What do the emissions scandal at Volkswagen and cyber security breaches at Home Depot have in common? Both could trigger claims on the company’s Directors and Officers (D&O) insurance policies. Now more than ever, D&O is serving as a safety net for exposures that other policies won’t cover, from cyber security claims, to employment practices claims, to Errors & Omissions (E&O) and others.
“We are increasingly seeing D&O policies respond to claims as a last wall of defense,” said Christopher Gonzales, National Product Leader, Professional Liability, Burns & Wilcox Canada. “For example, we had a royalty remissions company with a collection and remissions issue that wasn’t covered through the E&O policy due to a common exclusion. However, the D&O policy picked it up. It could be the same situation in IP cases as well, where D&O is in the background protecting the insured.”
It extends to those responsible for making management decisions, including executives and managers at many different levels not just those that sit on the board of directors.
D&O insurance provides coverage for negligent acts, omissions or violations of antitrust laws committed by directors and officers and executives of a company that result in a lawsuit being filed against the company. Typically it covers settlements or defense costs from legal actions brought against current and former C-suite executives. However, an increasingly litigious society has triggered a broader need for D&O coverage for all businesses – private, public and non-profit.
“D&O coverage has a name that can be misleading,” said Dario Nalli, Director, Executive Lines at Burns & Wilcox. “It extends to those responsible for making management decisions, including executives and managers at many different levels not just those that sit on the board of directors.”
THREE DISTINCT ADVANTAGES OF D&O
1. Covers claims that other policies do not
Retail brokers and agents should be aware that D&O policies are designed to cover individuals serving on a board and members of management, as well as the insured business entity. With evolving threats like cyber data breaches, there is an increased need for companies to protect their management.
“More companies are making the right decision to purchase cyber security coverage. But they may not realize that while a breach and loss of data can start out as a Cyber Liability claim, it may eventually hit their D&O policy if clients or shareholders believe that management did not put the correct security measures in place to protect the company and its clients,” added Nalli. “It is a rapidly growing source of D&O claims.”
2. Protects clients against regulatory action and inquiries
Regulatory actions can also play a part in driving the need for comprehensive D&O coverage. Investigations and investor lawsuits have steadily increased in recent years and are costly to defend, putting management’s personal assets at high risk.
“It’s important to be fully aware of what D&O policies will and won’t cover and determine if there are gaps,” added Gonzales. “A policy should cover regulatory inquiries, pre-suit investigations, and the cost of responding to subpoenas, not just when a trail begins or a settlement is paid.”
3. Shields clients from litigation, regardless of location
Geography is also important to note. There are several “hot button” states, like Illinois, California and Florida that file considerably more claims than others. Once a precedent is set on payout for a D&O claim, others tend to follow.
For instance, according to the Nonprofits Insurance Alliance Group, California seems to produce the most expensive employment claims against non-profit organizations, both in the cost of defense and in indemnity payments. The average employment practices claim against a nonprofit in California is about 45 percent more expensive than claims against nonprofits in the rest of the United States.
Employment law has become more complex across the country, making it easier for companies to fail to uphold the spirit or letter of the law. That may include sexual harassment, racial and gender discrimination, retaliation, defamation, failure to accommodate (i.e. ADA requirements), and improper employee classification.
Like cyber security breaches, wrongful employment practices may turn into a claim against management and executives. While a harassment suit may start out as an employment practices claim, if it is found that management did not abide by state laws, did not have up-to-date employee handbooks, or committed some other human resources infraction, executives could be found liable for mismanagement.
D&O policies can cover a wide-range of unexpected issues, on both the personal and professional lives of executives. Directors can be charged with unexpected misrepresentation claims that they may not even realize.
“This is a part of the industry where you hear a lot of ‘I didn’t think of that’ from the under insured,” said Gonzales. “For example, we recently handled a claim with a board member accused of having fake profiles on a dating site. The D&O covered it.”
When it comes to D&O coverage, it pays to be proactive with clients and discuss the potential claims scenarios to illustrate their risk. Policy terms and conditions can often be improved and there are many nuances to understand. Consulting with an expert can often shed light on the complexities of corporate management and the many hurdles leaders and organizations must overcome in today’s competitive and complex business environment.