When a company is purchasing Directors & Officers insurance to protect its leadership, premiums may be a focus, but it is essential to verify that the policy terms offer maximum protection. Outlined below are some of the questions that organizations should ask their insurer to ensure they get the right protection.
How Is Directors & Officers Insurance Policy Structured?
A standard D&O policy will generally cover three categories of losses known as Sides A, B, and C, but it is important to check that the company understands the specific structure used by their insurer.
This typically covers the direct losses incurred by a director or officer, and it is important because companies might be unable to indemnify directors or officers should the business become insolvent and in cases where they are legally prohibited from doing so.
This covers losses stemming from claims made against directors and officers for which the organization has indemnified them. This means that the company will be reimbursed when indemnifying directors or officers or advancing legal expenses on their behalf.
This covers any losses that arise from claims made against the company and may be referred to as entity coverage. This is typically limited to losses that stem from securities claims.
Some D&O policies may also contain a Side D clause extending coverage to costs that arise from responding to stockholder derivative demands.
How Can A Company Avoid Having Its Policy Rescinded?
Rescission is a major concern when purchasing D&O insurance as many states allow the insurer to cancel the policy due to material misrepresentation or omission at the time of application, and this may apply even if the misrepresentation was innocent.
Many applications incorporate the company’s SEC filings for the previous year or two. Therefore, it is important to ask what will happen should the company need to restate its financials as the insurer could theoretically respond by rescinding the policy.
To reduce this risk, companies should prepare their application extremely carefully and be sure to respond to requests for answers to supplemental questionnaires accurately. They should also exercise caution if the insurer asks them to sign a warranty letter that contains a knowledge exclusion clause prior to extending additional coverage.
Companies should inquire whether their D&O policy contains a non rescission provision preventing the insurer from rescinding their Side A coverage under any circumstance, in addition to ensuring that only material misstatements and omissions will trigger adverse action by the insurer.
What Is Included In The Fraudulent Conduct Exclusion?
In the past, fraudulent conduct exclusions were rarely invoked because the insured was often able to avoid an adverse final adjudication simply by settling before trial; fraudulent conduct exclusions typically only took effect following a final adjudication of fraud by the court.
Now, however, some exclusions for fraudulent conduct will contain broader final adjudication language specifying that this exclusion will take effect when “there is a judgment against, final adjudication against, adverse finding of fact against, adverse admission by, or plea of nolo contendere or no contest by an insured person as to such conduct.” In particular, the “adverse finding of fact” phrasing could be used by the insurer to argue that any adverse finding, even if it takes place before a trial, could be used to invoke the fraudulent conduct exclusion.
How Can A Company Expand Claims Covered By A D&O Policy?
Companies should inquire what they can do to expand the claims that are covered by their policy as many insurers will provide endorsements broadening the definition of what constitutes a covered claim.
In some policies, a claim may be defined as written demand letters, formal regulatory or administrative proceedings set into motion by a notice of charges, or civil complaints. However, a standard policy may not cover potentially costly legal matters such as the company being targeted in a criminal probe by the Department of Justice or an SEC investigation, or if its directors and officers are subpoenaed to testify in front of a regulatory body.
It may be possible to obtain an expanded claim endorsement to cover some of these situations. However, it is important to note that in many cases, such expanded claim endorsements may only apply to the company’s directors and officers and will not modify what is considered a claim in the company’s entity coverage.
Can The Company Obtain Coverage For Derivative Claims?
Although most D&O policies do cover settlements from derivative lawsuits, some insurers are hesitant to pay cash settlements in these cases, particularly in light of the recent trend toward hefty derivative settlements. Therefore, it is important to confirm that the policy makes it clear that derivative settlements and judgments will be covered, subject to the other terms and conditions in the policy. At a minimum, directors and officers should be able to obtain coverage for attorney’s fees in derivative cases.
Contact The Experienced D&O Insurance Agents
Directors & Officers insurance is a complex type of coverage, and it is important to make sure that you understand it fully before choosing a policy. The experienced D&O insurance agents at CI Solutions can explain the types of policies available to your organization and answer all of your questions. Call us today to find out more.