Carmoon Group Ltd. Business Insurance Hempstead New York Page 1

What Is Director's and Officers Insurance?

By Floyd Arthur

Directors and officers insurance (also known as D&O insurance) is liability insurance

that covers directors and officers of a company for claims arising from actions

performed while serving in their official capacity. It is similar to an errors and omissions

policy in that it covers claims that result from professional decisions that have negative

financial consequences. However, it applies only to decisions and actions of board

members and C-level management staff.

What Is Director's and Officers Insurance?

What Does D&O Insurance Cover?

Many business executives mistakenly believe that D&O insurance is designed

specifically for publicly owned companies and provides coverage only for securities-

related claims. However, this is not at all true. Although D&O insurance covers C-level

employees whose actions result in financial damages to the companys stockholders (for

instance, a sudden drop in the stock price) it offers other protections as well. For

example, D&O insurance includes coverage for:

Carmoon Group Ltd. Business Insurance Hempstead New York Page 2

Allegations of fraud, such as when a lender claims a senior manager misrepresented

the companys ability to repay a loan, and the company subsequently defaults.

Allegations of misconduct, such as a claim alleging that the companys officers were

negligent in failing to notice or report violations of federal environmental policy,

resulting in regulatory action by the EPA.

Allegations of wrongful termination of a high-level employee due to the improper

actions of other C-level executives

Customer or client allegations of systematic wrongdoing by the company that board

members failed to deter

Intellectual property disputes involving the actions of high-ranking executives

Any allegation by a stakeholder that C-level employees or board members failed to

perform in a manner that was consistent with their duty of care and loyalty to the

organization

Directors and officer's insurance can be written for most business entities, including

educational institutions, non-profits, private for-profit businesses and publicly owned

firms. Policy forms for non-profits offer the broadest level of coverage and typically

include employment practices liability insurance and coverage for the organization as a

whole.

What Are the Limitations of D&O Insurance?

D&O insurance is an important adjunct to a commercial general liability coverage;

however, it has limitations. These include:

Limited Coverage for the Organization: Generally, D&O coverage forms for

publicly held companies cover only the actions of the directors and officers. There is

limited protection for the company as a whole, and what protections exist only cover

securities-related claims. On the other hand, coverage for private firms is usually more

comprehensive, and often includes some coverage for the organization itself.

Carmoon Group Ltd. Business Insurance Hempstead New York Page 3

Shrinking Defense Limits: Unlike most commercial general liability policies, D&O

insurance is typically written with shrinking defense limits, which means defense costs

are subtracted from the maximum indemnification the policy allows. In other words, any

damages paid by the insurer are reduced by the amount of litigation costs and attorneys

fees. In the event of a lengthy lawsuit, this can mean a significant reduction in the

amount the insurer pays on the claim itself.

Duty to Pay Versus Duty to Defend: Typically, D&O insurance policies contain a

duty to pay rather than a duty-to-defend clause. Under most CGL policies, the

insurer has an explicit duty to defend against any claim, even if it the claim is ultimately

denied. This includes the obligation to assume control of the defense process, including

selecting counsel and paying legal bills. Under the duty to pay clause, the insurer is

only required to reimburse the insured for his defense costs.

Claims-made Versus Occurrence Trigger: D&O policies are typically written on a

claims made basis, which means that coverage applies only to claims that are

submitted to the insurer during the period the policy was in force. Thus, if the policy

term is from Jan. 1, 2016 to Jan. 1 2017, the insured is covered only for claims submitted

to the insurer during that year. By contrast, occurrence-based policies cover the

insured for claims that occur during the policy period, regardless of when the claim is

made.

Deciding how much and what kind of insurance to purchase for your business is a

complex and difficult process. For that reason, many firms wind up under-insured.

Dont let your lack of experience in insurance matters undermine your firms financial

security. Get a comprehensive business insurance review today. Our experts are

available every weekday from 9 a.m. to 6 p.m., so call us at 516-292-3780 to schedule an

appointment. Or if you prefer, request a free consultation online now.

Resource: International Risk Management Institute