Sunday, March 16, 2008

What does a D&O policy cover?

One of my agents just asked me for a brief overview of what a D&O policy is supposed to do. One of his clients has an attorney who is recommending they purchase the coverage (good attorney!!). But apparently, the attorney could not explain to the client's satisfaction *why* they should have the coverage.

Below is a copy of the very high level overview. Feel free to use it to educate your insureds.

D&O Coverage Overview

By law, directors and officers of corporations bear legal responsibility for certain actions pertaining to their management and oversight of the entity. This responsibility arises generally from the three common law duties of directors and officers. They are:

The Duty of Care

The Duty of Loyalty

The Duty of Obedience

When a director or officer violates one of these duties, claims can arise, brought by shareholders, customers, vendors, competitors, employees, or regulatory or governmental entities. Claims brought by shareholders can be made on their own behalf, or on behalf of the corporation (known as a “derivative” suit).

The corporation may or may not be able to indemnify directors and officers for their legal expenses and any settlements or judgments. Whether the entity is able to indemnify can be a matter of legality, parameters of the bylaws, or financial ability.

Directors and Officers liability policies are a common tool used to ensure that the entity will have the financial means to indemnify directors and officers for their expenses. The policy also removes some of the questions regarding legality or bylaws, because the entity is not forced into an adversarial position with the Ds & Os in order to protect its own assets.

Most directors and officers liability policies for privately-held entities have another coverage feature – the entity is also an insured. This is a recent coverage development, having begun in 1994.

This protection for the entity for claims brought against it for its own actions brings into coverage many causes of loss that used to be considered “business risk” and uninsurable.

Claims from competitors, vendors, and customers regarding business practices, competitive position, corporate conduct, and sometimes even contractual breaches can frequently be subject to coverage at least for defense, and sometimes for indemnity.

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