29.06.26

Directors’ and Officers’ (D&O) Insurance : What to look out for.

After assessing your company’s risks, you’ve made the decision to purchase Directors and Officers (D&O) insurance. Now what?

It’s essential to understand your D&O policy, including the limit and excess, what’s covered and, most importantly, what is not covered. Why? Because whilst you may assume you’re covered for a claim, policy exclusions may apply. So as time consuming as it may be, it’s essential to read the fine print in your policy, as the exclusions may affect the cover of potential claims.

Key Features of D&O Policies

• Limits of Indemnity. One of the most important factors to consider when buying a D&O policy is the limit of indemnity. You will have the option to consider different limits for your individual requirement and you must decide how much is sufficient to cover your exposure. This process includes assessing your company’s specific circumstances and the possibility of a claim arising, alleging a wrongful act.
  • For the majority of policies, the limit of liability is an aggregate limit for all claims during the period of insurance, and typically includes the costs of defending the claim. This means that once the limit has been exhausted, any additional claims arising during that policy period will not be covered.
  • There also may be sub-limits for certain types of loss, such as reputational crisis and emergency defence costs, written into the policy. Be sure that you are comfortable with the limit of indemnity set forth in your policy because claims that exceed this limit will be excluded.
• Policy Period. Typically, D&O policies only cover claims first made and notified to the insurer while the policy is in effect. It is important to carefully review the start and end date of the policy to ensure that you are fully covered.
  • There can also be language in the policy that provides for a discovery period (or run-off terms) if the policy has not been renewed, under which a claim may still be covered, so long the wrongful act giving rise to the claim occurred during the period of insurance.
  • The majority of D&O policies also offer the option to purchase an extended reporting period in the event you or the insurer declines to renew the policy. Like the discovery period, this extended reporting period only applies to wrongful acts committed prior to the expiry of the original insurance period.
  • Terms for the discovery period and extended reporting period will differ from one policy to another; therefore it is important to be aware of the exact terms and conditions in your specific policy. Also, it is important to make sure that the policy is irrevocable by the insurer, other than for non-payment of the premium.

• Claims made after retirement or resignation. When a director retires or resigns, he or she is still vulnerable to claims of wrongful acts if those acts occurred prior to their departure.
  • Most policies will grant directors retiring or resigning an additional lifetime discovery period (run-off) at no additional cost. However, there can be stipulations and conditions placed on this discovery period.
  • Read your policy carefully to make sure that past, present and future directors are covered under your policy. If you are thinking about retirement soon, be aware of the length of the discovery period for retired insured persons in your policy and the conditions associated with it.

Types of Exclusions in D&O Policies

Some exclusions that insurers and insureds dispute about concern incidents that happened or allegedly happened before the D&O policy was first incepted. In some cases, the insurer may decline the claim, whilst in others, the insurer may render the policy void.

• The Known Circumstances Exclusion. With this exclusion, the insurer will not pay for claims that arise from a wrongful act that occurred prior to the first inception date of the D&O policy.
  • The insurer determines that the insured either knew or could have foreseen that circumstances that could give rise to a claim, already existed prior to the inception of the policy. This exclusion is found more frequently in private and not-for-profit policies than in public company policies.
  • What is important to note is that the premium may not be returned to the insured if it is determined that they withheld their knowledge of those circumstances prior to the start of the policy.

In the case of a rescission scenario, the premium is returned to the insured. Rescission means that the policy is rendered void after the insurer discovers that the insured answered untruthfully to any of the warranty questions on the insurance application.  

Warranty questions ask the applicant if they know of any fact, circumstance or situation that might reasonably be expected to give rise to a claim. Rescission can also occur if the applicant provided false or misleading information in the company’s financial data.

• Prior Acts Exclusion.Similar to the known circumstance exclusion, this exclusion is also concerned with pre-policy circumstances. The insurer will not cover wrongful acts allegedly committed or attempted before the cover was first incepted. A wrongful act is that which damages the rights or financial interests of another party.
• Bodily Injury Exclusion. Most D&O policies come with a bodily injury exclusion as standard. However, it is possible for this exclusion to not apply in respect to a Corporate Manslaughter allegation or an Employment Practices Liability matter. Make sure you know whether there is a bodily injury exclusion in your policy, when it applies and whether it is absolute (broad or narrow).

Other exclusions found in D&O policies relate to the duty to defend, and defence expenses in the event of a claim. If the insurer has the duty to defend, then they also have the right to select the insured’s defence and have greater control over the rates and billing practices of the defence counsel.

• Reasonableness of Defence Fees. This is more prevalent in private company and not-for-profit D&O policies, as most of those policies give the insurer the right and duty to defend the insured’s claims, whereas, public companies retain the right to choose their own defence counsel.
  • If this is written into your D&O policy, it means that the insurer will only pay for “reasonable and necessary” defence fees. Some insurers also provide detailed information on litigation guidelines.

• Consent to Settle and the Hammer Clause.If the insurer has no duty to defend, such as in cases against public companies, then they have no automatic right to settle the case at a time of, and on terms, of their choosing. As a result, the insured may elect to continue with litigation, even if that would exhaust the policy limit, because the defendants don’t want settlement of the case to be perceived as an admission of their wrongdoing or incompetence.
  • This can create tension between insurers and the insured, especially if the insured does not include the insurer in the settlement discussion. Therefore, some insurance policies have a consent to settle exclusion in the policy, prohibiting the insured from settling the claim without the insurer’s prior written consent.

Most D&O insurers expect that D&O insurance is only a part of a company’s wider insurance portfolio. In some cases, however, this assumption doesn’t always prove to be true. Certain firms may go without Difference in Cover/Difference in Limits insurance or even Public/Products Liability insurance policies, making D&O one of their only forms of insurance. Because of this, many D&O insurers write exclusions in their policies stating what claims they won’t cover because other types of insurance would potentially cover the claim.

• Other Insurance Exclusions. D&O insurance is just one form of insurance in a comprehensive risk management plan for most companies. Because of this, most D&O policies have exclusions for claims that involve bodily injury, property damage claims, which could be covered by other types of insurance, such as a Public/Products Liability policy. In the event of a claim, the insured should notify all insurers from their various policies, in order to allow the insurers to determine who is liable for the claim.
• Contractual Liability Exclusion. This exclusion is especially pertinent to private companies and not-for-profit organisations, that have broad entity cover under a D&O policy. Since contractual obligations are not liabilities imposed by law but rather an obligation that is voluntarily undertaken, many D&O policies have an exclusion that prevents insurers from having to cover claims relating to breaches of a contract that the policyholder has entered into with another party.

When examining this exclusion in your D&O policy, make special note of the wording of this clause. This exclusion can substantially affect the extent of your cover under the policy—the narrower the scope of the exclusion, the more favourable to the policyholder.

D&O insurance protects directors and officers from wrongful acts resulting from poor business decisions, but most policies do not protect them from gross misconduct. These exclusions include:

• Conduct Exclusions. Most D&O policies have exclusions that deny cover for certain types of misconduct. There are two categories of misconduct exclusions:
  • 1. For loss relating to fraudulent or criminal conduct
  • 2. For loss relating to illegal profits or remuneration to which the insured was not legally entitled
  • It’s especially important to look at the wording on these exclusions in the policy; subtle wording differences can significantly impact the extent to which or even whether a policy will respond.
• Insured vs. Insured Exclusion. In some D&O cases, one insured director may bring a claim against another insured director, and some insurers do not want to cover this because they don’t want to get involved in the infighting between a company’s directors and officers.

Conclusion

D&O insurance is vital for protecting the directors and officers of your company against allegations of wrongful acts; but simply purchasing the policy won’t benefit you unless you understand extent of your cover.

Do you understand your D&O insurance policy? Contact Cox Mahon Limited today for more information about your cover and exclusions.

Information provided by Andrew Kenyon – Director, Cox Mahon Ltd.