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Protect Your Assets and Executives with D&O Insurance

(ARA) - When disgruntled shareholders, employees, customers or competitors allege financial mismanagement, discrimination or other wrongful acts, blame often lands at the feet of corporate directors and officers. Claims of managerial malpractice are on the rise, along with the costs -- legal fees, settlements and judgments -- associated with them.

Just how expensive can a claim against your company and its officers be? The average shareholder claim rose $1.51 million to $8.67 million in 1999, the highest ever recorded. During the same period, the average employee claim climbed to $306,000, up from $287,000 in 1998.

"That fact is, the threat of lawsuits and litigation costs is a basic risk of corporate directorship," says international risk management expert Thomas W. Harvey. "Because directors' and officers' services are considered fiduciary, requiring decision-makers to exercise their powers in good faith and with prudent judgment, directors and officers risk what essentially are managerial malpractice claims."

According to Harvey, president and CEO of Assurex International, the world's largest privately held commercial insurance brokerage group, directors and officers (D&O) claims typically result from disputes over financial or accounting irregularities or company decisions alleged to adversely affect shareholders' return on investment.

For public companies, shareholder complaints are the most frequent sources of D&O claims. Common shareholder complaints involve financial disclosure, breach of fiduciary duty, fraud, mergers and acquisitions, stock offerings and spin-off-related issues.

Discrimination is the primary employee complaint, followed by wrongful termination, harassment and breach of contract. Clients cite discrimination more often than any other type of complaint. Business interference tops the list of competitors' claims. For both clients and competitors, contract disputes come in second on the list of typical grievances.

"Directors and officers insurance can help mitigate losses when an organization and its directors or officers are slapped with a legal claim," said Harvey. "For responsible organizations operating in the age of workplace lawsuits, D&O insurance is a must."

The Purpose of D&O Insurance

Available for public and private companies, non-profit and for-profit organizations, D&O insurance:

1. Protects directors and officers with insurance covering matters for which they might not be indemnified under corporate by-laws.

2. Reimburses the organization after it has indemnified directors and officers in accordance with corporate by-laws.

3. Motivates the organization to attract quality outside persons to serve as directors or executive managers.

4. Reassures inside directors and officers.

What Type of D&O Insurance is Right for You?

Your organization's structure will determine the type of D&O coverage application form used by the underwriter. Insurance companies that underwrite D&O policies distinguish between for-profit and non-profit organizations, as well as publicly held and private companies when preparing D&O quotes and policies.

The good news for non-profits: D&O coverage is both broad and reasonably priced for non-profit organizations. Minimum premiums begin well under $1,000. Directors and officers of non-profit organizations can obtain coverage aspects and extensions not available to the directors and officers of for-profit organizations. Non-profit organizations' coverage provisions might include full coverage for the organization, employment practices liability, an affirmative coverage grant for punitive damages (unless prohibited by law), defense expenses payable beyond policy limits and in some cases no per-claim deductible.

When it comes to private versus public company D&O insurance, a major distinction is the scope of coverage available for the organization as an entity. Most publicly held organizations are able to purchase coverage for the organization's liability only for shareholder claims in connection with Securities and Exchange Commission (SEC) liability. Since this exposure is not faced by private organizations (even those with shareholders), underwriters generally exclude the SEC exposure from private companies' D&O policies. But, it is still important that a private organization's D&O coverage not exclude claims brought by shareholders, as many private organizations do indeed have shareholders.

Underwriters of private company D&O insurance offer several coverage forms to cover the organization's liability to the same extent as the liability coverage provided to directors and officers. However, since for-profit D&O policy limits are provided on an aggregate limit basis, payment of covered claims made against the organization erodes the coverage limit available for directors and officers.

Don't Forget Employment Practices Liability Coverage

A benefit of covering private organizations as an entity on a D&O policy, in addition to protecting the directors and officers, is the ready availability of Employment Practices Liability (EPL) coverage. EPL insurance protects employers from workers' claims of discrimination or wrongful termination based on race, sex, age or disability. EPL insurance also protects organizations from third-party liability claims filed by customers and outsiders.

How to Maximize Your D&O Coverage: 15 Buying Tips

D&O insurance coverages are highly negotiable. Your insurance agent should make every effort to customize D&O coverage to meet the unique needs of your organization and its management structure. Market conditions should be taken into account as well.

Assurex International offers 15 tips to maximize your organization's D&O insurance coverage.

1. Make sure the policy is non-cancelable, except for non-payment of the premium. Require the insurer to give a minimum of 90 days written notice of non-renewal.

2. Strive for an affirmative coverage statement regarding punitive damages.

3. Be clear on the extent of entity coverage afforded, for settlements, judgments and defense expenses. As an alternative, pre-set an allocation percentage (ideally 100 percent) for the entity. Generally, for publicly held entities, the only entity coverage available is for SEC-related claims. While broader entity coverage is available, D&O entity coverage is still evolving.

4. Is the policy endorsed to extend to EPL claims? This extension is valuable only if the entity is specifically covered for EPL claims.

5. If your organization is publicly held, have your agent investigate a coverage carve out in the exclusionary language for pollution-related claims, covering shareholder suits against directors and officers.

6. Generally, exclusionary language for Professional Services or for Errors or Omissions is too broad. Request coverage carve out for failure to supervise, if the exclusion cannot be removed entirely.

7. Secure a written commitment from the insurer for multiple-year pricing, or language that restricts possible premium increases to significant financial changes, a major acquisition or significant claims activity.

8. Seek automatic coverage for newly acquired or created organizations, with no additional premium payable with policy renewal or anniversary.

9. Make sure there is a specific provision for the insurer to advance defense costs to the insured.

10. Arrange for pre-approval of the insurer's choice of defense counsel.

11. Secure coverage for non-officer employees named in a covered suit with officers and/or directors.

12. Be sure a minimum of 12 months is allowed for the Extended Reporting period (discovery clause).

13. Have legal counsel review the D&O policy application forms before submitting them.

14. Extend coverage to include outside directorships.

15. Have your insurance broker obtain a carve out from the usual insured versus insured exclusion to cover claims brought by bankruptcy trustees, federal or statutory receivers, and debtors-in-possession. This is valuable in situations involving bankruptcy of the insured organization.

D&O insurance will not necessarily protect your organization against intentional wrongdoing such as fraud, theft or blatant disregard for employees' rights. However, whether your organization is private, public or non-profit, D&O insurance should be a component of your overall insurance and risk management program.

Assurex is the world's largest grouping of privately held risk management and commercial insurance brokerages. Visit Assurex online at www.assurex.com.