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Directors and Officers (D&O) Coverage

Directors and Officers (D&O) coverage protects the directors and officers of corporations and other entities against legal judgments and related expenses resulting from allegations of wrongful acts committed in their individual capacity as company directors and officers. Mercator Risk Services writes all types of D&O Insurance coverage (see here).

The "individual capacity" is the most important aspect of this coverage. Directors and officers are fiduciaries of corporations, responsible for managing the affairs of these organizations. They must act with due diligence in carrying out their responsibilities and can be held personally liable if their neglect results in a loss to the corporation or its shareholders.

The larger a company, the more susceptible it is to claim against its directors and officers. Anyone with an interest in a corporation shareholders and stakeholders alike-can file a claim if they feel wronged by corporate directors or officers. Defending a D&O claim, even when it's not valid, is a financial and emotional drain on involved individuals and their companies.

The exposures presented by directors and officers accounts vary considerably. Account types can include:

In addition to the corporate form, a variety of operating characteristics can impact D&O coverage. For example, the potential for claim and the types of claims are very different for a non-profit than for a public company.

In selecting and pricing D&O accounts, underwriters look at a variety of factors. These include the obvious ones, such as corporate form and size. Other factors include location, industry, mergers and acquisitions, and loss experience.

Because of these variables, D&O policies come in a wide range of types and are offered by a wide range of insurers. Often, the best price, coverage and service option may be provided by a smaller specialty insurer rather than a well-known multi-lines insurer. Because of the specialty nature of the business, D&O coverage is traditionally considered to be part of the specialty lines insurance market. In many cases, coverage is provided in the surplus lines insurance market rather than the admitted market.

Coverage

D&O is provided on a claims-made basis. Coverage is typically provided in two parts: direct coverage to the directors and officers and corporate reimbursement. The direct coverage part is only utilized when the corporate entity is not permitted to reimburse the directors and officers.

D&O coverage can become very complicated, and coverage changes depending upon the type of insured entity. For example, volunteers are often covered under D&O policies for non-profit entities, but not usually provided under other policies. Some policies include entity coverage, and some include employment practices (EPL) coverage.

Except for some very specialized policies, D&O coverage does not provide protection to the directors and officers of a professional organization for professional liability claims. This is because the organization should buy a separate professional liability policy.

For D&O coverage, broader policies are not necessarily better. For example, employment practices coverage (EPL) can be purchased for small to medium sized firms for a very low price with deductibles lower than most D&O policies. Rather than allow an EPL claim to erode D&O limits, it is often better to purchase a stand-alone EPL policy and leave the D&O policy to respond only to D&O claims.

Some corporate D&O coverage provides protection from claims arising out of the issuance of public or private securities, and some do not. Some policies provide only limited protection. Each corporation has different needs, and the policy should match those needs.

Why direct reimbursement coverage?

Direct reimbursement of the directors and officers by the D&O policy is necessary because there are situations where, despite corporate indemnification provisions in the company by-laws, corporate reimbursement may be disallowed. This can occur in situations such as shareholder derivative actions, where the shareholders as a class sue the directors and officers on behalf of the company. In this situation, as a matter of public policy, the corporate entity is not permitted to reimburse the directors and officers and the policy responds directly. Another example is bankruptcy. There are usually no funds available to directors and officers for legal expenses when a company has gone bankrupt or has been liquidated.

Note that the exposures noted above mean that corporate self insurance of D&O coverage is a very bad idea. Directors and officers can be left with no resources to pay a D&O claim if a D&O policy is not in force.

Safe Harbor Statutes

Certain types of entities are protected under safe harbor statutes. For example, some states have provisions protecting directors of non-profit entities from losses. Unfortunately, these safe harbor statutes do not eliminate the need for insurance. The provisions only protect the target from a final adjudication, not from a lawsuit being filed. In addition, plaintiffs attorney's have become adept at structuring their complaints so as to avoid the safe harbor provisions.

Directors and officers are being held to higher standards of conduct than in the past, and lawsuits without merit have grown considerably throughout the recent past. They are continually exposed to the possibility of claims being made against them for negligent acts, errors, or omissions in connection with the services they provide.

Mercator Risk Services writes directors and officers coverage for a wide variety of types of entities. We offer a broad portfolio of D&O products, in many cases customized to meet the needs of a variety of types of corporate or non-profit entities.

Directors and Officers Coverage is a complex and important coverage for a range of accounts. From small non-profits to large publicly traded corporations, Mercator Risk Services can provide D&O insurance coverage.

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