Most companies have Directors & Officers Liability (“D&O) insurance. As the name of the policy suggests, these polices provide coverage for lawsuits against a company’s directors and officers for acts performed in the course of their duties. But policyholders are sometimes surprised to learn that D&O policies may provide coverage in a number of other situations.
First, some D&O basics. D&O policies generally include multiple insuring agreements, typically referred to as “Side A,” “Side B,” and “Side C” coverages. Side A coverage insures individual directors and officers against “non-indemnified losses” – that is, losses insured by these individuals that are not indemnified by the company for one reason or another, such as if the company is legally prohibited from providing indemnification or lacks the financial resources to do so. Without this coverage, the personal assets of the company’s officers and directors would be at risk, significantly disincentivizing their service.
Side B coverage, by contrast, protects the company itself, and covers the company’s losses incurred in advancing legal fees or indemnifying individual directors and officers for their losses incurred due to a claim relating to their service. Most companies offer their directors and officers such indemnification to the extent permitted by law.
Side C coverage, sometimes called “entity coverage,” is included in some D&O polices and also protects the company, providing coverage for certain types of claims against the company. For most public companies, this coverage is limited to claims based on state securities laws, but many policies issued to private companies offer much broader coverage for a variety of claims against the company arising from “wrongful acts” by the company or its directors or officers.
Each of these coverage grants provides coverage for “claims” as defined in the policy. But what is a claim? Not surprisingly, lawsuits filed against the company, officers or directors will constitute claims if they allege “wrongful acts” within the definition of the policy. Most policies, however, include other definitions of “claim,” which can include:
- A request to toll or waive the statute of limitations. Companies frequently receive such requests if a potential plaintiff is interested in resolving a dispute short of litigation, but is concerned about the statute of limitations running. A tolling agreement stops the running of the statute while the parties attempt to work out a resolution of the dispute. If your company receives such a request, your D&O policy may provide coverage.
- A subpoena or civil investigative demand (“CID”). Some, but not all, D&O policies include subpoenas or CIDs within the definition of “claim.” In addition, some courts have held that a subpoena or CID constitutes a “written demand for non-monetary relief,” which is one of the definitions of “claim” included in most policies.
- A governmental investigation of the company or one of its directors or officers. Policies that cover governmental investigations often require the investigating entity to identify an insured target in writing before coverage is triggered.
- A criminal proceeding against the company or one of its officers or directors, commenced by filing of charges.
- An arbitration, mediation or other alternative dispute resolution proceeding. Many companies require such alternative dispute resolution efforts in contracts with counterparties, either in lieu of, or as a prerequisite to, litigation.
As with any form of insurance, the specifics of the coverage available to your company depend on the terms of your policy. It is essential that companies understand what does and does not constitute a “claim” under the D&O coverage so that they can be sure to satisfy their’ policy’s notice requirements and avoid the risk of losing coverage altogether through failure to give timely notice.