Directors & Officers (D&O) insurance can be a very useful type of coverage for organizations as it provides liability coverage to the company’s executives and leadership. This protects them as well as their personal assets from any claims that may arise from the actions they take while performing their typical duties as representatives of the company.
However, there are some important exclusions you need to be aware of when shopping for D&O insurance so that you can make an informed decision about whether the policy offers acceptable coverage for your business.
Directors & Officers Insurance Exclusions
It is particularly important to pay attention to D&O exclusions because they may exclude a broad range of risks and limit the extent to which defense costs will be covered in the event that the company’s leadership is sued. This type of coverage can vary significantly across providers and policies.
Here is a look at some of the most common D&O exclusions to take into account.
Many D&O policies will contain an exclusion for losses stemming from deliberately fraudulent or criminal activities. If an insured individual gains remuneration that they were not legally entitled to, the policy will not cover them in a lawsuit that stems from this. However, it will typically cover legal expenses until a formal court judgment is made attesting to the fraudulent or criminal nature of the action.
This means that allegations on their own are not enough to trigger the exclusion. It is a good idea to look for a policy that contains “final nonappealable adjudication” wording in this exclusion that will trigger coverage for the legal fees of any D&O misconduct claims. In policies that have this exclusion, it is also advisable to ensure a provision exists allowing coverage for innocent directors and officers who are not parties to the alleged fraudulent or criminal action.
Insured Versus Insured Exclusions
Many insurers will include an exclusion for lawsuits filed between directors and officers within the same business to avoid the fallout from corporate infighting and collusion. This exclusion means that directors and officers will need to pay their own legal fees if they sue one another.
Although this exclusion prohibits coverage for a number of claims, there may be some exceptions that will keep coverage intact for specific situations. One common exception pertains to actions that are brought by bankruptcy trustees, former directors and officers who have not participated on the board for a set period of time, and whistleblower suits that are filed under the False Claims Act. Businesses should confirm that these modifications are listed on their D&O policy.
Antitrust laws regulate the conduct of corporations with the aim of promoting fair competition at both the state and federal levels. Private companies face complex antitrust exposure from regulators as well as private plaintiffs, and most D&O policies contain exclusions that prohibit coverage for losses stemming from activities that stand in the way of competition.
These D&O exclusions often have a significant impact because they eliminate coverage for claims of deceptive trade practices in addition to violations of general competition law. It may be possible for businesses to negotiate a limited coverage amount for specific aspects of these exclusions or have them removed from their policy.
Defense Cost Exclusions
It is not unusual for D&O lawsuits to contain extensive allegations, and it is important to note that insurance companies are technically only responsible for defending the company’s interests based on the specific coverage provided by the policy. Some aspects of the claim may not be covered.
For example, many D&O policies contain limitations restricting defense provisions to the covered portions of the claim. Companies may be able to obtain a 100 percent defense cost allocation clause specifying that defense coverage will apply in any case where even a portion of the claim is covered.
Prior Knowledge Claims Exclusions
A prior knowledge claims exclusion gives insurers the power to eliminate or limit coverage for any activities or claims that were known prior to taking out the policy. Therefore, insurers typically ask a company whether it is aware of any situations that could lead to future claims under the policy at the moment of application. In the case of an affirmative answer, the company will be asked to supply further details regarding the circumstances of these potential future claims so that the underwriter may determine if the risk is acceptable.
If this information is withheld intentionally during the application process, the claim could spur a rescission of the policy. In that case, the insurer could retroactively cancel coverage on the grounds of misrepresentation during the initial application. It may be possible to eliminate this clause.
Companies that have any concerns about previous business activities should seek coverage for “full prior acts” as this will cover all management decisions made since the formation of the company. It is also possible to limit the prior knowledge of events exclusions to those directors and officers who were aware of the circumstances so that those who had no knowledge of the events will be protected.
Reach Out To The Insurance Professionals At CI Solutions
To learn more about various protection options covered by D&O insurance, get in touch with the insurance brokers at CI Solutions.