Learn about potential D&O liability exposures for both for-profits and non-profits.
Discover some differences in D&O Liability policy wordings that impact coverage.
Liability. A single word that bears a lot of weight. Whether you own or manage a business or non-profit, you have liability exposures. A General Liability insurance policy is a must, but its focus is bodily injury or property damage liability claims resulting from the normal course of business operations. For liability associated with managerial decisions or mismanagement, a Directors and Officers (D&O) Liability insurance policy should be considered.
Some potential D&O liability exposures include allegations involving:
- employment discrimination
- misused funds belonging to the entity
- violation of workplace laws or governmental regulations
- managerial neglect in enforcing cyber risk management controls resulting in costly customer identity theft
- bankruptcy resulting from negligent business decisions by directors and officers, who may be sued personally to pay the entity’s financial obligations
CAVEAT: Liability exposure does not mean there is liability coverage. This is the case for any liability insurance policy. Actual policy terms, conditions, and limits always apply. With respect to D&O Liability policies in the market today, many different insurance companies use different policy wordings, which impacts the level of protection provided.
With the above caveat in mind, the following highlights provide a framework of a few basic D&O Liability insurance policy features to be aware of and consider:
- Coverage is typically on a claims-made basis. The claim or notice of potential claim must be reported to the insurance company during the policy period, subject to the policy retroactive date and/or continuity date. Not only must the insurance company receive notice during the policy period, there is no coverage for claims arising out of acts prior to the retroactive date, or for claims arising out of acts that the insured had actual or constructive knowledge of prior to the continuity date.
- Policy definitions and exclusions. Pay attention to the definition of “Wrongful Act”. Is it broad or limited in scope? Understand that the merging of policy definitions and exclusions may result in no coverage for exposures you expected to be covered by a D&O Liability policy. For example, be aware of who and what is an insured under the D&O Liability policy. If employees and/or volunteers are insureds, and the policy contains an Insured Vs. Insured Exclusion, there would be no coverage under the D&O Liability policy for a claim of age discrimination against any of the other insureds. A separate Employment Practices Liability Insurance policy should be considered for liability claims associated with employment-related disputes such as discrimination and wrongful termination.
- Policy Limits. Most D&O Liability policies today include defense costs within the limit. That means the policy limit may be exhausted by payment of defense costs only, and the insurance company has no further obligation to the insured. Some companies offer options to purchase separate limits for defense costs.
- Policy Form. Is the D&O Liability policy a stand-alone policy, or is it bundled with other liability coverages? If in bundled form, is there a separate limit for each type of liability coverage? How are defense costs treated in bundled policy form? Does a single limit apply to defense costs for all liability coverages, or separately for each liability coverage? Duty to Defend Vs. Reimbursement. Many small and medium-sized non-profit and for-profit entities purchase D&O Liability insurance for legal expertise they do not have in-house. A Duty to Defend policy form provides added peace of mind for the insured, as the insurance company is bound to handle the claim or potential claim from the time of first notice. A Reimbursement form still requires the insured to give prompt notice of claim or potential claim, but the insurance company is not required to provide immediate defense. From a practical standpoint, the insurance company will monitor the status and handling of a claim on a Reimbursement form.
Richey-Barrett Insurance is your Trusted Choice Independent Insurance Agency for commercial insurance. Call us to discuss your needs for basic and specialty commercial insurance coverages.
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