Directors & Officers Liability Coverage

A directors and officers policy provides the directors and officers of a private company or nonprofit organization protection in the event a breach of duty is alleged.  The coverage pays for actual or alleged wrong decisions, which the policy refers to as wrongful acts.  Each insurance company provides its own definition of the coverage in its coverage form.  Generally, the directors and officers policy includes “any actual or alleged act or omission, error, misstatement, misleading statement, neglect or breach of duty by an insured person in the discharge of his/her duties.”

The types of claims that are covered under directors and officers policy include: employment–related issues such as discrimination, harassment, wrongful termination, and other issues such as failure to provide services, and mismanagement of assets.  The directors and officers policy will not pay for bodily injury or property damage: these are the types of coverages provided by general liability, auto liability, and workers compensation policies.  Although the policy provides coverage for employment-related issues, it will not replace an employment practices liability policy.  The directors and officers policy provides coverage for some employmen-related issues associated with being a director or an officer.  However, most policies define only particular acts and don’t provide the full-blown protection provided by an employment practices liability policy.

All directors and officers policies are written by non-standard or non-admitted companies.  This is why each policy and proposal needs to be evaluated on its own merits.  Here are some coverage issues to consider when reviewing a directors and officers policy:

Claims-made coverage form

An occurrence form liability policy will pay for events that occurred during the policy period, even if there is no coverage at the time the claim is filed for the event.  Claims made policies, on the other hand, require that you have coverage at the time the claim is made and for the time in which the claim actually occurred.  Typically, claims covered by a claims made policy are filed months, even years after the “wrongful act” would have occurred.  A claims-made policy will only respond when a strong threat of the suit exists or lawsuit is filed.

For example, a company’s directors and officers policy took effect January 1, 2000:  the company renewed the policy in 2001, and in 2002.  In 2003, the company decided not to renew the policy because of a substantial premium increase.  Six months after the policy expired, the company received a letter from an attorney alleging breach of duty that occurred in 2001.  Even though the policy was in force at the time the “wrongful act” occurred, the company will not have coverage for this claim.  The reason there will be no coverage is because the policy was not in force at the time the suit was filed.  One solution for companies who need to cancel their claims made policy is to purchase an extended reporting period, also known as tail coverage.

 Defense Within the Limit

The majority of directors and officers policies provide the cost of defending a claim inside the limit of liability.  This means that the limit of liability is eroded by defense costs leaving only the difference to be paid out for the claim itself.  This is why you must purchase enough coverage to cover awards and the cost to defend all claims. 

Extended Reporting Period

Since claims-made policies will only provide coverage at the time a lawsuit or threat of a lawsuit is filed, and if the coverage was in place at the time the “wrongful act” occurred, an extended reporting period can be purchased at the time of cancellation.  The extended reporting period provides coverage for events that took place prior to the expiration or cancellation of the policy, for claims that are brought after that date and before the end of the reporting period.  The minimum and maximum reporting periods are determined by each insurance carrier.

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