Directors and officers (D&O) insurance policies provide protection to the directors and officers of a company for claims asserted against those directors and officers arising from the management of the company. D&O policies may also protect the institution itself from certain claims. Unlike other forms of insurance, such as property or general liability policies that are based on standardized forms, D&O coverage can vary significantly from one insurer to another.
The insuring agreement of most D&O policies will provide coverage for “loss” that is incurred as a result of a “claim” made for a “wrongful act.” The term “claim” typically refers to an assertion of a legal right or demand for payment by a third party, and the term “wrongful act” generally is defined as “actual or alleged act, error, misstatement, misleading statement, omission or breach of duty.” Applying these policy definitions, D&O coverage can be surprisingly broad.
The typical D&O policy provides coverage in three different ways, commonly known as Side A, Side B, and Side C coverage. Side A provides “direct” or personal liability coverage for individual directors and officers where the company cannot legally provide a defense or indemnify loss (where such indemnity is prohibited by state law) or where the company is financially unable to do so. Side B indirectly covers the individual directors and officers of the company by reimbursing the company for defense or indemnity payments that the company has made or is required to make on behalf of its directors and officers. Side C, which is also known as “entity coverage,” provides coverage for claims against the company itself.
While it may be beneficial to the directors for the company to have its own coverage, it is important to remember that when Side C coverage is purchased, the company itself and the directors and officers will be sharing the same insurance policy limits. If the claims against the company deplete the available limits, then the directors and officers may be left with insufficient coverage. To avoid this, the company could purchase a Side A-only policy with limits dedicated solely to the directors and officers for non-indemnifiable losses.
One provision in a D&O policy that warrants particular consideration and comparison among various carriers is the definition of “claim.” In the highly regulated world of financial institutions, claims by regulators are as much, if not more, a concern as claims for monetary damages asserted by shareholders. Coverage for defense costs incurred in responding to a government subpoena or other action, particularly if those costs may be advanced under the policy, is especially valuable given the high cost exposure. The policy’s “claim” definition is critical to such coverage and should be defined broadly to include administrative and regulatory proceedings, criminal investigations, and civil investigative demands by regulators. It is important to note, however, that civil monetary penalties may not be covered in certain circumstances.
Another pertinent policy provision is the fraud exclusion. In some policies, this exclusion may apply to a simple allegation of fraud in the underlying claim; if fraud is alleged, there is no coverage. In others, however, the exclusion only applies where there is an “actual finding of dishonesty or fraud.” If the latter, then the insurer should provide coverage for the claim until a court finds the insured has committed fraud. Given that most claims are settled prior to court adjudication, this type of “final adjudication” fraud exclusion can be very important to an officer or director who has been sued for fraud.
Financial institutions should work with coverage counsel and an experienced broker to identify risks and consider procurement of insurance to offset those risks. Counsel and the broker can help ensure that policy language, such as a broad “claim” definition or narrow fraud exclusion, will maximize coverage in the event of a claim.
Heather Howell Wright and Stewart Cox are partners with Bradley law firm. Heather litigates a wide variety of commercial matters and handles cases through all stages of the litigation process, including injunctive relief hearings, mediation, arbitration, and trial. Heather’s litigation experience helps her identify potential liability and compliance risks for her clients. Stewart handles a wide range of complex litigation matters for business clients from different industry sectors. Stewart has tried cases before state and federal court juries involving consumer and commercial loans, leases, product manufacturing, bank deposits, software licensing, a railway accident and industrial equipment.