Here in a tag-team blog, solicitors Kemsley Brennan and David Hinder (pictured below) outline 10 key questions you should ask your broker or insurer before buying directors' and officers' (D&O) liability insurance to ensure you get effective cover for your premium.
1. What are the standard insuring clauses?
Standard D & O Policies generally contain three insuring clauses:
- Directors' and officers' liability clause (Side A clauses): These clauses provide coverage to individual directors for losses caused by wrongful acts done as a director, when the company cannot indemnify the director. Generally these clauses have no deductible (i.e. excess).
- Company reimbursement clause (Side B clauses): These clauses operate when the company can indemnify the directors in respect of loss arising from their wrongful acts. Generally a deductible applies.
- Corporate entity clauses (Side C clauses): These clauses provide coverage for the company in respect of its corporate liability. Payment of claims under Side C clauses usually reduces an insurer's liability under other insuring clauses.
2. Who should be covered?
The definition of a director must include the relevant corporate decision-makers. Most policies have definitions that include people based on their position; other policies have broader functional definitions that consider a person's capacity to influence their organisation.
3. How broad is the “claim” definition?
To assess whether a D & O Policy provides coverage, you must first determine whether the policy definition of "claim" is satisfied. The definition should encompass demands for compensation or non-pecuniary relief, civil and criminal proceedings and administrative and regulatory investigations and prosecutions. Most "claim" definitions require that a director committed a "wrongful act" in their insured capacity: namely as directors of the insured company. D & O policies typically will not cover claims arising from wrongful acts done in another capacity.
4. How broad is the "loss" definition?
You should always review this definition, as the policy's definition of "loss" may limit the cover available under the policy.
5. What exclusions apply?
Many exclusions limit the cover provided by D & O Policies. Three common exclusions are:
- Fraudulent or dishonest conduct: Cover is typically excluded if a director is found to be dishonest. Some exclusions use "final adjudication" wording: this is preferable, as the insurer pays the defence costs until a final finding of fraud or dishonesty is made.
- Professional indemnity: These clauses typically exclude coverage for mistakes directors make in providing professional services to the insured company. The scope of these exclusions varies between policies.
- Prior or pending litigation: Claims involving facts, situations, or occurrences that were the subject of demands or pending litigation on or prior to a particular date are generally not covered.
6. Is the severability clause satisfactory?
D & O policies should contain a severability clause: such clauses allow innocent directors to claim coverage if other directors are denied coverage due to their fraud or dishonesty. Broader severability provisions benefit directors. Most insurers now offer broad provisions.
7. Is the allocation provision appropriate?
Claims often contain some allegations that fall within the policy and others which do not. The defence costs and any settlement costs must then be allocated between those allegations which are covered and those which are not, as insurers will not pay to defend or settle matters excluded by the policy.
8. When does the insurer pay defence costs?
It is important that the insurer pays defence costs as they are incurred, or on a "current basis", rather than reimbursing the insured when a claim is over.
9. What is the territory?
The policy should provide cover in all jurisdictions in which the company operates.
10. What are suitable policy limits and deductible?
Assessing whether insurance cover is adequate requires an assessment of a company's exposure to potential claims and the nature, likelihood, frequency and defence costs of those claims. The operation of the insurance policy and the size of any deductible must be considered.
Kemsley Brennan is a partner and David Hinder is a solicitor in the insurance team at Colin Biggers & Paisley.
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