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| InterWest Insurance Services, Inc. fields a team of experienced insurance professionals who have managed the negotiation, purchase and maintenance of pre- and post-IPO Directors and Officers (D&O) Liability Insurance contracts for over two decades. InterWest and its affiliates have access to the global public and private D&O insurance marketplace. Our management liability specialists currently advise a diverse group of financial institutions, privately owned companies and publicly traded companies. |
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| In today's litigious environment, Directors and Officers (D&O) Liability Insurance coverage is an essential part of managing a private or publicly traded company. Directors and Officers are held to a high standard and have legal responsibilities to shareholders, investors, creditors, employees and others. |
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| Why Buy Directors and Officers Liability Insurance? | Top of Page |
Over the past decade, the role of D&O's has evolved into much more than a prestigious title and rubber-stamp approval of management decisions. Increasingly, the public is holding D&O's responsible for the day-to-day operation of their companies.
D&O's are held responsible for implementing sound corporate policies and procedures and for monitoring management's implementation of them. This can include day-to-day decisions such as sound investment management, release of non-public information, conflicts of interest, hiring and firing decisions, and corporate policies regarding discrimination, sexual harassment, benefit plans, mergers and acquisitions, just to name a few.
- Investment Management - D&O's can be held personally responsible for investment decisions in managing the company's portfolio of assets. Claims can result from choosing the wrong asset manager, failing to have policies limiting the type and duration of asset purchases, failure to require board approval for purchases in excess of certain limits, etc. Regardless of the reason, D&O's can be brought into a suit for failure of the company's portfolio to perform.
- Release of Information - The SEC requires companies to abide by specific procedures for disseminating company information to the public. The SEC can impose both criminal and civil penalties for improper release of information by the Company. While D&O insurance is not intended to protect against intentional wrongdoing, a well-written D&O policy can protect the innocent as well as company assets against allegations made by the SEC, shareholders and others, until final adjudication of wrongdoing.
- Conflicts of Interest - This is a major area for potential lawsuits against Directors and Officers, who typically serve on multiple boards and have investment portfolios that may encompass competitive situations. It is common, for example, for large physician groups in a hospital to have board representation. It can be alleged that these doctors have a conflict of interest when negotiating with other physicians. As another example, it is common for companies to have their attorneys, accountants, brokers and other professional consultants on their boards. This is usually a very bad practice, unless such professionals recuse themselves from voting on specific issues and refrain from providing professional services. Companies should adopt formal Conflict of Interest policies to monitor such conflicts. Shareholders and other potential defendants will utilize any angle they can in order to win a verdict.
- Hiring and Firing Decisions - Although Directors and Officers are not individually involved in most hiring and firing decisions, they assume ultimate responsibility for ensuring that their company is well run and provides a safe and discrimination-free work environment. The D&O's approve the company's policies and procedures regarding hiring, firing and promoting employees. They are also responsible for supervising senior management in the implementation of these procedures. Both the Company and the individual D&O's can be named in an employment-related claim. A properly worded policy protects all concerned parties.
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| Issues to Consider in Evaluating D&O Coverage | Top of Page |
Directors & Officers Liability Insurance is available from many insurance carriers. No two policies are exactly alike. Our Professionals deal with the unique features of each policy and negotiate changes to obtain the broadest possible coverage to fit our client's needs and budget.
- Policy Limits - Standard limits for most small- to medium-sized organizations start at $1 million, but most public companies buy at least $5 million in coverage. Companies typically buy an individual claim amount and an aggregate. For example, a minimum policy may be a $1 million/ $2 million policy. This means that the insurer will pay a maximum of $1 million for any one claim, but will pay an aggregate amount of $2 million in the given policy year. This could mean one million-dollar claim and ten $100,000 claims.
- Claims-Made Coverage - Almost all polices are written on a "claims-made" basis. However, almost all policies have an extended reporting endorsement. This means that, when you cancel the policy, you may purchase coverage for a period of time at a predetermined rate to cover later claims relating to the expired policy period. That rate can vary from 75% of the expiring premium to more than 250%. Usually, that rate is not negotiable; however, you should be aware of terms offered by different insurers.
- Does The Policy Cover The Company Itself? - Most D&O policies provide coverage for an individual Director or Officer (usually Coverage Part A) and coverage for the Company's obligation to indemnify a Director or Officer (Coverage Part B). Some policies do not cover the actual Company (the "Entity") in a D&O suit (Coverage Part C). You should know if Coverage Part C is included in the policy.
- Do Your By-Laws Indemnify the D&O's? - A D&O policy claim can be triggered by the legal obligation of the policy holder (the Company) to defend a case or pay a settlement. Are your D&O's indemnified in the Corporate By-Laws? Coverage Part B protects the Company's balance sheet when there is an obligation to defend the D&O's.
- Does your Policy Segregate Defendants? - Most D&O policies will exclude coverage for fraud or other criminal activities at some point. Although insurance policies should not provide defense for criminal actions, it is necessary to provide defense for the Company and other innocent parties that might be named in a lawsuit due to a criminal action on the part of someone else. Without some form of segregation clause, innocent defendants may be without D&O coverage if one of the other D&O's or even an employee commits a criminal act.
- Does your Policy Cover Fines, Penalties or Punitive Damages? - Settlements for large D&O cases can involve punitive damages, which can be even greater than the actual damages. Most policies specifically exclude punitive damages, but policy modifications can be made for coverage in some situations.
- Employment Practices Liability - Employment-related claims are a growing risk for Directors, Officers and Companies. No entity with employees should overlook Employment Practices Liability insurance (EPLI). Most D&O policies can provide some form of EPLI coverage. In some circumstances, it makes sense to include EPLI coverage with D&O. In other cases, separate EPLI coverage is the best strategy. The choice can be a matter of policy limit allocation, premium, deductible or breadth of policy terms and conditions.
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