Seven Questions Directors Should Ask About D&O Coverage

First Quarter 2012
Corporate Board Member
by Charles Keenan

Joining a board of directors isn’t without risk. Christine Weirsky, public relations director, Marketing and Communications, North America, XL Group Insurance, says directors should never shy away from asking about what coverage is available to protect them.

Are the company’s policy limits appropriate to its risk profile?
Especially in today’s litigious climate and struggling economy, directors and officers are held to a very high standard. According to John Burrows, chief underwriting officer of the XL Group’s Professional Liability group, “A number of factors, including financial strength, risk tolerance, and litigation trends are factored into determining appropriate D&O policy limits, terms, and deductibles for any company, and it’s important that directors know and are comfortable with those terms and conditions.”

What is the priority of payments in our policy?
Priority-of-payments provisions govern the order of payments from D&O policy limits. A typical provision provides that any payments under the D&O policy will be paid first under the policy’s Side A coverage to protect the assets of individual directors and officers before any payments can be made to the company.

If policy limits are exhausted, is there Side A coverage to protect me personally?
Side-A coverage, sometimes referred to as “Difference in Conditions” coverage, doesn’t indemnify the corporation in any respect and only benefits individual directors and officers. According to Burrows, there is a growing trend among independent directors to request stand-alone Side-A coverage so they do not have to share it with management and other directors. “The good news is that there are high-quality policies with broad coverage and few exclusions available in today’s market,” Burrows says.

Are their exclusions in the policy?
D&O policies can contain a wide variety of other exclusions, which can be problematic for directors. Those to watch out for are exclusions arising from pollution, derivative action,
or pension funds.

What is the insurer’s reputation for handling and paying claims?
Insurers can be evaluated on a number of factors, such as financial health and reputation for acknowledging or fighting coverage for similar claims. It is worth knowing if the company’s D&O insurers have a reputation for delaying payment of defense costs and litigating with insureds over coverage.

Is your Side-A coverage nonrescindable and fully severable?
According to Burrows, Side-A coverage should preferably be nonrescindable and noncancelable. That means it can’t be voided for any reason. So if there was wrongdoing by some of the company’s management—say a misstatement when obtaining coverage—to no fault of the individual officers, their coverage stands. Many D&O policies don’t provide full severability—only partial severability.

How broad is the definition of loss?
Traditionally, Side-A policies cover four distinct areas: settlements or judgments in shareholder derivative lawsuits, allegations of federal securities law violations, standards of conduct in state indemnification statutes, and when the company is financially unable to provide coverage for a director or officer.

Related Articles:
D&O Liability: Avoiding Legal Hot Spots
Say on Pay: Avoiding the Crosshairs
M&A Liability: Post-Closing Risk
IDL: Looking Out for No. 1
Simmering Risk: Cyber Attacks and Government Investigations

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