Understanding the Directors and Company Officers Liability Policy Insurance

Understanding the Directors and Company Officers Liability Policy Insurance

Many large corporations and multinational companies are finding it rather difficult to attract many legible, highly intelligent, and exceptionally skilled company directors and officers to accept a job offer. In fact not even higher compensation can make these people agree to have a contract with these multinational companies.

Part of the strategic move that company owners have initiated is by giving these exceptionally and highly skilled people a policy insurance known as the Directors and Officers Liability Policy Insurance. The governing law does not usually permit such act as it seems to be interpreted as motivating highly intelligent people to commit mistakes and do wrongs.


What is the Directors and Officers Liability Insurance?

Many people are not aware that Directors and Officers of the company who has been exposed in a legal battle because of a mistake or a wrong call he did while in the line of duty is covered by the company; and that any damage that his wrong action has yielded shall be legally covered by the company. This is a policy insurance that is often referred to as the Directors and Officers Liability Insurance.

People who belong to the top management are usually responsible in making a company-wide impacting decision. They are also tasked to understand and fully comprehend the various aspects and angles of an action prior to a decision are made and this alone as a job makes it a lot difficult to hire an exceptionally qualified individual. And when you are able to find one, you will need to make a lot of bargaining form his remuneration to how his traveling privileges are made down to all the perks that serve as magnet to affirm his appointment.

This is fundamentally the reason why many company owners are “enrolling” the Directors and Officers as part of the whole remuneration package.

The Directors and Officers Liability Policy Insurance is commonly being bought by the company together with a product termed as the Corporate Reimbursement Policy Insurance. When the company buys these insurances, they are being made as one product known as the Directors and Officers Insurance.


What do companies enact in order to make this look like legal?

As mentioned in the early part, this is an action that is being prohibited in some countries. However, this seems to be the only way to attract highly exceptional people to grab the job offer therefore, many company owners are being “forced” to maneuver the purchasing of the insurance policy.

Many company owners purchase the insurance policy by making it look like the whole policy was bought by both the company and the person. In which case, the law permits that action. When this insurance policy has already been settled that is the time that the person finally makes an official binding contract with the company owners.


Understanding Directors & Officers Liability Insurance

Directors & Officers (D&O) Liability Insurance provides financial protection for wrongful acts arising out of the discharge of directors’ and officers’ governance and management duties. Having such coverage in place is not just beneficial in the event of a claim but can assist an organization in attracting and retaining qualified board members. There is, however, no “standard” coverage, and D&O policy terms can vary greatly. This article poses questions to assist an organization in evaluating some of the nuances and provisions of a D&O policy.

1. Does a D&O policy only protect the individuals serving on an organization’s board of directors?

D&O policies are typically structured with three insuring agreements providing what is called Side A, Side B and Side C coverage.

· Side A coverage insures individual directors and officers against losses that the organization is not legally or financially able to indemnify. This could be due to insolvency or a prohibition in the organization’s by-laws. Side A coverage protects the personal assets of the individual directors and officers and oftentimes is not subject to a monetary retention.

· Side B coverage reimburses an organization for expenses incurred in defending its directors and officers due to its indemnification obligations.

· Side C coverage, often called entity coverage, insures the organization for claims made directly against the organization for wrongful acts by the organization or its directors or officers. For public companies, Side C coverage is typically limited to securities claims only.

2. In addition to settlement costs and damages, does a D&O policy also insure defense costs associated with a claim?

Eroding Limits: Unlike a General Liability policy which often provides defense costs in addition to the listed policy limits, D&O policy limits generally include defense costs within the policy limits, which means that defense costs erode the overall policy limit. Some insurers are able to offer additional, dedicated defense costs, but this varies by insurer and type of exposure.

Insurer vs Insured Duty to Defend: D&O policies are written on either an insurer duty to defend basis or an insured duty to defend basis. Insurer duty to defend requires the insurer to assume control of the claim defense process and selection of counsel. The insurer has both the right and duty to defend a claim, even if any of the allegations are groundless, false or fraudulent.

Typically, this arrangement is favorable to the insurer as its panel counsel is familiar with the billing practice and also gives the insurer more control in their effort to minimize coverage payments.

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The other option, called insured duty to defend, causes the insured to be responsible for defending a claim and the insurer to be responsible for reimbursing an organization for expenses incurred in defending that claim. This type of arrangement allows for the organization to control its own defense but puts the onus on the entity to respond to legal proceedings in a timely manner. Even with this arrangement, the insurer will still need to approve an organization’s choice of counsel and the rates being charged.

We recommend if you have a preferred defense counsel that this be discussed with the insurer ahead of a claim so that the insurer can review and hopefully approve that counsel for use in the event of a claim. Ultimately, the insurer may only agree to pay a portion of the hourly rate and the insured will pay the difference, if a preferred counsel is retained.

3. If an officer of the company is asked to serve on the board of another organization, how is that individual covered?

Individuals who serve on the board of another organization would first look to that organization’s D&O insurance policy for coverage if named in a suit arising out their capacity in such a role. Many D&O policies also provide Outside Entity coverage which provides additional protection for an individual serving as a director, officer, trustee or board member of another organization (Outside Entity).

However, this extension typically only applies to participation on not-for-profit boards. This coverage applies excess of any D&O policy coverage purchased by the Outside Entity and would also be excess of any indemnity obligations.

It is typical that Outside Entity coverage is only available if the individual is serving in such a role at the request and knowledge of your organization.

4. What is the appropriate coverage limit to purchase?

No Formula: There is no correct answer and no true scientific method in determining the amount of limit to purchase. When considering the policy limit, we recommend the following:

· Evaluate historical claim frequency and severity for your organization and other similar organizations;

· Consider current litigation trends;

· Identify how the limit structure is shared amongst directors, officers and possibly the entity;

· If a public company, review and consider historical stock price changes and market cap;

· Consider unique exposures such as mergers and acquisitions as well as perform benchmarking against similar organizations’ purchasing practices; and

· Understand where the source of claims can arise, particularly if the organization is in an industry that is regulated by governmental agencies.

After gathering this information, the final decision will be dependent on the organization’s risk tolerance, budget and level of insurance that will provide comfort to the directors and officers serving the organization.

Additional Limits for Board Members: Side A DIC policies do not provide additional Side B or Side C coverage and therefore provide dedicated additional protection for individual directors and officers. This type of policy will also drop down and provide primary coverage if the underlying insurer fails or refuses to pay a claim, attempts to rescind coverage, or becomes insolvent. Some insurers will provide additional Side A coverage within the standard Side A/B/C policy, though this is often provided at a lower sublimit.

In bankruptcy situations, some courts have ruled that the D&O policy is an asset of the estate and therefore bankruptcy trustees may attempt to seize the insurance proceeds. An advantage of purchasing a Side A DIC policy is that there is a much weaker argument for a bankruptcy court to seize a stand-alone Side A policy which does not provide any corporate balance sheet protection. As this policy is only triggered when an organization is unable to indemnify its directors and officers and does not provide entity coverage, we do not recommend reducing the purchased Side A/B/C coverage to replace with Side A DIC limits.

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5. If a claim is brought against both the organization and an individual director, in what order will payment be made?

D&O policies have a “priority of payments” provision which states that the insurer will first pay any Side A coverage which protects the named director or officer and then will pay the loss for the entity with the remaining available limit. We would recommend that this provision be written in a way that payments for any Side B coverage (claims against individuals that are reimbursable by the company) are also made prior to payment for the portion of the loss against the entity (Side C).

6. If the insurance application is completed inaccurately or facts are misrepresented, will the policy coverage remain available?

D&O insurance applications are almost always required at the initial placement of coverage as well as at each respective renewal. In addition to being required to obtain a coverage proposal, these applications become a part of the issued policy. The Representations section of a D&O policy should be severable so that coverage remains available for individuals who were unaware of any misrepresentations in the application.

Additionally, only the knowledge of particular parties, such as the CEO and CFO, should be imputed to others or the entity. Finally, we recommend that this provision include language stating that the insurer cannot void or rescind the coverage. At a minimum, Side A coverage should be non-rescindable.

7. If an organization no longer exists or decides to terminate the purchase of D&O coverage, is coverage still available for claims alleging wrongful acts during the time that coverage was purchased?

D&O coverage is written on a claims-made basis, which means that it provides coverage in the policy period that a claim is made, regardless of when the event occurred, subject to any retroactive dates. If an organization no longer carries D&O insurance, then coverage would not be available if a claim is brought after the policy coverage terminates unless an Extended Reporting Period is purchased.

Organizations have the option to purchase an Extended Reporting Period (ERP) if coverage does not renew or is terminated for reason other than failure to pay premium. ERPs are considered tail coverage and allow for claims to be reported even after the policy is no longer in place. While the extended period allows for claims to be reported, the alleged wrongful act must have occurred prior to the termination of coverage. We recommend pre-negotiating extended reporting periods of at least one (1), two (2) and three (3) years at pre-negotiated rates. These rates represent a percentage amount of the annual premium.

8. When must a claim be reported? Could an insurance company deny coverage if there is a delay in reporting?

If the failure to notify an insurer prejudices its rights and ability to defend a claim, then the insurer may look to deny coverage by issuing a reservation of rights letter. Therefore, it is critical that an organization understand its reporting requirements. Typically, a claim must be reported to the insurer upon knowledge of an insured. We recommend limiting this requirement to knowledge of particular parties, such as the CEO, CFO and Risk Manager or General Counsel.

By limiting the parties for whom knowledge of an incident must be reported, this limits the possibility of late or missed reporting due to individuals who are unfamiliar with the reporting requirements or the scope of coverage under the policy. Additionally, to provide substantial time to gather information, we recommend allowing for the reporting of an incident/claim “as soon as practicable” rather than “immediately”. Notice should be permitted by either certified mail or by email.

9. How has COVID impacted the D&O insurance marketplace?

The D&O insurance market, particularly for public companies, has been hardening since 2019. Insurers are reducing their limit capacity, and seeking increased policy retentions, significant premium increases, and restrictions of coverage terms. Excess policy layers are no longer following primary layer rate changes, which has led to further premium increases in organization’s D&O programs.

As a result of the hardened market, insurers are performing additional underwriting and requesting more information from organizations regarding their exposure data. COVID has further complicated the underwriting process as insurers anticipate COVID-related claims. This has resulted in requests to questions such as how an organization’s management team is handling the pandemic, making proper disclosure to investors and analysts, and other similar items.

Due to the amount of information being requested at renewals and anticipated premium increases, we recommend beginning renewal discussions early to obtain feedback from your insurer(s) and to set early expectations.

Liability Policy Insurance

A Liability Policy Insurance is a type of insurance coverage that protects individuals or businesses from financial losses arising from legal claims and lawsuits for bodily injury or property damage caused to others. It is designed to provide coverage for the policyholder if they are found legally responsible (liable) for causing harm to another person or their property.

There are different types of liability insurance policies tailored to specific needs:

  1. General Liability Insurance: This type of policy provides coverage for bodily injury, property damage, and personal injury claims (such as libel or slander) that may arise from your business operations or personal activities. It’s typically purchased by businesses to protect themselves from potential lawsuits filed by customers, clients, or other third parties.
  2. Professional Liability Insurance (Errors and Omissions Insurance): This coverage is designed to protect professionals, such as doctors, lawyers, architects, and other service providers, from claims of negligence, errors, or omissions that result in financial losses for their clients.
  3. Product Liability Insurance: Manufacturers, distributors, and retailers can obtain this type of insurance to protect against claims resulting from defective products that cause harm or injury to consumers.
  4. Public Liability Insurance: This is a form of liability insurance that covers businesses or individuals for claims made by members of the public who suffer injury or damage to their property as a result of the insured’s business activities.
  5. Employer’s Liability Insurance: This policy provides coverage to employers for legal claims filed by employees who experience work-related injuries or illnesses not covered by workers’ compensation.

It’s important to note that liability policies typically have limits on the amount of coverage they provide, and policyholders may need to pay a deductible before the insurance company starts covering the costs of a claim. Additionally, there may be exclusions in the policy that specify situations where coverage is not applicable.

Liability insurance is essential for businesses and individuals who want protection from the potentially devastating financial consequences of lawsuits and legal claims. It helps provide peace of mind and a level of financial security in case an unfortunate event leads to legal liability.


Liability Insurance

Liability insurance is a broad category of insurance coverage that provides financial protection to individuals and businesses against claims and lawsuits for their legal responsibility (liability) for causing bodily injury, property damage, or other types of harm to third parties. It is also known as third-party insurance because it covers damages to someone else, not the policyholder or the insured themselves.

There are various types of liability insurance policies available, and they serve different purposes depending on the insured’s needs:

  1. General Liability Insurance: As mentioned earlier, this policy provides coverage for bodily injury, property damage, and personal injury claims resulting from accidents on your property or during business operations. It’s typically purchased by businesses to protect against potential lawsuits filed by customers, clients, or other third parties.
  2. Professional Liability Insurance (Errors and Omissions Insurance): This coverage is particularly important for professionals who provide advice, services, or expertise, such as doctors, lawyers, accountants, consultants, and architects. It protects them from claims alleging negligence, errors, omissions, or failure to provide professional services as promised.
  3. Product Liability Insurance: Manufacturers, distributors, and retailers obtain this type of insurance to protect against claims arising from injuries or property damage caused by their products. It covers legal costs and potential settlements or judgments resulting from defective products.
  4. Employer’s Liability Insurance: While workers’ compensation insurance covers employees for work-related injuries or illnesses, employer’s liability insurance extends coverage for legal claims filed by employees who allege that the employer’s negligence caused their injuries.
  5. Public Liability Insurance: This type of policy is common for businesses that interact with the public. It covers claims made by members of the public who suffer injury or damage to their property due to the insured’s business activities.

Liability insurance policies typically have limits on the coverage amount, and they may also include exclusions to specify situations where coverage does not apply (e.g., intentional acts or criminal behavior). The policyholder (insured) usually pays a premium to the insurance company, and in return, the insurer assumes the financial risk of potential liabilities up to the policy’s limits.

Having liability insurance is crucial because legal claims and lawsuits can be expensive and financially devastating. Liability insurance provides a safety net, offering peace of mind and financial protection against unforeseen circumstances that may lead to legal liability. It is a fundamental component of a comprehensive risk management strategy for businesses and individuals alike.



Insurance is a way to protect against financial loss. It involves paying a premium to an insurance company in exchange for the promise of payment or reimbursement for certain losses or damages. Insurance can help individuals, businesses, and organizations manage risks and protect against unexpected events.

There are many different types of insurance available, including:

  1. Health Insurance: This type of insurance helps cover the cost of medical expenses, such as doctor visits, hospital stays, and prescription drugs.
  2. Life Insurance: Life insurance provides a lump-sum payment to the insured’s beneficiaries in the event of their death. It can help provide financial security for loved ones and cover expenses such as funeral costs and outstanding debts.
  3. Auto Insurance: Auto insurance provides coverage for damage or injury caused by a car accident. It can also provide coverage for theft, vandalism, and other incidents.
  4. Homeowners Insurance: This type of insurance helps protect homeowners against damage or loss to their property, as well as liability for injuries or damage caused to others on their property.
  5. Renters Insurance: Renters insurance provides coverage for personal property and liability for renters.
  6. Business Insurance: Business insurance provides coverage for various types of risks that businesses may face, such as liability, property damage, and employee injuries.

Insurance policies can vary widely in terms of coverage, exclusions, and premiums. It’s important to carefully review any insurance policy before purchasing it and to understand what is covered and what is not.

Insurance companies use various methods to assess risk and determine premiums, including actuarial science, statistical analysis, and underwriting. Factors such as age, health status, driving history, and location can all impact insurance premiums.

In conclusion, insurance is a way to protect against financial loss and manage risks. There are many different types of insurance available, including health insurance, life insurance, auto insurance, homeowners insurance, renters insurance, and business insurance.

It’s important to carefully review any insurance policy before purchasing it and to understand what is covered and what is not. Insurance companies use various methods to assess risk and determine premiums, and factors such as age, health status, driving history, and location can all impact insurance premiums.

Prepare and write by:

Author: Mohammed A Bazzoun

If you have any more specific questions, feel free to ask in comments.


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