Traditional director and officer liability insurance coverage is actually two distinct coverages within one policy. The first coverage, referred to as the personal (or direct, or D&O) part of the policy, reimburses the individual directors and officers for losses for which they are not indemnified by their corporation. The second coverage, referred to as the corporate reimbursement part of the policy, reimburses the corporation for amounts which it is lawfully permitted or required to expend in indemnifying its officers and directors. Although both coverages are with in the same policy, each will have its own retentions, deductibles and exclusions. The corporate reimbursement part of the policy is the one under which most claims are made.

It is important to note that these policies do not insure the liabilities or defense costs of the corporation itself. As a result of this, most D&O insurance settlements or judgements are "allocated" between the responsibility of the directors and officers themselves versus the responsibility of the corporate entity. This allocation ranges from 50% to 80%. Some insurers are now providing insurance coverage for the allocation up to including full entity coverage, as well.

A D&O policy insures for the "wrongful acts" of the named individuals. The defined term, Wrongful Act, is unique to D&O and fiduciary insurance. There are two parts in the definition, one relating to the "conduct" and the other to the "status." Wrongful Act is usually defined as:

 1. any actual or alleged error or misstatement or misleading statement or act or omission or breach of duty directors or officers while acting in their individual or collective capacities; or

2. any matter claimed against them solely by reason of their being directors or officers of the Company. 

The significance of the two part definition is to make clear that errors, misstatements, misleading statements and so on must have occurred while the insured was acting as director or officer. However, any matter claimed against the person solely because he/she was a director or officer is also included. The policy will define the individual insureds and, in rare instances, may categorize them. It is critical to analyze who should be covered persons. Coverage extends to all subsidiaries if the information is provided to the underwriter.

Directors & Officers Loss Prevention

Written loss prevention policies and procedures are absolutely critical. The broker should be a catalyst with you and in conjunction with your insurer and legal counsel to enhance or develop written policies and procedures in the following critical areas:

1. Analyst Communications - To reduce the securities litigation risk associated with analyst communications, the company should adopt policies providing the company will:

a. Avoid commenting on analyst estimates or releasing internal projections, or if it does,

b. Disclose and circumstances that might prevent the company from meeting projections or estimates;

c. Document the reasons for its beliefs regarding the estimates or projections, and the reasons why any contrary views were rejected;

e. Document its communications with analyst;

f. Avoid distribution of the analysts’ reports or otherwise appearing to endorse or adopt the analysts’ estimates.

2. Insider Trading - An insider trading policy should include:

a. Prohibition of trading in the company’s stock by anyone in possession of material, non-public information;

b. Identification of a senior manager to pre-clear all inside trading;

c. Identify "trading windows" for insiders wishing to trade that do not possess material non-public information;

d. Identify "trading blackouts" when all trading in the company’s stock is prohibited;

e. Adopt procedures for an insiders written plan to which insiders may trade in the company’s securities only at regular intervals and amounts.

3. Periodic Reporting - "Defensive Disclosure" is the key word to adopting procedures that:

a. Provide that the company routinely will include a separate "risk disclosure" section in its periodic reports;

b. Identify persons within the company whom are responsible for appropriate disclosure statements in periodic reports;

c. Define a process which identifies the company’s business risk;

d. Determine a timetable which will ensure documentation of these business risk in the preparation of required periodic reports.

Standard Policy Exclusions

The following list of standard exclusions are generally used as the basis for most D & O insurance contracts. Some variations are seen.

1.Hostile takeovers against the opposition of the Board except where independent expertise has provided written opinion that the offer for securities is inadequate.

2. Any Director or Officer gaining in fact any profit or advantage to which they were not entitled.

3. Illegal remuneration of the Directors or Officers.

4. Brought about or contributed to by the fraudulent, dishonest or criminal actor of the Directors or Officers.

5. Insured by other collectible insurance.

6. Prior and Pending litigation.

7. Arising from bodily injury, property damage, slander, etc. (General Liability coverages)

8. Arising from pension, profit sharing, employee benefit plans and ERISA of 1974.

9. Wrongful Acts in the discharge of their duties of any entity other than the Company.

10. In any way relating to environmental pollution.

11. Insured versus Insured.

12. For an accounting of profits made form the purchase and sale by the Directors and Officers of securities of the Company withing the meaning of Section 16(b) of SEC 1934.

13. Arising out of failure to maintain any policy of insurance.

14. Subsidiary prior acts to the date of acquisition of such subsidiary.

Some common policy enhancements or removal of the exclusion are:

1. Retentions will waived where all insureds are dismissed or not found liable.

2. Deletion of the word "negligent" from the definition of Wrongful Act.

3. Advancement of the Costs of Defense subject to Allocation provisions.

4. Setting of the Allocation percentage up to and including full entity coverage.

5. Modification of the definition of claim to include oral or written demands and administrative proceedings.

6. Automatic coverage for new subsidiaries.

7. Marital Estate extension.

8. Deletion of the "insurance" exclusion.