Directors & Officers (D&O) insurance policies, never standard, continue to evolve in light of the bank failures and corporate scandals in recent years. Below is a shorthand list of provisions to review carefully at your next renewal.

  • Protecting Independent and “Innocent” Directors and Officers
    • Ideally, D&O policies should not be rescindable, especially the “Side A” coverage.
    • In addition to non-rescindability, or alternatively, guarantee severability of representations in the application, to protect and preserve coverage for innocent directors & officers.
  • Trigger
    • D&O policies are claims-made policies and, thus are triggered or activated by a “claim” made during the policy period.
    • Some policies are “single-anchor policies,” and require one event to take place during the policy period (usually, the claim against the policyholder).
    • Some policies require two events during the policy period (claim against the policyholder and notice to the insurer). Such double-anchor policies could be more difficult to trigger.
    • Attempt to buy D&O policies that include a single-anchor only.
  • Alternative to Entity, or Side C, Coverage
    • With the demise of entity coverage, consider including a preset allocation formula in your policy or program.
  • Protection Against Insolvency of Policyholder Company
    • Provide that deductibles or SIRs, which may be substantial, do not apply if the company is insolvent.
    • Include priority of payments provisions, which help ensure that the individual insureds obtain maximum protection and are “paid first.”
  • Definition of “Insureds”
    • Review the definition of “insured” to make sure it is broad enough to cover all of those for whom protection is sought.
  • Definition of “Claim”
    • Ensure that coverage is broad enough to pay for administrative, regulatory, civil, and criminal proceedings.
    • Attempt to obtain coverage for both “formal” and “informal” investigations, if the policy makes a distinction.
    • Cover not only litigation, but also alternative dispute resolution proceedings and investigations, which are increasingly common.
  • Defense Cost Issues
    • Review insurer’s list of panel counsel and negotiate alternatives.
    • Avoid provisions granting the insurance company the right to recover payment of, or recoupment of defense costs.
    • Review “consent to settle” clauses.
    • Ask to review insurer’s billing guidelines before purchase; amend them if necessary to avoid disputes when claims arise.
  • Ensure Coverage for All International Risks and Global Exposures
  • Review All Exclusions, but Especially Consider, Modify, or Eliminate the Potential Impact of the Following Exclusions:
    • Deliberate, Fraud, or Criminal Acts Exclusions. The most desirable form of these exclusions from a policyholder’s perspective are those that require a final adjudication and finding of fraud or other “bad” conduct in a securities litigation.
    • Prior Acts, Prior Notice, and Prior Pending Litigation Exclusions. Narrow them or, ideally, eliminate them. Buy back the prior litigation date to the earliest date possible. Ideally, purchase full “prior acts” coverage.
    • Insured vs. Insured Exclusion. This should not apply to preclude coverage when the debtor in bankruptcy is involved for an insolvent policyholder or when the (former) insureds are adverse to each other.
    • Severability of Exclusions ¡ Include severability provisions in conduct-related exclusions, but otherwise try to limit or avoid these exclusions. ¡ Refuse extracontractural exclusions inserted into “warranty letters.”
    • Application Provisions
      • Limit the documents and representations in policy “warranty” provisions.
    • Issues for Excess D&O Policies ¡ Confirm that they follow form in key respects to underlying policies.
    • Eliminate “actual payment provisions” which provide that excess policies do not attach unless the underlying insurers, and only they, pay 100% of the underlying limits.