We regularly represent policyholders who are seeking to recover insurance proceeds due to them under a wide variety of individual and business policies. Outside of litigation, we are also asked frequently to counsel clients about insurance that may be available to cover risks and losses in their business and personal lives.
One of the most commonly misunderstood policies that we encounter for our business clients is the directors and officers liability policy, commonly known simply as the “D&O” policy. D&O policies provide coverage for claims alleging “wrongful acts” by corporate directors and officers. cThe D&O policy is not a standardized policy, meaning that the scope and terms of what is covered can vary widely, and the policy documents need to be carefully reviewed in each case to determine applicable coverage.
In sum, D&O provides insurance for “loss” caused by a “claim” that alleges one or more “wrongful acts” by an “insured person” acting in his or her insured capacity. Because the policies are not standard forms, each of these definitions, and others, can vary widely from one policy to the next. Almost all D&O policies include past, present and future directors and officers within the scope of coverage. Some go farther to include, for example, audit committee members, non-officer financial personnel and/or in-house counsel. Some private company policies are broader and include “all employees” as “insured persons.” Many policies also provide separate coverage for certain claims against the company.
Covered “loss” varies with respect to punitive damages and the multiplied portion of any statutory damage award (e.g., Chapter 75 treble damages). Covered “loss” does not include the payment of restitution or disgorgement of “ill-gotten gains.” Accordingly, how a settlement is structured and how payments are characterized can be critical to the availability of indemnification from the carrier.
D&O policies are typically “claims-made” policies, which means the policy is triggered if the “claim” submitted for coverage was first made and reported during the policy period. The definition of a “claim” typically includes lawsuits, arbitration proceedings and formal written notices of criminal charges or government investigations, but may extend more broadly to include other written documents, including demand letters and tolling agreements. Sometimes the insured will purchase an extended reporting period (called “tail” coverage) that extends the period of time during which claims can be reported to the carrier and still be treated as having been “made” under the policy.
“Wrongful act” is a broad term and typically includes any actual or alleged act, error, omission, misstatement, misleading statement, neglect or breach of duty by any insured person acting in his or her insured capacity for the company. Broadly, this is intended to capture any matter claimed against the person by reason of his or her status as a director or officer.
Examples of claims likely to implicate D&O coverage include claims by shareholders for securities fraud or breaches of fiduciary duty by management. Other typical claimants include creditors, employees, regulators, customers and bankruptcy trustees, any or all of whom could assert claims seeking recovery for alleged misrepresentations or other mismanagement. Both public and private companies should, and often do, have D&O insurance, but many smaller private companies and executives are surprisingly unaware of the scope and extent of coverage they have in this area.
There are a number of D&O exclusions that frequently arise. The so-called “bad acts” exclusions preclude coverage for claims brought about or contributed to by the insured’s intentionally dishonest, fraudulent or criminal actions or other willful violations of the law, as well as claims alleging profit gained by an insured to which that insured is not legally entitled. Another common exclusion, particularly in the case of privately-held companies, is the so-called “insured v. insured” exclusion, which precludes coverage for claims brought by or with the solicitation or assistance of one insured against another. The idea is to prevent collusive suits. Because not every action involving an insured as plaintiff implicates that concern, there are a number of carve outs that can be negotiated by the insured, including non-collusive shareholder derivative actions, whistleblower actions and actions involving former D&O’s who have been gone from the company for years.
D&O policies are typically “wasting asset” policies, meaning that every dollar paid to defense counsel is one less dollar available to pay a settlement or judgment to the underlying claimant. The policies also contain a number of exclusions intended to consolidate related claims into a single policy period (and single set of limits). For example, “inter-related wrongful acts” are treated as a single claim, first made at the time the earliest claim was made, and covered only by the policy in effect at that time.
Disputes frequently arise regarding the proper construction of definitions, exclusions and other terms in insurance policies, and D&O policies are certainly no exception. This post includes just a sampling of the issues that are frequently disputed under such policies. A slight difference in the construction of a word here or a phrase there can mean the difference between complete protection and financial ruin for an executive or small business policyholder.
At Parry Tyndall White, we have significant experience helping individual and business policyholders recover insurance proceeds that are due to them, including claims under D&O policies and other types of liability policies. If you believe that you or your business has been wrongly denied coverage or has otherwise suffered damages from an insurance company’s refusal to live up to its policy obligations, please give us a call at 919.246.4676 to set up a free initial consultation.