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D&O Questions & Answers

What does D&O insurance cover?

Covers D&O’s for actual or alleged error, omission, misleading statement, neglect, breach of duty or act while in the course and scope of their duties.

What doesn’t the D&O cover?

In general, the policies exclusions can be divided into four categories: Uninsurable such as insider trading; Other insurance such as dishonesty or E & O; Beyond industry’s capacity such as nuclear, and; Underwriting judgment which includes items such as one insured suing another and litigation started prior to the policy inception.

Who would bring a claim? 

Shareholders, competitors, vendors, clients, creditors, governmental agencies, owners of acquired businesses.

Who would they bring it against?

Directors and officers including their estates, heir, legal representatives, spouses, ex-spouses, as well as the corporation itself.

Why would they sue me?

  1. Shareholders because they feel the directors and or officers diminished the value of the company and therefore their holdings.
  2. Competitors because they feel your firm competed unfairly. See ‘Why Do I Need D&O Coverage’.
  3. Vendors because they are dissatisfied with the agreement between your two firms. See 
    ‘Why Do I Need D&O Coverage’.
  4. Similar to the type claims vendors might bring.
  5. Creditors because they feel the directors and officers did not properly protect the assets of the company.
  6. Governmental agencies for violation of regulatory procedures.
  7. Acquired business because the owners feel they received insufficient value. See <“Why do I need D&O Coverage”.> (HYPERLINK if not already)

How much can they get?

Average payment on closed claims was over $175,000 per claim, according to the 2012 D&O Liability Survey prepared by Tillinghast-Towers Perrin.

What will the policy pay for?

  1. Judgment or settlement
  2. Defense
  3. Punitive Damages where insurable

How much will it pay?

Up to the coverage amount purchased including defense costs for the entire policy period regardless of the number of claims.

How does the retention work?

  1. There is no retention if the corporation is not permitted to indemnify the directors and officers for a claim.
  2. If the policy does permit the corporation to indemnify the individuals, the policy will pay up to the limit of liability in excess of the retention amount.

For example, a $1 million policy with a $5,000 retention will pay up to $1 million excess of the first $5,000 of loss. You will pay the first $5,000 of any claim.

How does my retention compare to other Insured’s?

Most D&O policies have at least a $25,000 retention.  ECC negotiates lower retentions and sometimes $0 retention if EPL is also purchased. 

The insurance company has to defend me, right?

Yes, if the policy is written on a duty to defend basis. If not, you must make arrangements to find an attorney and manage the litigation yourself. Most D&O policies can be offered with a duty to defend.

Ok, but I have an excellent attorney.

You are free to use them if you choose as long as you get the consent of the insurance company first. They will want to make sure the attorney is qualified to handle such matters.

What happens if several of us are sued, but only one of us was dishonest? Would we all be excluded?

No, only the guilty party. There is severability of all exclusions which means only the guilty party is excluded.

Ok, but what if we are accused of being dishonest and none of us are? Are we still excluded?

No. D&O coverage will cover you up until the point you are found to be guilty in a court.

Is there coverage if I have an offering of stock?

Yes as long as it is a Private offering and does not exceed $50 million. If you plan a Public Offering, please advise us as soon as possible so we can make arrangements to cover it.

What if we acquire another company?

It is automatically covered unlike most other policies which have an asset size test.

What is the ‘hammer’ clause and what is so bad about it?

If the insurance company wants to settle a claim that you feel would be an admission of guilt and prefer continuing to fight instead, the underwriter can exercise its ‘hammer’ requiring you to pay any amounts in excess of the proposed settlement.

When should I report a claim?

Imagine a policy expiring on 1/1 and receiving a claim on 12/31. Many policies require that you report it before that policy expires. In other words, New Year’s Eve. We always recommend claims be reported as soon as possible. Even if there is not an actual claim, it can be beneficial to report the occurrence to the underwriter.