What ‘s Really in a ”Comprehensive” Director and Officers Insurance Policy?
Financial Institutions (FI) insurers routinely market their D&O policies as providing “comprehensive” coverage. Sounds great to us . . . but does “comprehensive” mean it covers everything you would expect?
Let’s take a look inside a typical policy sold to FIs. Many D&O policies are now labeled as “Management Liability” (or similar) coverages and are largely driven by the key definitions and exclusions in the policy.
Here are some key provisions:
Key definition – wrongful management liability act: Coverage is provided for a “wrongful management liability act” or similar term, which is typically broadly defined to include virtually all errors and misstatements, acts and omissions committed by reason of serving in a board or management capacity. As you can see, the definition is quite broad and provides an initial impression of extensive coverage. But let’s look further at some additional terms.
“Civil fines”: Those imposed by regulation as a civil monetary penalty are typically excluded. While such penalties are rarely imposed, they can be substantial.
Subsidiaries: Note that the FI and its “subsidiaries” are also typically covered as “insured organizations.” A “subsidiary” generally includes an entity in which the FI owns more than a 50% interest. However, individuals serving on the board of the subsidiary are typically not covered under the FI’s policy (they can get their own coverage or separate policy, at an additional cost, of course).
Defense Obligation. Many D&O policies contain a contractual obligation to defend an insured in a lawsuit. A typical provision provides that the insurance company “shall have the right and duty to select defense counsel and defend any ‘claim’ covered under this policy. The ‘[insurer’s]’ duty to defend ‘claims’ shall apply even if any of the allegations are groundless, false or fraudulent, but shall only obligate the ‘[insurer]’ to pay ‘defense costs.’” Insurance companies often try to claim they have no obligation, even to defend, when the allegations are frivolous (as they often are). You can and should insist upon coverage, if your policy contains the above provision.
Important Conditions to ML Coverage:
- Presumptive Indemnification: D&O coverage often requires the FI “as a condition precedent to the right to receive the benefit of any coverage provided by this Policy . . . to agree to indemnify all ‘insured persons’ for all ‘loss’ to the fullest extent permitted by law.” Such a provision appears to encourage (if not require) indemnity agreements be in place.
- “Wasting” Policy: Typically, defense costs are part of coverage limits, and will reduce the amount of coverageotherwise available. This is an important consideration, as any lawsuit that “drags on” could result in sizable defense costs that will significantly reduce or all together eliminate the dollars available for settlement or judgment. Your FI should carefully select and monitor defense counsel if there is a “wasting” policy.
Important Exclusions to ML Coverage:
- Dishonest or Willful Acts: A “loss” typically excludes damages caused by “ . . . any deliberate dishonest, fraudulent, intentional or willful misconduct or act, or any willful or intentional violation of any law, statute or regulation, by any ‘insured,’ if a final judgment, order, decree or other determination establishes that such misconduct, act or violation was committed by the ‘insured.’”
- Securities: Some policies contain an “investment” or “securities” exclusion. Here is one example where it provides that a “loss,” cannot directly or indirectly include “any actual or alleged purchase, sale or distribution of or offer, representation or agreement relating to securities (including any unit of a capital account).”If your FI’s policy contains such an exclusion, it would appear to affect virtually all investment related activities at your institution. For example, if your FI has 30% of its assets in investments, that portion of your FI’s activities would likely not be covered by insurance, if your policy contains this exclusion.
So, as you can see “comprehensive” does not really mean it covers everything. Now more than ever, it is critical to know what is in your insurance policy. We recommend that clients obtain a periodic review of their coverages by an independent broker as well as legal counsel. After all, you want to know what your policy covers (and does not cover) BEFORE you need to use it.