Does D&O insurance cover the entity?

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?

The intention of traditional D&O coverage

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?

Yes, the organisation is covered for costs incurred on behalf of 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?

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No, the organisation is not covered for its own liability, except in some situations

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.

1. When it is involved in an securities claim
2. When it is involved in an employment practices liability claim

Finally, depending on the type and size of an organisation, it may have access to the expanded entity coverages provided by management liability insurance.

A word on 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.