Directors' and Officers' (D&O) Insurance

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Fri, Aug 28, 2009
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We have spent some time in the last few weeks discussing some Fiduciary Best Practices Related to Fees and Liability Insurance Coverage, Appointing a Non-Company Officer as Fiduciary, and Advancing Defense Costs under Corporate Indemnification Agreements. When making sure your company and its fiduciaries are properly covered, it is also important to review your directors and officers liability insurance coverage. Directors' and Officers' Insurance discusses the importance of an effective directors' and officers' insurance program:

Although the best protection should continue to come from conscientious attention to directorial and management responsibilities, an effective D&O insurance program, in combination with well-drafted indemnification and exculpation provisions in corporate charters and by-laws, is a critical component of protection for directors and officers at a time of increased scrutiny by shareholders, courts and regulators.

It also discusses six items to consider when developing your insurance program and selecting your insurer(s):

  1. Side A excess coverage – There are three types of coverage (A, B, and C). Type A is the only coverage that directly indemnifies a director and B and C, which are company claims, can exhaust the coverage while leaving the directors under-covered. Purchasing additional A-only coverage is a way to provide additional protection and minimize this problem. A-only Difference-in-Conditions ("DIC") excess coverage is another option.

  2. Financial condition of insurers – Ways to provide protection from having your insurer go insolvent include purchasing excess insurance in small layers from different insurers to diversify risk, spending more to be covered by insurance companies in a strong financial position, and taking into account many factors when making a decision, including "ratings, broker input, policyholder surplus, level of regulatory oversight, policy language, claims payment history and cost".

  3. Bankruptcy – Understand how your coverage would be impacted by the bankruptcy of your company. Is the insurance policy an asset of the bankruptcy estate subject to claims? What other bankruptcy terms are in the policy.

  4. Policy wording – The policy language and terms should be reviewed and negotiated annually. Ask about improvements in terms that have been offered to other insureds.

  5. Excess insurance – Excess insurers and policies should be reviewed to make sure they are consistent and mutually reinforcing, even if the primary insurer has paid less than the full amount due to a compromise with the policy holder.

  6. Worldwide coverage – Make sure to consider international terms.

D&O Insurance Coverage also takes a look at the common coverage in D&O policies and identifies 15 things to watch for:

Directors and Officers Liability Policies are usually "Manuscript Policies" in the insurance business. That means that they are not standardized, and each company tends to make a lot of variations even within their own issued policies.

D&O insurance coverages are highly negotiable. Your insurance agent should make every effort to customize coverage to meet the unique needs of your organization and its management structure.

Topics: ESOP Corporate Governance

Aaron Juckett, CPA, CPC, QPA, QKA
Written by Aaron Juckett, CPA, CPC, QPA, QKA

Aaron is President and Founder of ESOP Partners and provides implementation, administration, and consulting services to hundreds of companies. He is a member of The ESOP Association (TEA) and the National Center for Employee Ownership (NCEO).

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