How exposed will you be to litigation when you accept the position of a director or officer? The short answer is that you are going to be exposed to it a lot. In fact, every move you make as a director/officer is going to be put in scrutiny so intense that you’ll feel like you are in some Orwellian nightmare.
The good news is that there are D&O Policies out there that can assure you assistance in case something goes wrong in any decision you make for the company. But, this begs the question, are all D&O policies made equal? The answer is no and this could work for or against you, depending on the circumstances.
Where does the Difference Lie?
Like in all insurance policies, D&O policies differ from one another in terms of coverage. Sure, they can cover claims that seek for financial damages (and even some moral ones, too) but a D&O policy often covers three distinct areas. In the interest of simplicity, lets call these areas “sides” from here on.
- Side A – this covers every damage and expense assessed against a director/officer who has not been indemnified by the company for such costs. This is perhaps the most common coverage in D&O policies as it was designed to directly protect a director’s personal assets in case of civil and criminal liabilities.
Side A coverage often becomes necessary in companies that cannot provide indemnification because A) They are bankrupt or B) By law, they are not allowed to do so. Some provisions on a corporation code (depending on the laws in effect in that area, mind you) prevent companies from indemnifying directors and officers when faced with certain lawsuits.
This often happens when the suit they are slapped with happens to be derivative. That means that the ones filing the complaint come from the company itself in the form of shareholders and even employees.
- Side B – This is the Indemnification coverage and it basically reimburses the company for money they have spent on directors and officers in the interest of indemnifying them. Technically, this does not prevent a company from spending its own money to assist its officers and directors when faced with a lawsuit but simply reimburses every expense it has made on behalf of the people being made defendants and respondents in a case.
This coverage should include lawyer’s fees, filing fees, rewards for damages, and even transportation fees It could even cover fees for counter claims, third party claims, and other responses to the original complaint. Now, there are limitations as to how much these policies can cover as far as indemnification is concerned. But you can be certain that the amount should be enough to cover the bulk of the expenses already made.
- Side C – This is what is called the Entity Coverage and, technically speaking, it is directed to the company itself. Simply put, this coverage is meant to protect the company as far as its juridical entity is concerned.
Here’s how it works. Whenever the company or, to an extent, the board of directors and upper executives are dragged into a legal controversy arising from the actions of one of its agents (I.e. singular directors and officers), this coverage will come into play.
However, Side coverage differs depending on the type of company it protects. For instance, if the company insured is publicly traded, the entity coverage a policy can provide will only revolve around securities claims.
Other Considerations
Aside from these three, there is another factor that affects the scope of coverage and it’s the age of the claims in relation to that of the policy. Most D&O policies are claims-made which means that their coverage only includes claims made during the policy period. Conversely, that means claims made after the policy ends will not be covered for reasons that are obvious.
However, there are D&O policies that do cover claims that were made before the policy existed. This is made possible through a Prior Claims clause stipulated in the policy or any similar clause. This basically ensures that claims arising from decisions made in the past few years or even as far as the company’s first years of existence will be covered. This should also include past directors and officers, even the ones that have long been resigned from the company.
Another consideration is the nature of the claim itself regarding the relation the defendant has with the plaintiff. Some D&O policies have coverage that specifically include claims arising from an employer-employee relationship. This includes cases of wrongful termination, discrimination, and unfair labour practices. Gender-based harassment can even be included here provided that the claims specifically state that the incident can only exist by virtue of the person being an officer/director.
In most cases, D&O policies cover claims that are inter-department and inter-corporate in nature. Simply put, it covers claims made by creditors, directors, officers, and legal entities against other people of the same position whether within the company or in another company.
Should You Consider D&O Policy Packages?
In most cases, the underwriter will come up with a policy that fits your company’s size and its needs. You won’t need Side A, B, and C coverage if your company is that small and is not publicly traded. You might just be fine with either B and C, C and A, A and B, or any other combination depending on your circumstances.
However, scheme did perpetuate one myth: that packages are an all-or-nothing offer. The truth is that the underwriter is more than eager to get another specialised insurer who can accept the risk of the policy. This might be convenient for insurance brokers but the priority here remains: protect the interest of the company and its directors and officers from any legal complication arising from its actions.
Again, this all loops back to the conclusiveness of your D&O policy. To make sure that your D&O policy is adequate to your company’s needs, there are a few questions that you need to have answered.
- How far does it Extend where Past and Future Directors/Officers Are Concerned?
- Does the Stipulations Cover All Types of Directors and Officers?
- Are Committee Members and Volunteers included in the list of insured?
- Does it cover employees as well?
- Will it cover the spouses and family of directors and officers?
- Will the policy provide a suitable defense against lawsuits and claims or does it merely reimburse your potential expenses?
- Will it cover claims based on libel, slander, and other similar criminal suits?
- Does it cover claims that seek for damages going beyond money and property?
- Will it cover claims filed against the company for procedural and regulatory lapses?
- Will it protect you from claims arising from contractual issues?
- Will it cover you and your directors/officers from claims arising from gender, racial, and cultural discrimination?
- Does the policy come with regular advice on risk management for your company?
If the answer you have to most of these questions are yes, then that D&O policy might be enough for your needs.
Package or Standalone?
So this does leave us with a bit of a conundrum. Should you accept a packaged policy or get a standalone one? To answer that, here’s a bit of a comparison.
| Coverage | Packaged | Standalone |
| The Insured | Here, what is considered directors and officers are those that are named as such in the first item in the articles of incorporation. It will also cover all subsequent directors and officers in the company. But the coverage is exclusively for them and cannot be transferred in instances of their death or incapacity. | This covers every person who will ever be elected or appointed to the position of director/officer as well as their estates, heirs, and legal representatives. |
| Assistance | This only covers indemnity. Also, you will only be reimbursed until the liability has been determined by final judgement. | Stand-alone policies offer both indemnity and defense. Simply put, you get the defense you need and be reimbursed for every payment you made prior to the policy being activated. |
| In the Event of Failure to Obtain Adequate and Proper Insurance | Completely excluded from the policy. | Defense and reimbursement are still provided even in such an instance. |
| If the Suit is for Non-Monetary Claims | Packaged policies are designed primarily for monetary claims so it may or may not be used in this instance depending on the policy provider. | Standalone policies can cover both monetary and non-monetary claims. |
In Conclusion
So, it is without a doubt that D&O insurance policies were never made to be uniform. They are meant to fit your company based on the type of litigation it is most exposed to as well as its size, age, and scope of operations.
That being said, it would really help your company if you can consult with a particularly reliable insurance underwriter. They are most capable of drafting a D&O policy that will make sure that your company is not going to be severely financially incapacitated whenever you, a director, or an officer gets slapped with a complaint at court.
