Directors and Officers Insurance
Directors and Officers (“D&O”) policies protect a company and its officers and directors facing allegations of wrongdoing arising out of the management and governance of the company. “Side A” coverage protects officers and directors when indemnification from the company is unavailable because, for example, the company has no indemnification obligation or the company is insolvent. “Side B” coverage insures the company to the extent of its indemnification obligation. Sometimes companies also purchase “Side C” or “Entity” coverage, which covers the company for claims asserted against it. Side C coverage for private companies is generally quite broad, while Side C coverage for public companies is generally limited to securities claims.
Reimbursement Versus The Duty to Defend
Unlike Commercial General Liability (“CGL”) policies, D&O policies – particularly those issued to public companies – are often reimbursement policies that place the duty to defend on the insured. Some insurers provide the insured with the choice of defending or tendering the defense to the insurer. When the insured has a duty to defend, the insurer may pay defense counsel directly; however, the policy may provide for reimbursement of the insured – sometimes not until the end of the case.
When selecting a policy, a company should consider the extent to which it is important for the company to select its own defense counsel and its ability to front the defense costs, particularly if the policy provides for reimbursement at the end of the litigation. If a company selects a reimbursement policy, it should consider negotiating up front the rates that the insurer will pay. It should also consider negotiating the timing of the reimbursement. Otherwise, the company may find itself facing significant defense costs that it is not in able to pay.
Typical D&O Exclusions
D&O policies generally exclude coverage for claims covered by other policies, including, for example, claims for bodily injury and property damage (which are covered by CGL policies) and claims brought under ERISA and similar laws (which are covered by Fiduciary Liability policies).
D&O policies also generally contain conduct-based exclusions. For example, they will contain exclusions for fraudulent or criminal conduct, or conduct resulting in the insured receiving profit or advantage to which it was not entitled.
One significant exclusion found in almost all D&O policies is the “insured versus insured” exclusion. This exclusion precludes coverage for a lawsuit brought by one insured against another insured. Given that the definition of “Insured” generally encompasses past, present and future directors and officers, this exclusion is often very broad. Companies should try to negotiate the insured versus insured exclusion. For example, some insurers will agree not to apply the exclusion when a Claim is brought by an individual who has not been with the company for a year or more.
Another significant exclusion is the contract/breach of contract exclusion, which insurers often cite in denial letters. It is not uncommon for insurers to broadly interpret this exclusion even though exclusions must be strictly construed. A policyholder that has been denied coverage based on such an exclusion should consider having a coverage attorney review the insurer’s position to make sure the exclusion is not being misapplied.
It is also common for D&O policies to include endorsements that impose additional exclusions that are focused on the risk posed by the particular insured. For example, if Company A has a history of litigation with Company B, Company A’s policy may contain an exclusion eliminating coverage for future lawsuits brought by Company B. It is important that such exclusions be negotiated and narrowly drafted.
Common Coverage Issues
D&O policies generally cover “Loss” in connection with a “Claim.” As a condition of coverage, the Claim must typically be made against the insured during the policy period and reported to the insurer during the policy period or within a short time after the policy expires. The definition of “Claim” will vary by policy, but it will often include a “demand for monetary or non-monetary relief.” Furthermore, it is not uncommon for an oral demand to constitute a Claim. In order to ensure that matters are timely tendered and coverage is not waived, it is important for a company to be familiar with its policy’s reporting requirements and definition of “Claim.”
Because of the broad nature of the coverage provided to directors and officers under D&O policies, it is not unusual for a D&O insurer to agree to provide coverage but to rely on various provisions to try to limit the amount it must pay. For example, a D&O insurer may state that it only has to pay a certain proportion of the Loss or only has to reimburse using the rates it would pay its panel counsel. Such issues can often be negotiated with the insurer without having to resort to litigation.
D&O insurance varies quite significantly from commercial general liability policies in terms of their content, operation, and issues. If your company faces a D&O coverage issue, you should look for an attorney with specific D&O coverage experience. The attorneys at Franklin | Soto LLP have such experience. Contact us at 619.872.2520 to discuss your D&O coverage claim.