All Your Questions on D&O Insurance Answered
As one of the most technical policies in the industry, D&O insurance prompts questions and concerns from directors and officers across America to ensure they are fully covered.
Moreover, with the policy continuously evolving due to shareholder litigation, new laws and rulings every year, it can be difficult to stay up to date.
If you are a director or officer searching for clarity or insights on D&O insurance, read below to find the most common questions and answers across board rooms today.
Why does D&O insurance exist?
Within companies, directors and officers are responsible for their acts and decisions and can receive lawsuits against them. These suits can range anywhere from decisions at board meetings to financial issues or statements.
Many believe D&O insurance coverage is solely for the company, but it also protects directors’ and officers’ personal assets.
What is the difference between private and public coverage?
In the basic construct of the D&O policy, there are three insurance agreements: Side A coverage, Side B coverage and Side C coverage. The main difference between private and public D&O coverage lies in Side C.
Side A coverage. This gives personal asset protection for non-indemnifiable loss, meaning loss for which a company does not indemnify the director or officer.
Side B coverage. This is for indemnifiable loss. The insurer reimburses the company for its indemnification of directors and officers.
Side C coverage. For public companies, the D&O only provides coverage for security suits, such as shareholder security suits or SEC proceedings.
For private companies, there is full entity coverage provided not only for security claims but for other D&O related suits where the company gets named.
Why do I need D&O if I’m a private company?
There are two common areas for D&O claims on private companies. If these claims were ever filed on your company, you would need insurance to help support you.
- Breach of contract claims – The contract states the company itself will not have coverage but the directors and officers will.
- Minority shareholder – A shareholder without board representation feels the value of the company has dropped significantly or is being mismanaged. Without board representation, they do not have a voice at those meetings, and therefore, they have suffered damages and losses and file suit.
What are some typical questions board members ask?
Typically, these three questions come up:
I am going on the board. Am I automatically covered? Do I need to be reported as a new director and officer to the D&O insurer?
Unless you are in a specific position—such as a board observer, advisory board member or audit committee member who is not typically automatically covered—you will have automatic coverage.
Will I have coverage once I leave the board?
The policy covers all past, present and future officers. When you leave, you will have coverage up until that point. But once the policy renews, you want to make sure it covers prior acts in case you want to report a claim after you leave.
How can I know I have full coverage as a director and officer?
You should review three points to ensure you have proper coverage with claims.
1. Your coverage must be trigged.
- You must be insured.
- A claim must be filed.
- There must be loss.
- There must be a wrongful act committed.
2. Review the exclusions.
- Are you covered for alleged criminal and fraudulent acts?
- Personal profit and remuneration?
- Note: There are additional exclusions within the definition of “loss.”
3. Review the application and severability. (The insurer can void coverage for a person or rescind the entire policy if the application was misstated and fraudulent.) Make sure:
- You have full severability and your company’s or any individual’s knowledge does not repute you.
- The policy is non-rescindable.
What is Side A difference in conditions (DIC) coverage?
Side A difference in conditions (DIC) coverage is a stand alone policy that is non-rescindable and typically is much broader than your standalone D&O policy. The company cannot cancel the policy either.
“The Side A coverage is non-rescindable. Period. That’s the lynchpin, if you will, of if an application for whatever reason is misrepresented, and insurance goes to rescind. You cannot rescind whatsoever under a Side A policy,” says President and Founder of UIC Tom Kovatch.
How detailed does a review of D&O have to be to ensure proper coverage and full limits will respond?
D&O coverage is a policy that can be very easily misinterpreted. You have to read every single word because there can be a big difference between the words “and” and “or” in respect to how coverage will be interpreted.
When you’re faced with a $100 million claim, insurers look for every little nuance within the four corners of the insurance contract to reserve their rights, reduce the payment of the claim or exert the allocation clause, which says it will only pay a portion, or in extreme cases, potentially deny the claim.
What concerns should international companies have?
Every country has different laws and standards for directors and officers. For example, in Europe, they have statutory tax liability coverage, and you are subject to tax liabilities as a director or officer. If the company cannot pay, you as a director must pay.
As a company, you should implement an international directors and officers program and local admitted policies, which conform to the country’s laws, rule and regulations.
What if you have a claim close to your policy renewal, and your insurer wants to renew but on an extended aggregate?
If you have a claim close to your policy renewal and your insurer wants to renew on an extended aggregate, huge alarms and bells should go off. This could mean that you have coverage for a year with a limit that is impaired or at worst is completely eroded depending on what happens with that reported claim. If you extend for another year and report that claim within the current policy year, you could extend that policy with theoretically no limits left.
Looking for more in-depth answers to your questions? Watch UIC’s D&O interview with President and Founder Tom Kovatch and Managing Director John Negrotto to hear more answers to your questions.