Wrongful acts include omissions, errors, misstatements, misleading statements, neglect, or breach of duty. Beneficiaries are the directors, officers, or the corporation itself.
Directors and officers can be personally sued by shareholders, creditors, employees, suppliers, customers, competitors, or regulators. Suites can be bought for various reasons- Shareholders might sue for insider trading, creditors might sue for misrepresenting the financial health of the company, or competitors might sue for anti-trust or unfair trade practices.
Being personally sued can be crippling for individual directors or officers. Just the risk of lawsuits might cause qualified individuals to refuse to take director or officer positions, or it could motivate existing officers or directors to act with excessive caution in pursuing a corporation’s interests. Directors and Officer's (D&O) insurance seeks to alleviate these issues by insuring directors or officers against personal liability for their wrongdoing.
Today, some policies are still purchased by individuals to cover themselves. These policies may be purchased by businesspeople who sit on multiple boards, lawyers, and accountants serving as directors, or officers may purchase professional indemnity D&O policies for themselves. This covers them for professional errors and omissions that their corporation’s policy generally won’t cover. In some jurisdictions, corporations aren’t allowed to pay for D&O insurance, so a corporation will split the cost with its directors and officers to comply.
Policies paid for by corporations can have as many as three layers of coverage. These are referred to as the A portion, B portion, and C portion-or A-side coverage, B-side coverage, and C-side coverage.
Coverage
- A-Side Coverage
A-side coverage directly covers directors and officers. - B-Side Coverage
B-side coverage indirectly covers directors and officers by covering the corporation for claims it pays on their behalf. - C-Side Coverage
C-side coverage, also known as entity coverage, covers the corporation itself for claims arising from securities litigation or other special types of claims not covered by general liability policies.
D&O policies cover claims made during the policy period, and it doesn’t matter when the wrongful acts occurred. A claim arising from a lawsuit filed this year for a wrongful act committed last year is also covered by this year’s policy.
D&O policies tend to be customized for the unique needs of each client. Coverage is generally for some fixed level of claims per year. For example, if a large claim is paid on behalf of one director, this can leave other directors, officers, or the corporation itself exposed for the remainder of the year. Policies cover damages (usually including punitive damages) and defense expenses up to the amount of coverage. Policies may or may not cover outside directors. They also vary concerning cancellation abilities, exclusions, and coverage for non-officer employees named in suits along with officers or directors. Policies with C-side coverage may include language specifying some precedence for A-side or B-side claims versus C-side claims.
Most policies have an exclusion against one insured suing another. Another standard exclusion is for a failure to maintain adequate insurance. If a corporation’s headquarters burns down and its officers let the property insurance lapse, the corporation cannot file a claim under its D&O policy.
Many corporations supplement D&O policies with employment practices liability coverage (EPL coverage). This protects against wrongful dismissal claims, failure to promote, sexual harassment, and other violations of employment or anti-discrimination laws. EPL coverage may be purchased as part of a D&O or general liability policy. It can also be purchased as a stand-alone policy.
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