Navigating the Policy Language for D&O Insurance

As many former officers and directors are well aware, a failure to procure adequate directors and officers (D&O) insurance coverage can result in a significant loss, especially when personal assets are exposed. However, this product is quite complex, containing a laundry list of variables, any one of which can result in either a) denial of coverage or b) a reduction in the amount of money a carrier will pay for defense or settlement of a claim.

Another important aspect to consider is that Corporate indemnity, which directors and officers rely upon to pay defense lawyers in the event they are investigated by a federal agency or sued personally, disappears with insolvency or bankruptcy of the corporation, leaving directors and officers with personal D&O insurance coverage as their only line of defense against any judgment ruled against them in court.

The negative impact of failing to carry adequate coverage

Unfortunately in these situations, personal estate often hinge on insurance policy language, or on a single sentence or phrase buried within a contract or, endorsement, which could result in not having adequate coverage. This can certainly have a direct impact on the personal assets of a director or officer, and any lapse of coverage could have devastating consequences. In the following general summary of directors and officer’s insurance products, a few of the most important issues are addressed.

Grasping a better understanding of the D&O policy

The basic D&O insurance product offered by many domestic and foreign insurance carriers has at least two separate parts, an executive liability part, (often referred to as “Side A”), and a corporate reimbursement part (often referred to as “Side B”).

The “Side A” portion of this coverage pays directors and officers directly for loss (including defense costs) when corporate indemnification is unavailable. The Side B portion of coverage provides compensation to the corporation for any money paid as indemnification to those insured directors and officers involved in litigation.

While such coverage presents some unavoidable risks, even when properly negotiated, it is essential to have it in place. First of all, coverage for the corporation can exhaust available limits, leaving directors and officers out in the cold. Secondly, a bankruptcy court could determine that policy proceeds are assets of the estate, and prohibit payment to the directors and officers under the policies. This illustrates the importance of speaking with an agent with clear knowledge of D&O coverage with any questions or concerns regarding this product.