Just what exactly is a D&O Insurance supposed to do? What was it designed for? After all, Directors and Officers Insurance policies are one of the pricier insurance products out there so you’d rather want to know what they were designed for to get the most out of it.
What you can be assured of, however, is that D&O Insurance policies are quite comprehensive in nature which means that it should sufficient to protect directors and officers from all sorts of problems arising from their decisions under the right circumstances. In order to understand what it’s actual purpose is, you have to get acquainted with the different aspects that make up a D&O Insurance policy.
Why Did They Become Necessary?
There are many reasons why D&O insurances have become in-demand these days but the prevailing one is that more and more directors have become at risk of being sued for personal liabilities arising from actions they made in relation to their duties and responsibilities as officers in a company. The type of industry does not matter as well as every director in fields like finance, healthcare, education, business, and even non-profit drives are at risk of being held personally liable. So as long as their work can potentially infringe on the rights of others, the chances of getting sued are always high for directors and officers.
The second reason is that the legal system, although it won’t admit to it, is inherently litigious. What that means is that every action that serves as a point of entry into the legal services system would often lead a person down the path of litigation and court hearing. If both parties could not agree to settle the matter out of court, the last resort would be the filing of complaints which initiates the often long and outright tedious litigation process.
Lastly, there is the fact that officers and directors are not positions that are to be considered along the ranks of standard employees. They are not hired but are appointed or elected and the definition of their jobs are defined by the articles of incorporation, not the code on securities and labour. Insurance-wise, that means that they fall beyond the coverage of your standard liability insurance. As such, D&O insurance policies were framed with the intention to cover these people as well as some other similar positions.
What are the Key Features of a D&O Policy
A Directors insurance policy, like all insurance policies, is basically a form of contract. That means that you should at least get familiar with its stipulations before you sign up for one. A D&O Insurance policy will often include certain features which are:
- Definition of Terms
This one can be pretty basic. To make sure that the policy holder and the provider are on the same level of understanding, the terms used in that policy have to be defined. The terms could vary from policy to policy but they should define some key subjects.
- The Insured – This part basically answers the question “Who is this policy for?” Naturally, the insured in a D&O policy are company directors and officers. However, some types of policies might allow coverage for certain positions provided that they fulfill the same obligations that officers and directors often have to meet.
- Acts Covered – This is actually quite important as how an insurance company defines certain acts or incidents determines whether or not your directors will be covered in the instance that they perform such an act. For instance. Insurance companies might have a different definition of “sexual harassment” compared to the law. This could lead to a prejudicial question which lengthens the duration of a case.
- Scope of Coverage – This section determines what the policy covers and the types of coverage it can offer. Some D&O policies can cover entire organisations aside from individuals and some cover the personal property of that director as well as that of the company’s.
Of course, there is the amount of coverage. Depending on the insurance that you have purchased, the common coverage amount can go in between £100,000 to £1,000,000. For policies that cover entire boards, that amount could go as far as £50,000,000.
Regardless of whether you think the amount is sufficient or not, you must make sure that an amount is stipulated in the policy as well as the method of which it would be delivered. Some policies also have measures such as contestability periods to make sure that policy holders don’t abuse the coverage once they purchase the product. As such, you have to be mindful of these measures when reading the policy.
- Other Stipulations – Lastly, the policy should set up other stipulations to ensure that the assistance provided would be used properly. One thing you have to look for is a Prior Acts clause which should extend to actions made before the policy was purchased. If possible, look for a clause that ensures decisions made as early as the company’s first few months will be covered.
Another clause you have to look for is severability. This one defines any action or circumstance where the policy would not be activated. You have to know where and when the policy may not be activated so as not to waste time raising the issue if you contest the company’s claims at court.
What are Employment Practices Coverages?
One important type of coverage your D&O policy should have is a clause that covers actions arising from employment practices. This simply includes any issue arising from upper management’s relations with its own employees.
For instance, when an employee is terminated, they may file a case of wrongful termination and other unfair hiring and firing practices. Depending on other factors, they may also claim instances of discrimination and gender-based harassment in the workplace.
Regardless of the grounds alleged in that complaint, you must make sure that the policy must activate in the instance that your company is served the notice of complaint. This can happen if that policy has a “Duty to Defend” clause. What this clause denotes is that the insurance company is obligated to provide legal and financial assistance to the policy holder for any personal liability claim.
Some companies also afford insurance coverage whenever expenses for defending the claim at court are incurred. This doesn’t exactly diminish the total amount you can expect to be covered for each claim but legal fees tend to consume a considerable portion of the defense budget depending on the claim. Either way, you have to make sure that the policy’s promised coverage activates at even the instance that a claim for damages is raised by a complainant.
Some Clarifications
Although D&O insurance policies are quite comprehensive, they won’t cover every claim directed against officers and directors. What is necessary is that the claim arises from any action done by a person in their official capacity. Any crime that has nothing to do with the office or position, then, won’t be covered. This includes assault, theft, and grave threats.
However, there might be instances when personal offenses might be covered by the policy. What must be alleged, in this regard, is that the offense should have existed by virtue of that person holding the office. This is something that your company should not do (as it’s tantamount to admitting guilt) but what the complainant indirectly or directly alleges in their suit.
Lastly, there is the aforementioned fact that the language used by the law and that of the insurance company will be different. Basically, they have very different treatments as to classifying offenses and incidents. However, if you can get a particularly clever lawyer to argue that this incident falls under the coverage of a policy as it shares the same essential elements as the incident stipulated in the definition of terms, the court may rule in compelling the insurance company to provide the assistance they promised to your company.
Final Thoughts
There is this misnomer that D&O policies are expensive and, therefore, out of the reach of smaller businesses. The truth, however, is that it doesn’t have to be. Sure, each policy comes with a rather steep premium but underwriters often consider the company’s size, type of industry, and financial stability.
The end is that you might just get a more affordable D&O insurance policy albeit with a more limited coverage and assured financial assistance. However, what you have to understand is that the highly litigious nature of modern society means that lawsuits would come aplenty for any business, big or small.
Even if the D&O insurance policy you got is comparatively limited, every bit of coverage you can get will ultimately help your company in defending its officers from all sorts of personal liability claims. After all, having a limited coverage is far more helpful to the company than none at all.
What other purposes do you think a D&O policy should fulfill? Do you think that the policies made available today as comprehensive as they advertise? Let us know your thoughts in the comments section below.
