Traditional director and officer liability insurance coverage is actually two distinct coverage's 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 coverage's 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 judgments 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, miss Legal developments of recent years and the explosion of lawsuits by employees against employers; including wrongful termination, sexual harassment and discrimination, have driven a need for employment practices insurance. Coverage for liability arising out of employment related practices is commonly excluded on a business’ Commercial General Liability policy. With this in mind, an employer may need this special coverage to protect the corporation from such situations as discrimination, sexual harassment and wrongful termination. Businesses in the United States, especially in California, are faced with a variety of laws and regulations, to which they must comply in their continuing employment practices. These laws include:

Title VII, Civil Rights Act of 1964 prohibits an employer from discrimination on the basis of race, color, sex, national origin or religion.

Age Discrimination in Employment Act prohibits discrimination on the basis of age against employee 40 years of age over older.

Americans with Disabilities Act of 1990 (ADA) prohibits discrimination against qualified persons with disabilities.

The Civil Rights Act of 1991 amends the above acts by creating right to jury trials. If successful, compensatory and punitive damages are awarded for claimants suing under these federal statutes.

Fair Employment and Housing Act prohibits employment discrimination on the basis of race, color, national origin, ancestry, sex, physical or mental disability, age (40 or above), religious creed, medical condition, and martial status.

California Labor Code, Section 1102.1 prohibits discrimination for employment based on an employee’s actual or perceived sexual orientation.

California Health and Safety Code, Section 199.21 states that the results of an AIDS test will not be used to determine insurability or suitability for employment.

The main purpose of the above stated laws are to provide a work place free of discrimination and harassment; and adhere to fair hiring practices and procedures.

Insurance Products

Insurance products available provide coverage for the following exposures:

Discrimination occurs when due to race, color, religion, age, sex, disability, pregnancy or national origin, the following takes place:

The termination of an employment relationship; or

A demotion, failure or refusal to promote; or

The failure or refusal to hire; or

The denial of an employment benefit; or

The taking of any adverse or differential employment action.

Sexual Harassment means unwelcome sexual advances, request for sexual favors or other verbal physical conduct of sexual nature that:

Are made a condition of employment; or

Are used as a basis for employment decisions; or

Create a work environment that interferes with performance.

Wrongful Termination occurs when the termination of employment is:

Against the law and wrongful; or

In breach of an implied contract.

Insurance Coverage is available from several Insurance Carriers . Limits available range from $250,000 to $5,000,000. These limits will include a deductible based on the amount of premium. Defense Costs are included within the limit.

Exclusions of the coverage include, but are not limited to:

Worker’s Compensation Liability;

Willful failure to comply with the law;

Contractual Liability;

Employee Retirement Income Security Act (ERISA);

Strikes, lockouts or picket lines resulting from labor disputes;

Consequential loss of any claimants domestic partner, spouse, child, parent, brother or sister;

Worker’s Adjustment and Retraining Notification Act;

Occupational Safety and Health Act (OSHA);

Reorganization / Downsizing actions and facility closing (within 60 days of the event of more than 20% of the total number of employees);

Punitive damages;

False or fraudulent claims.

Conditions and documentation for placement of coverage typically include:

Signed, Completed Application

Current Financial Statements

Copy of Employment Application

Written Grievance Procedures

Anti-Sexual Harassment Policy Statement

EEO Policy Statement

Performance Evaluation Form