Most people don’t consider exposure when serving on a Board of Directors. For-profit and non-profit board members have an exposure to lawsuits if accused of wrongful misconduct resulting from board member decisions. Any claim, whether baseless or legitimate must be responded to by an attorney, and the Directors & Officers Insurance (D&O) is the most economical way to transfer the cost of the lawsuit.
A D&O policy handles claims on a “claims-made” basis rather than “occurrence” basis like other insurance policies. Since D&O losses are not typically discovered by the claimant until months or even years after the alleged misconduct, the D&O policy must be in force continually to make certain coverage will respond at the time of the notice of loss. Any insurance carrier change will require a “retro dated” policy that will go back in time to respond to cover previous policy periods. Also, any organization that is closing should purchase “tail coverage” to keep coverage in place for three to five years in the future.
While older policies offered coverage only for board members and directors, today’s D&O policies provide coverage for the top level management and even non-executive employees. Typically, a company or organization’s exposure can be from stakeholders, investors, bondholders, employees, and lenders. Exclusions included in most policies include:
• Personal profiting and illegal compensation
• Open claims
• Pending and prior litigation
• Any claim covered under another type of insurance
It is very important for the company’s management to review and understand the elements of the D&O policy. Knowing what is considered as a legitimate claim and when it must be filed is especially important. Failure to report a claim to your carrier will most likely result in a loss of coverage. The insurance carrier will always state the rules for reporting claims within the policy, and it is the duty of the insured to understand and follow these rules.
D&O exposure and the policy that covers it can be one of the most complex insurance coverages on the market today and as such, it is always recommended that the company seek advice from an experienced D&O agent. There are many insurers that offer policies that may seem alike on the surface, but can have nuanced differences that may prove costly after a claim is filed. Take advantage of an experienced agent or broker to help navigate these differences so your decision will be informed and your protection sufficient.