Madison Avenue Insurance Group

Directors & Officers Liability Insurance

The primary purpose of D&O insurance is to provide financial protection for directors and officers of a company in the event they are sued for alleged wrongful acts in managing the company. This coverage is crucial for companies of all sizes and industries, as executives and board members are increasingly facing legal actions and lawsuits in today’s complex business environment.  Companies need to understand that without D&O insurance, directors and officers may have to personally bear the financial burden of defending themselves against lawsuits, which can have severe consequences on their personal assets and reputations.

Our team is licensed to write Insurance Policies in Washington State, Oregon, Idaho, California, Colorado, Montana, Arizona, and Illinois.

Who can sue a company’s leadership team?  

It can be investors, customers, vendors and even the employees.

Common lawsuits are related to breach of fiduciary duty, misuse of company funds, negligence, mismanagement, and other regulatory violations such as failure to comply with workplace laws.

D&O insurance coverage can include coverage for legal defense costs, settlements, and judgments resulting from covered claims.

The broader implications of not having D&O insurance, such as the negative impact on recruitment and retention of talented executives, as well as the potential damage to the company’s financial stability and overall reputation. D&O insurance plays a role in safeguarding both individuals and the organization for those operating in today’s litigious marketplace.

Examples of D&O insurance claims that have occurred in the past to illustrate the types of situations where D&O coverage may come into play:

1. **Shareholder Lawsuits**: Shareholders may bring lawsuits against company directors and officers alleging breaches of fiduciary duty, mismanagement, or misleading financial disclosures. D&O insurance can cover legal defense costs and settlements in such cases.

2. **Regulatory Investigations**: Directors and officers may face regulatory investigations by government agencies for compliance violations or misconduct. D&O insurance can help cover legal expenses and fines resulting from these investigations.

3. **Employment Practices Claims**: Claims of wrongful termination, discrimination, harassment, or other employment-related issues against directors and officers can lead to D&O insurance claims for legal defense and settlement costs.

4. **Securities Class Actions**: Allegations of securities fraud, insider trading, or misleading financial statements can result in class-action lawsuits against company executives. D&O insurance can provide coverage for defense costs and settlements in these cases.

5. **Mergers and Acquisitions**: During mergers or acquisitions, directors and officers may face claims related to conflicts of interest, inadequate disclosure, or breach of duty. D&O insurance can help protect them from personal liability in such scenarios.

6. **Cyber Breach** Costs can be staggering to the organization as well as its customers and vendors. The question will be who was responsible for the breach and was management doing enough to ensure adequate cyber security? Directors and officers may be held responsible for damage incurred.

While these examples are based on historical scenarios, they can give insight into the types of situations where D&O insurance claims may arise. It’s important for companies to work with experienced insurance brokers and legal advisors to tailor D&O insurance policies to their specific risks and ensure adequate coverage for potential claims.

D&O Policy Insuring Agreements

Within a Directors and Officers (D&O) insurance policy, there are several key components known as “insuring agreements” that outline the coverage provided to the insured directors and officers. These agreements typically specify the circumstances under which the insurer will provide coverage for claims brought against the directors and officers.

1. **Side A Coverage**: This insuring agreement provides coverage directly to individual directors and officers when the company is unable to indemnify them. It protects their personal assets in case the company is unable or unwilling to cover defense costs and settlements. This can happen in situations such as bankruptcy, company by-law restrictions, or when other insurance limits have been reached.

2. **Side B Coverage**: Side B coverage reimburses the company when it indemnifies directors and officers for covered claims. It effectively protects the company’s balance sheet by reimbursing the organization for the costs incurred in providing indemnification to its executives.

3. **Side C Coverage**: Also known as entity coverage, this insuring agreement provides coverage directly to the company itself for claims made against the organization arising from management decisions or actions taken by the directors and officers. It protects the company’s assets and can cover defense costs, settlements, and damages.

4. **Entity Securities Coverage**: This specific form of entity coverage extends protection to the company for securities-related claims under the Securities Act of 1933 and Securities Exchange Act of 1934. It can cover claims arising from alleged misstatements or omissions in securities offerings or financial disclosures.

5. **Employment Practices Liability Coverage**: Some D&O policies include coverage for claims related to employment practices, such as wrongful termination, discrimination, harassment, or retaliation. This coverage protects the company, directors, and officers from allegations of employment-related misconduct.

6. **Regulatory Investigation Coverage**: Insuring agreements may also include coverage for legal expenses and fines resulting from regulatory investigations into the actions of directors and officers. This coverage helps mitigate the financial impact of defending against regulatory inquiries.

7. **Derivative Actions Coverage**: D&O policies may cover defense costs and settlements for derivative lawsuits brought by shareholders on behalf of the company. This coverage is designed to protect directors and officers from personal liability in these types of actions.

These insuring agreements define the scope of coverage provided by a D&O insurance policy and establish the terms under which the insurer will respond to claims against directors and officers. It’s important for companies to carefully review the specific language of their D&O policies to understand the extent of coverage and any exclusions or limitations that may apply.

Not all policies are the same!

Duty to Defend vs. Duty to Indemnify?
Duty to Defend is the insurer’s duty to defend you, to provide legal defense counsel to respond to allegations made against you, while the duty to indemnify is an obligation of the insurance company to actually pay any damages that may be owed as a result of those lawsuits

What is a Hammer Clause?
A hammer clause is an insurance policy provision that allows an insurance company to force an insured to settle a claim.

What is Tail Coverage or a Sunset Clause?
Tail coverage is also known as an “Extended Reporting Endorsement,” and it can be purchased (or earned) when terminating a claims-made policy.

This coverage allows the insurance carrier to respond to any claims arising after the policy’s termination date for a claim that occurred while the policy was active.

What is a Derivative Action Lawsuit?
A derivative action is a lawsuit brought by a shareholder on behalf of a corporation to assert a wrong against the corporation and seek damages. It’s a legal action that’s typically used when a breach of duty, self-dealing, or other actions harm the company. For example, shareholders may file a derivative suit to resolve conflicts with officers, directors, or board members who harm the corporation.

Examples: Breach of fiduciary duty, Fraud and unlawful activity, Self-dealing
Unjust enrichment, Insider trading, False or misleading financial statements
Corporate waste

Misconduct Exclusions
D&O policies include an exclusion for losses related to criminal or deliberately fraudulent activities. Additionally, if an individual insured receives illegal profits or remuneration to which they were not legally entitled, they will not be covered if a lawsuit is brought forward.