Directors and Officers Liability Insurance: A Summary of Coverage Parts, by Andrew J. Kelly, RPLU
Of all of the insurance policies available within the professional liability industry, private for-profit directors and officers’ liability insurance are probably the most misunderstood. Every company has the potential to be brought into a lawsuit by many different parties for actions that would cause a financial loss. Potential plaintiffs include but are not limited to shareholders, customers, clients, competitors, third parties, and even the government in circumstances where the company is not operating within the boundaries of the law. Although a detailed technical discussion of the coverage is sometimes necessary, I am going to keep my discussion brief and focused on the general coverage parts so that the average layperson can understand the insuring agreements of the policy and what they are designed to do.
Directors and officers liability insurance has three parts. The first two parts of the policy cover the directors and officers that serve on the corporate board of the insured. The third part policy covers the entity in the event that it is dragged into a lawsuit.
In most cases when a director or officer is sued the company is responsible for reimbursing them for the costs associated with the defending a claim. The part of the policy that is responsible if a company has to pay back (or indemnify) a board member because of a lawsuit is called side B coverage. Side B coverage provides protection for the company’s bottom line. This part of the coverage is very valuable to the policyholder because it provides protection for the company so that they can be reimbursed by the carrier for any damages paid to a director or officer if a lawsuit is brought against a board member.
There are some circumstances where the company is not in a position to pay their directors and officers back in the event of a claim. Common reasons for this can include insolvency or situations in which the law statutorily prohibits the company from doing so as a matter of public policy. When the company is not able to pay back their directors and officers, the part of the policy that would apply is called side A coverage. This coverage is important because it covers the directors and officers when the company is not able to help or indemnify defend a board member.
The final part of a directors and officers’ liability policy is called entity coverage or side C coverage. Entity coverage exists to respond when the business itself is named in conjunction with a director or officer for a covered wrongful act. It is important to know that although both side A and entity coverage can be common on most quotes acceptable in the standard market; they are not always automatically included on harder to place business.
Selecting a wholesale broker that has the right experience is an important first step in getting a directors and officers liability policy that addresses the prospective policyholder’s exposure correctly and cost effectively. The insurance agent of record should discuss policy features like whether the policy properly addresses the correct continuity date, whether a separate or shared limit make sense, if any major shareholders must be addressed in the coverage, and even situations where manuscript endorsements must be drafted to address circumstances unique to the insured’s business. Having a qualified wholesaler participate in the transaction is key component in ensuring that the proper details are addressed proactively prior to binding.
Andrew J.Kelly, RPLU
Alexander J. Wayne & Associates, Inc.
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