WHAT IS DIRECTORS & OFFICERS LIABILITY INSURANCE
D&O Insurance is designed to protect the personal assets of directors and officers in the event that an action is taken against them in relation to their management of a company.

POLICY WORDING
D&O insurance is typically written on a claims-made and reported basis. Coverage is triggered when a claim is made or reported during the policy period for wrongful acts that happened after the "retroactive date". Sometimes it is possible to purchase a policy without a retroactive date – also known as "full prior acts coverage." -(refer bottom of this page for definitions of "Claims Made" and "Retroactive Date")

Directors and Officers' liability insurance usually contains two insuring clauses.
Part I - "Directors and Officers" - covers the individual directors and officers for claims made against them in their official capacities.
Part II – "Corporate Reimbursement" - is a reimbursement coverage, that indemnifies the corporation for payments it makes on behalf of the insured directors and officers.
In recent times, however, some policies offer a third type of coverage for the benefit of the company, for claims made directly against it, called "Entity Coverage."

DEFINITIONS:
These can vary from insurer to insurer and need to be checked thoroughly.

"INSURED"
Directors should also take into account whether they will be considered to be an insured for claims brought against them after they cease to be directors. Directors should also consider whether the policy would continue to define them as "insureds" and provide coverage after a merger, acquisition, or sale of substantially all of the assets.

"WRONGFUL ACT"
The definition of "wrongful act" defines what kind of conduct will be covered. This term should be broadly defined to include intentional and unintentional acts, errors, and omissions (including statements made) in the discharge of a director's duties, as well as any breaches of a director's duties to the corporation. The term should specifically include any misleading statements made in a disclosure statement.

DEFENCE COSTS
D&O policies typically cover "loss" from "claims", including defence costs and liabilities. But they are generally not "duty-to-defend" policies. The policy often stipulates that the insurer may make any investigation deemed necessary and may associate itself with the defence. The policy will then outline where and what claim expenses may be incurred, claims defended, and settlements reached. Usually, the insured will be required to hire so-called "panel counsel" – lawyers on the insurance carrier's approved list. Some insureds negotiate to retain the right to select their own counsel. Defence costs typically erode policy limits; in other words, defence costs, including legal fees, reduce the amount of coverage unless defence costs are covered in addition to the sum insured. Particularly where multiple insureds are sued, defence costs can be quite significant.

DEFENCE COST REIMBURSEMENT
Unlike other forms of insurance, most D&O policies do not impose a duty on the insurer to defend a cause of action against the insureds. A company may negotiate for an endorsement extending a duty to defend, but the inclusion of an express duty to defend may be very expensive and is generally rare. Some policies have express defence cost advancement provisions; others do not. Litigation has ensued where there is no express provision – some jurisdictions have held that the insurer is obligated to reimburse for defence costs as they are incurred; others have not. This question is made more complex when there is no final resolution of the underlying litigation, but rather the case is settled. Directors should ask for language clarifying that costs incurred in settling a claim will be considered defence costs. Even when the carrier has an express duty to advance defence costs (subject to the insured's promise to repay the carrier if, at the end of the day, he was not entitled to them), one can encounter substantial delays. Also, some policies require security from the insured of his reimbursement obligation before defence costs are advanced.

DUTY TO CO-OPERATE
As with any insurance policy, the directors and officers and the corporation, as parties to the insurance contract, are required to assist the insurer in investigating the merits of the claims, to cooperate in the defence of the claim, and not to do anything to prejudice the insurer's position or its right to recovery or subrogation. In some cases, this can be problematic – especially if there is an ongoing criminal investigation. It can also create complications in achieving a settlement if, as is often the case, the insurer has reserved its rights instead of acknowledging coverage. For example, a director may settle three claims brought against him for ten million dollars. If his insurance company believes only one of the claims was covered, it may argue that it need pay only one third of the settlement amount.

INTENTIONAL ACTS
Most policies will not cover claims arising from personal profits improperly gained by a director – although there are continuing arguments about just what this means. Similarly, policies generally will not cover claims in which there has been dishonesty or actual, intentional fraud. Innocent insureds may still have coverage based on a non-imputation or severability clause. For example, if two of a company's ten directors commit intentional and bad acts resulting in a lawsuit, a non-imputation clause will provide coverage for the eight innocent directors, but not the two wrongdoers.

INSURED v. INSURED EXCLUSIONS
Under a so-called "insured versus insured" exclusion, most polices will not cover claims brought by the corporation, which is usually also an insured of the policy, against its directors. The "insured versus insured" exclusion was originally designed to prevent collusive claims. It can be especially problematic in a receivership situation. For example, many claims against a bankrupt company may come from its own officers and directors for unpaid salaries. An insurance provider may argue that the policy will not cover such claims as one between an insured (the directors) and an insured (the corporation itself).

BODILY INJURY/PROPERTY DAMAGE/ENVIRONMENTAL EXCLUSIONS
Bodily injury and property damage claims are typically excluded. It is not unusual for a policy to cover shareholder litigation relating to environmental issues, but exclude coverage of the underlying environmental controversy.

SETTLEMENTS
The typical policy will also include a clause, stating that the insurer may settle any claim for an amount it determines to be reasonable, with the consent of the director. If, however, the director withholds his consent, the insurer will not cover any part of the loss exceeding the amount for which it could have settled the claim; nor will defence costs be paid after the date when it could have settled.

MISREPRESENTATIONS IN THE PROPOSAL FORM
More and more often, D&O insurers, when faced with a major securities case or the uncovering of a fraudulent scheme, will contend that, like the plaintiffs, they, too, were deceived by misrepresentations in the application. Usually, today, the application requires audited financial statements to "be attached to and made a part of" the application. Insurers will void insurance policies if there are misrepresentations in the application material to the risk, even if the misrepresentations are innocent.

Jurisdictions vary on whether an entire policy can be void ab initio as to all insureds, i.e., all directors, officers and the company, for the misrepresentations of the individual director or officer who completed the D&O application. To avoid the problem of the "innocent" director, some insurers make all directors and officers sign the application. In addition, although most policies include a "severability" or "non-imputation" clause, some courts have held that, based on the particular policy language, the provision does not apply to the application process. This means that if one of the corporation's directors makes misrepresentations in the insurance application, the policy will be void not only as to claims brought against him, but also as to the remaining, otherwise innocent directors.

ALLOCATION ISSUES
The process by which an Insurer evaluates which portion of a loss is covered. An Allocation of coverage is made between (1) the corporate entity and the Directors and Officers, (2) covered and uncovered defendants in a Claim, and (3) the covered and uncovered allegations of a Claim. An Allocation process normally occurs both at the beginning of the claims process to evaluate how much of the defense costs are advanced and again at the end of the claims process to evaluate how much of a settlement or judgment is covered.

BANKRUPTCY
Complicated bankruptcy issues arise whenever a D&O policy also provides entity coverage. In essence, some courts have held that D&O policies are property of the bankruptcy estate and that claims under the policy are barred by the "automatic stay" in bankruptcy – effectively leaving the officers and directors to fund their own defense and/or settlements. Even where the bankruptcy court permits an officer or director to access the policy, he may face serious allocation problems if the total available limits are not enough to pay his claims and defense and those of the estate as well.

AUTOMATIC ACQUISITION COVERAGE:
The policy automatically provides coverage for new subsidiaries provided that the total asset size of the new subsidiary does not exceed a pre-agreed percentage of the Insured's total asset size. A 60 to 90 day coverage window is usually available for new subsidiaries which are larger than this threshold. The new subsidiary must be noticed to the Insurer during this window, and the Insurer must agree to provide coverage beyond the window

SETTLEMENTS
Finally, a topic addressed in several jurisdictions is whether an insurer can be liable for bad-faith failure to settle when it settles the claim on behalf of some, but not all, insureds. The question is whether an insurer can be held to have acted in bad faith for settling on behalf of some insureds, exhausting the applicable policy limits, thereby leaving the other insureds with no coverage. Most jurisdictions permit such settlements – necessitating adequate limits to ensure sufficient coverage for all insureds.

ENTITY COVERAGE (ALL CLAIMS):
Extends coverage to the corporate entity for all covered Claims. This coverage is normally only available for privately held companies. Please note, exclusions will apply to this extension.

CONCLUSION
First, when made aware of a potential claim or lawsuit, IMMEDIATELY put all carriers with potential coverage on notice of the claim, whether you think you have coverage or not. (Issues of policy interpretation can always be litigated at a later time, but if you fail to adhere to the notice requirements of a policy, coverage can be lost forever.) Secondly, when you receive from the insurer the declination or the reservation of rights letter – don't just accept it – seek expert help. Thirdly, when facing a potentially significant claim or planning a significant corporate transaction, plan ahead your strategy for dealing with your D&O carrier and policies. Don't assume it will simply be taken care of.

WHAT IS A 'CLAIMS MADE AND NOTIFIED' POLICY? HOW DOES IT DIFFER FROM AN 'OCCURRENCE' POLICY?
A 'claims made and notified' policy requires all claims and any fact, situation or circumstance that results in a claim, to be notified to the Insurer within the Period of Insurance. The actual mistake could occur at any time, if there is retrospective cover, or otherwise it must occur during the Period of Insurance. The Insured must not have had any prior knowledge of the fact, situation or circumstance before the Period of Insurance. In an "occurrence" wording (as for Public Liability policy wordings), the circumstance must occur during the Period of Insurance whilst the notification of this event can occur at any time subsequently.

WHAT IS THE DATE OF INCEPTION?
The Inception date is the date of the start of the Policy Period.

WHAT IS THE RETROACTIVE DATE?
When the policy provided is written on a claims-made basis, prior acts become an important consideration. If an Insurer is not willing to provide coverage for previous, unknown events that may have occurred prior to the policy inception, the tool used to limit this exposure is the “retroactive date” limitation.

If a policy is written with an effective date of 1st January, 2005 for a business that has been trading since the year 2000 without a retroactive date, the policy is activated for any incident that is reported during the policy period ie after the 1st January, 2005, regardless of when the incident occurred. Adding a retro date to the policy is comparable to building a fire wall. When the insurer adds a retroactive date to the policy that is the same as the inception date of the policy, the policy will respond only to claims that are reported during the policy period if they occurred after the policy was written ie. in the case above, only errors committed after the 1st January, 2005 would be covered.

A claims-made policy that does not have a retroactive date or an unlimited retroactive cover is better for the insured because there are no restrictions on when the wrongful act must have occurred. For coverage to apply, the claim must be made after the policy inception, regardless of when the incident occurred. Such a policy still does not cover incidents that are known at policy inception and could give rise to a claim in the future. These must be disclosed on the application and are not covered.

A contract without a retroactive date is advantageous to the insured from a coverage standpoint and, as a result, the insured can expect to pay more for the coverage. Most professional liability contracts do include a retroactive date. When a client cannot obtain unlimited retroactive coverage, the retroactive date should be set as far back as possible.