Insurance commonly referred to in the insurance industry as "directors and officers" or "D&O" insurance is insurance that is payable to directors and officers of a corporation, or to the corporation itself, as indemnification for losses or the advancement of defense costs in the event the corporation suffers a loss as a result of legal action brought for alleged wrongful acts by the corporation's directors and/or officers that were taken in their capacity as directors and/or officers.
Depending on the scope of the policy, the policy may also provide coverage for members of corporate committees or defined classes of volunteers.
Who Needs D&O Insurance Anyway
Corporations do! Whether for-profit or non-profit, corporations act through their boards of directors and officers, whose decisions are subject to scrutiny and second-guessing by the corporation's stockholders. As a result, the corporation's directors and officers become targets of lawsuits brought by the corporation's stockholders. Understanding this practical reality, a critical and recommended step that any corporation can take in an effort to protect its board members and officers, and in doing so, itself, is to obtain D&O insurance.
Non-profit corporations occasionally question whether they need D&O coverage given the additional protections provided by Chapter 55A. However, the additional protection afforded to non-profit officers and directors does not shield them from defending against D&O claims. D&O coverage offers great value to non-profits.
Purchasing Power
Both the North Carolina Business Corporation Act, which can be found in Chapter 55 of the North Carolina General Statutes, and the North Carolina Nonprofit Corporation Act, which can be found in Chapter 55A of the North Carolina General Statutes, specifically authorize—but does not require—for-profit and non-profit corporations, respectively, to purchase insurance on behalf of an individual who is or was a director, officer, employee, or agent of the corporation (and in the case of a non-profit corporation, also a committee member) to protect against liability asserted against, or incurred by, the individual in the individual's official capacity or arising from his/her status as a representative of the corporation.
Considerations to Bear in Mind When Shopping for D&O Insurance
Corporations in the market for D&O insurance do themselves a service by being mindful that not all insurance policies are created equal, and not all policies cover every type of risk or need. Typically, the broader the coverage, the better protection the policy will afford the corporation's directors and officers. However, carefully considering all options available and discussing the businesses' needs and nuances with the corporation's insurance broker are important steps for the corporation to take when obtaining D&O (and any other type of) insurance.
While not an exhaustive list, the following are important questions to ask when shopping for D&O insurance:
- Does the policy's definition of "insured" extend beyond the actual directors and officers (i.e., does it include, where applicable, committee members and desired classes of volunteers)?
- Does the definition of "insured" protect past as well as present D&Os?
- Does the policy provide a defense to claims and lawsuits (as opposed to just reimbursing for a judgment if one is eventually entered)? Even a successful defense can result in large attorney and court costs.
- Does the policy cover against defamation (i.e., libel and slander) claims?
- Does the policy provide a defense against claims seeking non-monetary remedies?
A non-monetary, or non-pecuniary, claim is one in which the plaintiff is not seeking money but instead asks the court for a declaration that the director or officer has acted wrongly (i.e., a suit for not fulfilling their mission or challenging an unpopular decision of the directors or an officer).
- Does the policy cover derivative lawsuits?
A derivative action is a lawsuit brought by the corporation's stockholders "in the name" of the corporation.
- Does the policy defend against a claim or lawsuit for failure to maintain or obtain insurance?
- Does the policy provide coverage for decisions directors/officers make in accepting or rejecting contracts?
- Does the policy provide coverage for an investigation of a claim not yet in suit?
A shareholder accuses the director/officer of misconduct and demands an investigation, prior to filing a lawsuit.
- Does the insurer provide the nonprofit corporation with risk management advice/training?
D&O Coverage as an Endorsed v. Standalone Insurance Policy
For many corporations, insurance premiums represent a significant annual cost of doing business. The list of typical policies/coverage types carried is not short and tends to grow rather than shrink, with many businesses carrying commercial general liability, commercial property, commercial auto, worker's compensation, and employer's practices liability coverages. In recent years, additional coverages have increasingly become more prevalent as typical coverages to see in place, such as crime, fidelity, and cyber insurance.
With the growing expense insurance premiums often represent for businesses, it is not uncommon for companies to source ways to lessen their insurance expense burden. Some do so by adding additional coverages as endorsements (i.e., provisions that add to, remove from, or otherwise alter a policy's original scope of coverage) to their existing liability or businessowners' policies as opposed to procuring a standalone D&O policy.
A downside of an endorsed policy is that too many claims against an endorsed policy can cause the premiums of the liability/property casualty coverage to increase, and sometimes dramatically, or can impact the policy's renewal. There are other potential downsides to endorsed policies as well, to discuss with the corporation's broker, like how aggregate limits can come into play when there is more than one claim or more than one insured involved in a claim under the same policy in a policy period.
While a standalone policy could be more expensive than an endorsed policy, standalone policies often provide better coverage, which can save money in the long run.
Characteristics of D&O Insurance to Keep in Mind
D&O insurance has several characteristics worth keeping in mind, as the application of these characteristics can have a significant impact on whether, and/or to what extent, there is coverage for a given claim/suit that has been brought and tendered to the D&O carrier for coverage. While not exclusive to D&O policies, these features tend to either not appear or to be less common in a number of the coverages that many businesses may be accustomed to interacting with to a higher degree of frequency, like their commercial general liability and commercial property coverages, for example. This article highlights but two of these characteristics.
First, D&O policies are typically either "claims-made" or "claims-made and reported" policies, meaning to trigger coverage the claim has to have been made during the policy period (claims-made) or both made and reported during the policy period (claims-made and reported). If these timing requirements, which are strictly interpreted and enforced, are not satisfied, there will be no coverage.
Second, D&O policies are generally "eroding limits" policies, meaning amounts spent on defending a covered claim/lawsuit reduce the policy's available limit. For example, if the policy has a $1,000,000.00 limit applicable to the claim/suit, and $250,000.00 is spent on legal fees and expenses defending the case, the most the D&O insurer would ever be responsible to pay out under the policy would be $750,000.00 for indemnity, and that assumes there is full indemnity coverage. Of course, any applicable deductible/retention would need to be satisfied by the insured. Eroding limits can be a significant issue with the rising costs associated with litigating claims, and where multiple insureds may need to be defended by different sets of attorneys, should there be potential conflicts of interest that require engaging more than one set of legal counsel under the policy to defend those insureds.
One final note regarding D&O policies is that an insured generally has more freedom to select their counsel than under other types of coverage where the insurer assigns the matter to panel counsel without input from the insured.
Conclusion
Having proper D&O insurance coverage in place is an important risk management tool that corporations should secure and seek to tailor to meet their needs. Our Insurance Counseling and Recovery attorneys have deep experience guiding corporations—both for-profit and non-profit—through the complexities of securing, evaluating, and maximizing directors and officers liability coverage. If you have questions or need assistance assessing your current policy or obtaining appropriate protection, don’t hesitate to reach out. We’re here to help you safeguard your leadership—and your organization.
