Insurance Recovery Series: Directors and Officers Insurance Coverage Explained

Policyholder Insurance Recovery Series

Last month, we explained the basics about Commercial General Liability (CGL) insurance which provides coverage for third-party property damage and bodily injury claims, often along with defamation, copyright infringement, and other advertising injuries.

This month, we’ll discuss Directors and Officers (D&O) coverage which generally provides insurance coverage for third-party claims against a company or its insured persons for actual or alleged acts, errors, misstatements, omissions, or breach of duty. D&O coverage is typically for claims alleging misconduct in managing the company (sometimes called Management Liability Insurance).

Under a typical D&O policy, the insurer agrees to pay defense and indemnification costs on behalf of the company and/or its insured person(s) incurred during an investigation or lawsuit. The definition of “Insured Person” varies, but typically includes past and present directors, officers, members, managers, and employees of the company. Thus, if a director of the company gets sued for breach of fiduciary duty, the company’s D&O policy will likely provide coverage for the director’s defense costs and indemnification.

D&O policies are typically “Claims-Made” policies, which provide coverage for claims made against the insured and reported to the insurer during the policy period. This differs from a CGL policy which is “occurrence-based,” meaning it insures for accidents or other fortuitous events that occur during the term of a given policy, no matter when a claim is actually made against an insured. The timing of when the claim is first received (or information is received which could give to a claim) is most important for a D&O claim, even if the act or omission occurred years before (but after any applicable “Retroactive Date”). Thus, for D&O claims, it is crucial that claims are timely reported during the policy period in which they are received.

The definition of a “Claim” varies but often includes a “written demand for monetary or non-monetary relief,” along with the commencement of a regulatory investigation, lawsuit, or arbitration. Thus, a demand letter or e-mail may constitute a Claim under a D&O policy, even though no lawsuit has been filed. Even if information received by an insured does not constitute a “Claim,” an insurer may consider it a “notice of circumstance” so that if the Claim is made later (e.g. a lawsuit is filed) in a subsequent policy period, coverage may be afforded under the policy period in which notice of a potential claim was first received.

D&O policies also typically have “Self-Insured Retentions” (rather than “Deductibles”), and defense costs erode the limits of liability available under the policy. If a policy has a $100,000 Self-Insured Retention, the insured is responsible for paying the first $100,000 of defense costs and settlement liability, before the insurer has an obligation to expend any funds. Once the Self-Insured Retention is satisfied, an expenditure of $500,000 for defense costs will reduce the amount of insurance available, by that amount, to pay for a settlement or judgment. Among other factors, the amount of a Self-Insured Retention and the limits of liability affect the premiums charged for the policy. 

It is crucial for an insured to review all coverage provisions, endorsements, and exclusions to understand for what types of actual or alleged acts or omissions they are buying coverage, and not buying coverage, prior to the issuance of the policy.