Are you a director of a company?
Does your D&O policy cover both you and your officers? Watch out!
As a director of a corporation the coverage afforded the D&O (Directors and Officers) policy provided by the company may not be what you expected. Usually the D&O policy is negotiated by the officers of the corporation, and it covers both the directors and officers. The officers usually complete the application and negotiate terms and conditions with the insurance company. This is seen as part of the executives’ duties – not something that the directors take on themselves. One of the most valuable parts of an insurance policy is the coverage for legal expenses. In this litigious society one can be subject to any number of lawsuits initiated by an energized contingent fee attorney eyeing an enticing target. While most policies have an exclusion for fraudulent acts many times the fraud needs to be proven. In one instance there was a massive fraud by the officers, however until it was proven the policy was paying for the officers’ legal fees that were more than anyone could possibly have anticipated. The expenses reached the policy limits leaving the innocent directors without any insurance coverage – not an enviable position. It would have been nice to have arranged things differently.
As a director think about the following when considering a D&O policy:
· What is the definition in the policy of “Wrongful Acts” typically meaning breach of duty, neglect, error, omission, or other act committed acting in the capacity as a director for the company?
· Does the policy have coverage that is paid directly to the individual directors committing the wrongful acts?
· Has the policy for the directors been negotiated and reviewed by professionals separate and apart from the policy that also covers the officers?
· Has someone representing the director reviewed the insurance application to be sure that there are no misrepresentations of material facts that could lead to it being rescinded or voided?
· Does the corporation have an agreement with the directors to indemnify them against liability for wrongful acts in connection with your serving as a director?
· Does the policy have coverage to reimburse the company for indemnifying directors for wrongful acts?
· Does the policy have a “severability “provision that says the director is insured if they are an innocent director?
· Is the policy construed to be a separate application and policy for the director?
· Is there coverage for the allegation of dishonest conduct, fraudulent, or criminal contact versus the adjudication of such conduct.
· Is the policy on a “claims made” (when the claim is filed) or an “occurrence” (when the event occurred) basis so you know when you are covered?
· What is the discovery date on your claims made policy (how long to report a claim after you cancel the claims made policy )?
· Are the policy limits appropriate for the situation.
Serving in any position with supervisory and decision-making responsibilities exposes one to many types of liability and they seem to be increasing. Whether as a director, officer, automobile driver, homeowner, volunteer or any number of positions one can hold there are ways to protect oneself and certainly having the appropriate insurance is primary. What is noteworthy is that understanding the nature and extent of coverage takes time, attention, and effort.
FBO is a multi-family office focused exclusively on providing accounting, tax, and administration of financial matters for UHNW individuals and families. It does not offer Investment Management Services.
FBO Services, Inc. 2011 Renaissance Blvd., Kingo of Prussia, PA 19406-2782
610-272-0800 email: info@fbosericesinc.com www.fboservicesinc.com
This material is provided for informational purposes only and does not constitute a recommendation by FBO Services, Inc. of any kind. The information herein is not intended to provide tax, investment, accounting, financial or other professional advice on any matter, and should not be used or relied upon as such. It is not intended to constitute legal advice, nor does it create a relationship between FBO Services, Inc. Recipients should consult with counsel before taking any actions based on the information contained in this material. FBO Services Inc. assumes no direct or consequential liability for any errors in or reliance upon this material.
