Directors and Officers Liability Insurance (D& O)
What does the policy cover?
Covers Individual Directors and Officers of a company against their Personal Liabilities whilst carrying out Administrative and Management Duties associated with running the Company.
In other words, this is a " Managerial Negligence" Cover
What does the policy cover?
A D & O Policy is in Two Sections
-
The first Section protects the Directors personally when they cannot be reimbursed by the Company.
-
The second section protects the Company but only when they are able to reimburse the Directors or Officers
Standard D & O Clause
-
The insurer will pay on behalf of the Director of Officer for loss resulting from a claim made against them arising out of a wrongful act committed in that capacity
Definitions
- Loss - Includes defense costs and any award
-
Wrongful Act - Includes actual or alleged error, act, misleading statement, breach of duty. or any other matter claimed against the Directors or Officers
Defense Issues
-
Duty to defend
-
Right to Select Council
-
Advancement of Costs
-
Vigorous Defence
What extensions are available?
Most policies can be extended to include:
-
External Directorships
-
Spousal Extension
-
Employment Disputes
-
Outside board cover (for associated companies) double excess basis - i.e. excess of other insurance, excess of other indemnity
-
Entity coverage for security claims
What are the main Exclusions?
-
Insured Versus Insured (IvI) exclusion
-
Pollution exclusion - can be amended to provide shareholder cover and defense costs.
-
Bodily injury/property damage
-
Insider Trading
-
Dishonesty or fraudulent actions (in fact or once proven)
-
Professional Liability
-
Fines, penalties and punitive damages
-
Liability from pension funds
-
Prior and pending litigation exclusion
Claims arise from
-
Share traded ( especially in the States: ADR's)
- Reason
-
Contingent fee system
-
Class actions
-
Specialist lawyers pursuing D & O's
-
7 law firms filed 63% of cases
-
1 law firm filed 25% of cases
- Complaint
- Drop in share price, resulting from:
-
Merger/ Acquisition
-
Poor business decision
-
Failure to disclose material information
Claims arise from:
- Investmens in the US
- Subsidiary companies
-
Sales
- Complaint
- Contractual disputes with contractors /suppliers or franchises
Claims arise from:
- Employees
- Reason
-
Legislation governing:
- Equal pay
- Age discrimination
- Disability
- Sexual Harassment
- Wrongful termination
Examples of Claims
- A US$ 259m settlement in a shareholder class action against a Bank and its various Directors and Officers. The lawsuit alleged the defendants misrepresented material facts regarding its financial performance and its acquisition of a new entity.
-
A US$ 230m settlement in a shareholder derivative lawsuit against Directors and Officers of a Financial Institution. The lawsuit alleged that the defendants breached their duties and unreasonably jeopardized the institution's financial condition by awarding to three executives US$ 500m in stock options.
-
A US$ 111m settlement of shareholder class action and derivative litigation against a Bank and its Directors and Officers. The lawsuits alleged that the defendants artificially inflated the company's stock price by issued misleading financial reports.
Why buy a policy?
- Protect the personal assets of directors and officers (corporate indemnification not always possible)
-
Protect corporate assets (from losses that could bankrupt corporations)
-
Attract and keep talented directors and officers (by protecting their personal assets)
Professional Indemnity Insurance (PI)
What does the policy cover?
The policy covers the monetary amounts, including defence costs, the assure is liable to pay to a third party following an action brought against him for an employee's:
- Negligent Act
- Negligent Error
- Negligent Omission
- Negligent Breach of Trust
- Negligent Breach of Professional Duty
- Negligent Misrepresentation
How does it respond?
-
Claims Made Basis" : Claims have to be brought against the assured during the period of the policy.
-
The Acts to which the claim is related must be on or after the Retroactive Date.
-
Covers any claim related to any circumstances known to the assured and advised to insurers during the policy period.
Are there any extensions available?
-
Loss of documents
-
Libel, Slander, Defamation
-
Unfair competition
-
Unintentional Breach of confidentiality
-
Unintentional Breach of copyright or patent infringement
-
Misstatement or misrepresentation
-
Employers Practice Liability
-
Dishonesty of employees
What are the main exclusions?
-
Any Circumstances known at inception by the assured
-
Any Wrongful Act, Error or Omission that took place prior to the Retroactive Date.
-
Any Dishonest, fraudulent or malicious acts
-
Contractual Liability unless attached in the absence of the contract.
-
Liability for bodily injury or property damage
-
Fines, Penalties, Punitive or Exemplary Damages
-
Liability to shareholders
-
Liability for financial risks (i.e. Depreciation in investments..)
-
Liability in respect of seepage and pollution et al
Claimants
-
The principal litigant against banks are
-
Customers
-
Governmental and Regulatory Authorities
-
Companies that have invested/lent money to clients of the bank.
Examples of claims
-
Bank received a deposit from a client but accidentally deposited the funds in the wrong account, from where they were withdrawn by another party. The client went into liquidation and successfully sued the Bank for US$ 65m.
-
In preparation for a pending merger, a Bank sought to sanitize their portfolio by stritctly enforcing the default provisions of their loan agreements. This resulted in a small retail customer going out of business. The customer counter-claimed and the Bank ended up settling the counterclaim for US$ 875,000 and spent US$ 231,000 in attorney's fees.
-
Private client claimed US$ 8m against a bank following the poor advice on the managements of his Assets.
Why buy a policy?
-
Indemnification in the event of claim being made
-
No Impact on the balance sheet
-
Demonstration to the clients that their interest have been considered
-
No impact on the image of the company
|
