Frank Rodriguez, CPCU, API, senior account manager, specializing in management liability risks, addresses the frequently asked questions concerning Directors & Officers (D&O) liability coverage.
What types of business entities need D&O coverage?
There is a misunderstanding that only publicly traded companies are in need of Directors& Officers (D&O) liability because of the potential exposure from claims brought by their shareholders. In reality, both publicly traded companies and privately held businesses, whether large or small, have risks that can be addressed by D&O coverage. To be brief, a claim can arise from an entity’s stakeholders, its customers, government agencies, or even a competitor.
What factors impact the pricing of D&O coverage?
The main factor affecting pricing would be an entity’s profit and debt, followed by claim history, and finally the limit of liability and retention (deductible) on the policy.
What are the most common wrongful allegations for D&O suits?
Allegations include, but are not limited to: misuse of company funds, fraud, misrepresentation of company assets, and bankruptcy. Aside from those, and surprisingly, the most common allegations are employment practices related; however, D&O policies will typically exclude employment practices claims.
Should D&O coverage be relied upon for employment practices related claims?
While some D&O policies may be silent in regards to employment practices claims, a D&O policy itself and its contract wording are not designed to address those exposures. In fact, many D&O policy forms will now exclude employer–employee relationship type claims, whether excluded specifically or triggered by the “insured vs. insured” exclusion. That said, no one should ever rely on a D&O policy to provide any type of Employment Practices Liability (EPL) coverage. It is always a better idea to supplement D&O coverage by purchasing the optional EPL coverage or purchase a separate EPL policy all together.
If a company has filed bankruptcy, would they still need to maintain D&O coverage?
Yes, definitely. A bankruptcy can expose the directors and officers personal assets because the company may no longer be in a position to indemnify them.
What are some current trends in the D&O marketplace?
As a whole, we have seen an increase in insurance premiums and the market steadily hardening over the past year. While D&O coverage is still relatively available for common business entities and non-profit organizations, it is the entertainment market that is experiencing more stringent underwriting criteria. This has led the industry to cycle into a hard market. However, it looks like competition will eventually increase which could lead the market to soften. New programs may be available in the future for entertainment risks and, possibly, other markets may join in to get a hold of market share.
Disclaimer: The above content is a general overview which is provided for discussion purposes only and is not in any way meant as providing recommendations or legal counsel. It is not intended to apply to each circumstance. Because the facts and circumstances of every matter differ and the terms, conditions, exclusions and limitations contained in insurance policies vary, you should review your policy carefully and seek any legal counsel that may be necessary or appropriate. Momentous is not responsible for any losses or damage resulting from reliance on the information contained herein.