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:
1. Known claims and circumstances
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.
2. Fraudulent and dishonest conduct
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.
3. Risks covered by other classes of insurance
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.
4. Insured parties suing each other
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.
Enjoying the article?
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.
5. Litigation against the company entity
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.
6. Catastrophic events for the insurer
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.
7. Claims the insurer is not permitted to cover
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.