Introduction:
A directors and officers liability insurance policy (D&O) is designed to protect a company’s management against lawsuits brought by shareholders, customers, or others who suffer harm due to the wrongful conduct of its directors and officers. The D&O coverage that an insurer provides typically includes:
- Indemnification.
- Defense costs.
- Payment of judgments against the insureds after exhausting their insurance policies and other available resources.
- Reimbursement for settlements.
- Medical payments.
- Property damages caused by third-party claims.
- Legal fees are incurred in defending actions covered under the policy.
Purchase and application:
D&O insurance is usually purchased annually by the company itself, although some insurers offer limited-term options of up to three years. When negotiating insurance terms, you should review your organization’s needs to determine how much coverage you need and at what level of premium. If you are considering purchasing more than one year of coverage, evaluate whether that purchase makes sense based on the type of risks you anticipate facing during this period. For example, if a corporation has experienced a significant downturn in performance over the past year, you might not want to pay full price for several years’ premiums. The potential negative effect of underwriting such a commitment can often be mitigated through special risk-sharing arrangements among insurers. However, this strategy may still leave the firm exposed to unforeseen risks. You must carefully consider all factors before making an informed decision about whether to purchase D&O insurance.
Coverages
Indemnification
An insurer agrees to pay amounts that become legally payable because the directors or officers are found liable for wrongful acts committed within their duties as a director or officer. Indemnification generally covers only direct liabilities – those arising directly out of the negligent acts or omissions of the directors or officers themselves. However, you may need to purchase separate coverage for certain indirect liabilities the directors or officers assume. Underwriters will usually attempt to negotiate comprehensive personal umbrella coverage beyond the limits required for other forms of coverage. This personal umbrella protection can help reduce exposure to contingent liabilities associated with derivative claims, which arise when a director or officer personally causes damage in his capacity.
Defense Costs
An insurer agrees to bear all expenses related to its director’s or officer’s defense except reasonable attorney’s fees. Most insurers limit their duty to defend coverage to the costs associated with defending the lawsuit and do not include the cost of settlement.
Negotiations.
These carriers are known as “claims made” policies because the company does not guarantee that all claims will fall within the policy period. Rather, the insurer merely assumes defense obligations once a claim has been asserted against the insured directors or officers. Some carriers also exclude coverage for certain intentional torts. The ability to include both these types of exclusions will depend upon the specific language included in an insurer’s policy.
Judgment
An insurer agrees to reimburse the company for any money it pays as a judgment, award, or settlement resulting from claims covered by the policy. Typically, this provision covers monetary damages awarded from the date of the underlying occurrence, plus interest until payment, but excludes punitive or exemplary damages. In addition, this form of coverage normally requires the insurer to pay a portion of the legal fees incurred in connection with judgments obtained against the directors or officers. It also provides reimbursement for settlements paid before any judgment is rendered.
Insurers offer varying degrees of protection depending on the length of time they have been willing to insure a particular company. The longer the time frame duration, the higher the premiums. While the exact definition of “term” varies from company to company, most companies use a three-, five-, or seven.
What is not covered by directors’ and officers’ liability:
Several important items are typically excluded from coverage under directors’ and officers’ liability insurance, including fines and penalties imposed by governmental authorities; interest on unpaid premiums or losses (except where specifically provided); taxes or assessments levied on the corporation; loss of income or profits; business interruption; loss of goodwill; diminution of value of the business property, including depreciation; extra expense incident to non-compliance with law or regulation; punitive or exemplary damages; and defense costs.
How to Select an Insurer.
Thousands of companies offer Directors & Officers Liability Insurance ranging from inexpensive basic policies to very comprehensive coverage. Remember that while purchasing protection may seem like a simple procedure, it is not necessarily as easy as it seems and requires careful examination of terms and conditions. Before buying Directors and Officers insurance, you should first choose an insurance carrier like Wigmore Insurance Agency Costa Mesa will help clients and businesses and that meets your needs. There are several factors that insurance companies compare before deciding whether to write a contract or refuse a request.
What are Side A, B, and C covered in a D&O policy:
Side A – Comprehensive General Liability Coverage
General Liability Insurance protects directors and officers against liability arising from general negligence. Coverage usually includes bodily injury and property damage. The insurer will usually require the company to obtain at least $1M worth of insurance. Additional coverages may include commercial general liability coverage, products, and completed operations coverage, environmental pollution and toxic tort coverage, and professional services liability coverage.
Side B – Director’s & Officer’s Excess Liability Coverage
This coverage applies if the total liability coverage under the primary layer falls short of the director’s or officer’s actual liability exposure. If this happens, the excess carrier will pick up the difference between the sum expended by the company and the minimum required limits under the primary coverage. Typically, side B insurance will only provide coverage when the company self-insures more than $500k of liabilities per year. This type of coverage can be quite expensive because there is no upper limit to the ultimate payout.
Side C – Legal Expense Coverage
This coverage extends umbrella coverage beyond the ordinary scope of indemnity and includes fees that could be charged to defend a lawsuit brought against a director or officer. When a suit is filed, the insurer will often negotiate with opposing counsel to determine the appropriate fee structure.
Why should a start-up consider Directors and Officers(D&O) Insurance:
Although many small businesses do not need an elaborate level of directors and officers liability insurance, you absolutely must get this type of coverage for any business with employees. Even large corporations cannot overlook this critical form of insurance. An employee who works for the company might lose his job and take the company down with him. Or worse yet, he might sue your company and claim that your negligent acts caused his injuries. It is impossible to predict what an individual might do once he becomes disgruntled, but the point is clear — you would rather be caught off guard than leave yourself exposed.
Conclusion: I believe that companies should have director’s and officers’ insurance as part of their overall corporate policy. The right kind of insurance will increase an organization’s credibility significantly. Costa Mesa Insurance company Wigmore Insurance Agency also helps protect the organization from the legal costs of defending itself against lawsuits. Lastly, it gives organizations the confidence to hire talented people without worrying about how they will handle being sued later on.