By fulfilling the role of an officer or director of an organization, these individuals are assuming liability.
- Obedience: They are expected to perform their duties in accordance with the organization’s articles of incorporation and bylaws.
- Loyalty: They are to discharge duties in good faith, in an honest manner, without self-dealing, personal profit, gain, or misuse of confidential information.
- Fiduciary Duty: They are to act in the best interests of the company, thereby avoiding conflicts of interest. When such conflicts arise, they are to disclose them and exercise due care to avoid any transaction not fair to the company. Although allowed to rely upon outside information, they must always make informed decisions – ignorance is not a defense. They must be forthright and truthful in dealings and not misrepresent fact.
Who is covered
D&O insurance policies define to whom the coverage applies. Generally, the following are included:
- Past, present or future directors, officers, managers, trustees, members of a board of managers, in-house general counsel, or equivalent of these positions
- Employees (part time, seasonal, leased, temporary), and volunteers
- Named Insured: The Organization listed in the policy
- Subsidiaries: If an organization has subsidiaries, operating companies, or affiliates, the definitions in the policy need to be broad enough to cover them. Typically, coverage is determined based on ownership and control. If the organization owns between 51% and 100% of the entity, and controls 51% or more of board voting, coverage is generally provide. Entities in question should be added to the policy by endorsement, preventing disagreement in the event of a claim. Be careful to only add entities your company would want to defend.
Key Provisions and Definitions
Claims-Made Coverage: D&O insurance is usually written on a claims-made basis, meaning coverage is triggered when the claim is first made, not when the incident occurred. This is because many allegations are manifested over time, after the policy term has ended. Further, many actions taken by a board do not manifest immediately, but over a longer period.
Claim: written demands for monetary and non-monetary relief, civil and criminal proceedings, administrative or regulatory proceedings, and requests for mediation or arbitration
Loss: costs of defense, monetary judgements, settlements, compensatory damages, punitive or exemplary damages, civil fines, and penalties assessed against individuals
Wrongful Act: If not excluded, it is covered.
Hammer Clause: Most directors and officers insurance policies state the insurance carrier cannot settle a case without consent from the policyholder. However, if the carrier wants to settle and the policyholder withholds consent, the hammer clause defines how additional costs are shared. The carrier will always pay the initial settlement, but anything additional will be split between the carrier and policyholder. An 80/20 split between the carrier/policyholder is common today, where the policyholder becomes responsible for 20% of any amounts over what the carrier might have initially settled.
Rescindability: A provision providing circumstances where a carrier may rescind the policy, usually when defrauded. Many carriers offer directors and officers insurance policies that are non-rescindable, and only those parties responsible for the fraud lose coverage.