries who already enjoy some level of master policy coverage.
The challenges encountered by a company and its management can be complex and involve numerous stakeholders. Following the discovery of a wrongful act, it can take time for affected parties to evaluate their position and commence legal proceedings against company executives. Often it will take many months or even years, for a mere circumstance to materialise into a formal claim. As a result, D&O exposures are known as being ‘long tail’ in nature.
As a company develops within industry, it enlists the services of various executives to help it achieve its goals and financial objectives. The management of a company will naturally evolve over time, and therefore it requires its insurances to accommodate changes in personnel. A D&O policy can protect current, future and former executives for wrongful acts that have been committed in the past, including acts that occur prior to the date insurance was first arranged. This is known as retrospective cover. Despite the retrospective protection provided by D&O insurance, it is critical for company executives to understand the key conditions that can have a significant effect on the breadth of cover provided by their policy.
D&O insurance grants cover on a claims-made and notified basis. This means that a claim will only be covered if the claim, or first knowledge of a circumstance that may lead to a claim, is notified to the insurer while the policy is in effect or within an agreed extended reporting period. In other words, if an executive becomes aware of a claim or potential claim, they must notify the insurer within the current period of insurance for the policy to respond.
A D&O policy provides retrospective cover for wrongful acts committed prior to the inception of the policy, provided that notification to the insurer satisfies the claims-made conditions. That is, if a wrongful act has been committed in the past, as long as notification of the claim is made within the current insurance period, an executive can seek indemnity under the policy.
While we have established that D&O insurance provides cover for prior acts, a policy may include a retroactive date, which specifies how far back in time the retrospective cover applies. It is common for D&O policies to be issued with unlimited retrospective cover, however an insurer may limit their exposure by enforcing a retroactive or prior acts date. The existence of a retroactive date can have significant consequences for the policyholder, as cover will not apply for any alleged wrongful act which occurred prior that date.
Claim Example:
ABC Company has been operating for many years, and has only recently decided to purchase a D&O insurance policy. The insurer offers cover to the company and imposes a retroactive date of “policy inception”. During the policy period, the board of directors become aware that a government authority is to conduct formal investigations into alleged improper reporting practices, occurring three years ago. The board immediately notifies their insurer of this circumstance, satisfying the claims-made condition of the policy. However, the insurer denies cover as the claim relates to an act that occurred prior to the retroactive date, i.e. three years before the policy was first incepted.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.Due to the claims-made nature of D&O, it’s not an insurers intention to provide cover for claims known about prior to the inception of a policy, or claims that should have been notified to insurers in past policy periods. In order to eliminate cover for claims that involve pre-existing legal action, an insurer may rely on a prior or pending litigation exclusion.
A prior/pending litigation date excludes cover for a claim, if that claim is any way related to litigation proceedings that have commenced prior to the specified date. The exclusion is absolute, and the policy will not provide any protection whatsoever for claims where legal action exists before the prior/pending date. The prior/pending litigation exclusion can affect the coverage afforded by a D&O in a range of scenarios. For example, if a legal action is bought against a company before the prior/pending date, and is later amended to include the directors of a company, indemnity will be denied to the directors on the basis that the original litigation had commenced before the prior/pending date.
Management can also be left exposed if a claimant files a legal suit with the courts before a prior/pending date, but the claim is not served against the company and its executives until afterwards. In this instance, it should be noted that even if directors and officers are unaware of imminent legal action, the claim would be denied by the insurer, as the litigation technically proceeded the prior/pending date.
Claim Example:
ABC Company has held a D&O policy for the past 10 years, with an unlimited retroactive date. On renewal of the policy the company transfers their D&O coverage to a new insurer, which imposes a prior/pending litigation date of “policy inception”, i.e. inception of the new policy. Prior to transferring insurer, a legal suit is filed to the courts by a former employee alleging wrongful dismissal. At this stage no verbal assertion or formal demand has been made of company management, and as such, they are not aware of the pending claim. Following renewal of the policy with the new insurer, the board of directors is served notice of the employee’s intent to litigate. Executives notify the new insurer of the claim, however indemnity is denied due to the fact that legal proceedings were pending prior to inception of the new policy.
Company executives must be prudent with taking an interest in their D&O policy. They should ensure that they have adequate understanding of the various conditions affecting retrospective cover. Without doing so, they can unwittingly be exposed to claims resulting from prior acts and/or litigation. To achieve the best result from D&O insurance, policyholders should consider the following:
Company shareholders are more informed than ever about their rights as investors, and the responsibilities of management appointed to manage a company’s affairs.
As key stakeholder of a business, shareholders will often take drastic measures to protect the value of their investments, resulting in significant legal exposure for not only the executives of a company, but also the company itself.
Shareholders invest their finances into a company with the expectation that they will receive a financial return. With large investments often at stake, shareholders can be sensitive to the management and performance of companies in which they have ownership. If the market value of a company’s share price is affected by a business decision or wrongful act, investors can commence legal proceedings against those responsible. With legal advice and litigation funding becoming increasingly available, shareholders have the resources required to attempt to recover their losses. The resulting securities claims are often lodged in the form of a shareholder class action, implicating the company and its executives as responsible for reducing the company’s value.
While the primary intention of D&O is to protect the executives of a business, the Side-B insuring clause (company reimbursement) does provide a company with some balance sheet protection. Despite this indirect cover for the business, the company is not typically insured for its own liability in securities related matters. Entity securities coverage, also referred to as the Side-C insuring clause, protects the company if it is implicated in a lawsuit arising from the purchase or sale of its shares. Side-C cover can be elected as an extension of regular D&O coverage, allowing the policy to also respond to claims by shareholders made directly against the company entity. Because the addition of entity cover increases the risk undertaken by the insurer, the policyholder is typically required to pay an extra premium for this benefit. Without entity securities coverage, a company is effectively self-insured for its own liability.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.When a shareholder legal action names both the company and its directors as defendants, there can be conflicting interests between the two parties. In situations where entity cover is not in place, an insurer is required negotiate with the company to determine the allocation of legal defence and settlement costs. That is, how much the insurer will pay on behalf of directors in relation to the company’s own (uninsured) expenses for its share of liability. The inclusion of Side-C cover in a D&O program can remove any potential allocation disputes, and can more closely align the interests of directors, company and insurer when defending a securities claim.
Despite the benefits of including entity cover within D&O, there are disadvantages. D&O insurance often shares an aggregate limit of liability across all sections of a policy; therefore the inclusion of entity cover can have significant affect on the protection afforded to executives. When Side-C cover is in place, an insurer is responsible for paying the legal costs of defending actions made against the company entity. As an insurer incurs costs on behalf of company the limit of liability is eroded, effectively reducing the limit available for protecting directors and officers. The erosion or exhaustion of the policy limit can leave management without adequate coverage, thereby personally exposing the very executives the policy was intended to protect.
In response to the conflicting interests of Side-C coverage, companies can implement a range of strategies to ensure its executives remain protected:
Despite being initially developed for the benefit of individuals, D&O insurance has broadened over time to cover the organisation in certain situations.
When D&O insurance was first conceived by Lloyds of London in the early 1930’s, it had one simple goal; to protect the personal assets of directors and officers from the implications of litigation.
Since then, the legal landscape has evolved into even more of an aggressive and onerous beast. In turn, many organisations now agree lend a helping hand to executives in trouble, with the introduction of corporate indemnification agreements.
Fortunately, insurers have recognised the increased risk inherited by organisations as a result of corporate indemnification, and have expanded their policies to provide organisations with coverage in a range of circumstances.
So considering the current climate, what is the intention of directors and officers liability insurance? Will it protect an organisational entity from claims? And if yes, to what extent?
Despite many directors and officers having access to corporate indemnification from their respective organisations, D&O insurance still performs a very important role in their protection.
It provides management with the comfort of knowing that if for whatever reason an organisation can not fulfil its indemnification obligations, their assets will remain protected from the hands of angry claimants.
The Side-A insuring agreement of a D&O policy, also known as directors and officers coverage, is designed exclusively to cover this gap; protecting individuals from claims made directly against them in situations where their organisation cannot intervene.
But what happens when an organisation can indemnify its management?
As corporate indemnification agreements have become commonplace, organisations have had a challenging time dealing with the financial implications of indemnifying their executives from claims.
This is because ‘indemnifying executives’ essentially means that the claim defence and settlement costs which were previously the responsibility of an individual, are now transferred to the organisation. In other words, it is now the organisation’s responsibility to pay the bills on behalf of its directors and officers.
Given the right circumstances, this can leave an organisation in financial difficulty. As a result, insurance companies have altered the coverage and pricing of their policies to also protect organisations when satisfying its indemnification obligations.
The Side-B insuring agreement of a D&O policy, also known as corporate reimbursement coverage, accounts for this by providing an organisation with much needed financial support while defending its directors and officers.
The ability to organisations to be reimbursed for their costs associated with indemnifying executives is a great benefit. But how about claims made against directly against the organisation? Are they covered too?
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.As a general rule for traditional D&O insurance policies, no, the organisation is not covered for its own liability. That means that if the entity is named in a claim, it is responsible for paying its own costs.
The reason for this is quite simple; underwriters price their insurance coverage on the risk exposures faced by individual managers. And therefore, do not intend to pick up liabilities related to the wrongful actions of an organisation.
As far as underwriters are concerned, lawsuits related to an organisation’s operation are considered commercial in nature. In other words, general litigation is to be somewhat expected in the business world; it’s just part of the game.
From a practical perspective, commercial risks are difficult to measure, and therefore are difficult to price and underwrite profitably. That being said, an organisation may have the option to insure its own liability in two circumstances.
Finally, depending on the type and size of an organisation, it may have access to the expanded entity coverages provided by management liability insurance.
Management liability insurance (ML) is tailored specifically to meet the needs of small and medium enterprises (SMEs). It is structured as a package-policy, combining the benefits of D&O insurance along with other important insurance coverages.
The inclusion of these coverages, typically only available on a stand-alone basis, makes ML a very cost affective insurance solution for smaller and less risky organisations.
In addition to standard Side-A and Side-B insuring agreements, ML may include a range of entity coverages such as corporate liability, employment practices liability, superannuation trustee liability, crime, statutory liability, and taxation investigation, to name a few.
The modern business environment is a legal minefield for an organisation and its management. Management’s decisions can impact an organisation’s stakeholders in a variety of ways, and as a result, they can be personally exposed to claims from a range of sources.
Here are 8 common sources of claims against directors and officers:
Shareholders often attempt to hold executives liable for errors and omissions in financial reporting, such as during the release of annual reports, or when an organisation hasn’t perform as expected.
It’s also quite common for management to face significant scrutiny when they conduct merger and acquisition activities that are not perceived to be in the best interest of the company and it’s investors.
Other examples of claims by shareholders include breaches of directors’ duties, negligent mismanagement, misappropriation of company funds, and allegations of misleading, deceptive or inaccurate disclosure.
The relationships between managers and employees can be challenging at the best of times, so it’s unsurprising that claims often arise from disgruntled staff members.
Risk exposures exist for executives when hiring and firing staff, as well as situations where they have failed to provide a safe working environment, free of harassment and bullying.
Lawsuits brought by employees can include allegations of defamation, wrongful dismissal, constructive termination, as well as sexual harassment and discrimination, to name a few.
If debts are left unpaid when an organisation goes into administration or bankruptcy, its board of directors may be held liable for insolvent trading.
Management has a responsibility to keep informed about an organisation’s financial position, and its ability to meet the payment of debts as they become due.
If this duty has been ignored or errors have been made, and an organisation has continued to incur debt irresponsibly, creditors may look to pursue directors personally to recover any outstanding funds.
Directors and officers can face claims as a result of providing everyday goods and services to their organisation’s customers, if customers feel unfairly sold or lied to.
An organisation’s customers and the consumer groups who represent them have been known to bring lawsuits alleging misleading conduct and breaches of fair trading laws.
Claims may also arise from contract disputes, the quality of business services provided, or even allegations that fraudulent or dishonest acts have taken place.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.Other players within industry can litigate against an organisation’s executives if they feel that wrongful conduct has been committed to their detriment.
Claims can vary from breaches of intellectual property and misappropriation of trade secrets, to allegations of collusive and anti-competitive behaviour.
Management can be also held accountable for actions that are perceived as defamatory or misleading, with claimants often seeking a remedy for their perceived losses.
Directors and officers have a duty to ensure that their behaviour, as well as the organisation’s, complies with the requirements of a range of government and industry specific legislation.
Actual and alleged breaches of these laws are thoroughly investigated by regulatory authorities, with any subsequent prosecution potentially resulting in severe penalties for the offending executives.
Government and regulatory authorities monitor the laws across many facets of the commercial landscape, including corporation law, securities law for publicly listed companies, fair trading law, employment law, environmental law, occupation health & safety, and taxation law, to name a few.
Depending on the location of an organisation, its directors and officers may be responsible for arranging the retirement, superannuation and 401k entitlements of employees.
If so, they are accountable for registering employees with approved retirement schemes, managing records and ensuring that accurate and timely contributions are made.
Management must ensure that they adhere to the legislative requirements monitored by scheme regulators, or risk being held personally liable for any discrepancy.
In certain circumstances, management can be exposed to claims from the very organisation in which they represent.
If an organisation goes into liquidation, its directors may be investigated and held personally liable if they have breached their fiduciary duty, or traded whilst insolvent.
Additionally, mergers or acquisitions resulting in a change in management can provide the new board of directors with an opportunity to pursue past executives, if they are found to have behaved badly in their past dealings with the organisation.
Finally, if shareholders believe that management has caused damage to an organisation in any way, they may bring a derivative lawsuit against the responsible executives on the company’s behalf. A derivative proceeding allows shareholders to ‘step into the shoes’ of an organisation and hold management personally responsible for their actions.
The definition of a wrongful act plays an important role in determining D&O insurance coverage, as it specifies what actions executives are covered for.
D&O insurance protects an organisation’s management from claims made personally against them. Specifically, it covers them from any ‘wrongful act’ committed in the the performance of their official duties.
Put simply, a wrongful act is an action or decision that considered to be wrongful by another party. Even if the offending executives feel that their behaviour is reasonable at the time, if the affected party feels otherwise, a claim may be brought against them.
Examples of wrongful behaviour can include anything from failing to perform leadership duties with the required expertise or releasing misleading information about an organisation’s performance, through to making defamatory comments about another person’s character.
In addition to claims faced by directors and officers due to their actual behaviour (i.e. acts that have actually been committed), they are also covered for allegations of wrongful behaviour.
This is important because claims often feature many details, recounts of events, opinions and conflicting interests for which the true position of liability is unclear.
The ability for D&O insurance to cover these situations ensures that management are protected for even the most obscure situations, no matter how wild the revelations may be.
It’s also important to note that if a policy includes any form of entity insurance, such as securities coverage, employment practices liability or management liability, the organisation may be also be covered for its own wrongful actions, in addition to those of its executives.
To ensure that an organisation and its management are protected against the myriad of claims in existence, the term ‘wrongful act’ is broadly defined within each policy wording. While this definition varies between policies, it typically covers any actual or alleged:
Actions or decisions made by management that others deem to be wrongful. Examples of acts include breaching contractual obligations, infringing intellectual property, or instances of libel and slander.
Errors can occur during any phase of a management role, and can range from unintentional mistakes, through to decisions made with poor reasoning and carelessness. Improper decisions made in day-to-day operations, incorrect reporting and regulatory non-compliance may also be viewed as erroneous behaviour.
An omission is when information is left out, not presented, or when an action is not taken as required. It often refers to management’s failure to act in a situation that requires their attention, or when they omit critical information from important documents or official statements, which are relied on by others to make informed decisions.
You’ll love The Beginner’s Guide to D&O. It includes everything you’re reading and much more.
Alright, let’s take a look.A misstatement is any statement that is incorrect or false. It consists of wrong information presented as fact. Unfortunately, even if a misstatement is later corrected, executives can still be held liable for the original act.
A statement is considered misleading if it creates a false impression, is uninformative, unclear, or deceptive, even if the statement is true. Misleading statements generally involve a misrepresentation of facts by misleading, remaining silent, or telling a part-truths to the stakeholders who rely on this information.
If a director or officer fails to comply with the legal requirements of their position, this may be considered a breach of duty. It may also include any situation where management has not acted in the best interests of an organisation, or when an executive hasn’t performed their duties with care and diligence.
Breach of trust occurs when a director or officer fails to adequately perform their fiduciary duties on behalf of an organisation. Abuse of power, misappropriation, or any other act by an executive that violates the confidence of shareholders, can be considered a breach of trust, even if the consequences were unintended.
If management does not competently perform their duties, or acts in a way which harms the performance of a organisation, they may be accused of neglect. Neglect can apply to a range of circumstances; from failing to seek professional advice when required, to not satisfying a duty of care owed to employees, customers and suppliers.
A breach warranty of authority is when an executive acts on behalf of an organisation when they are unauthorised to so. If a director or officer incorrectly and wrongfully enters into an agreement on behalf of the organisation they claim to represent, this may constitute as a breach of warranty of authority.
