Director's & Officer's Liability Insurance

Perils: Potential Problems

D & O policies complement Commercial General Liability coverage--although the two policies alone do not necessarily provide "complete" protection against everything that can go wrong. D & O coverage protects against liability claims not seeking compensation for bodily injury and property damage.

Most D & O policies do not list specific types of covered claims. Instead, they cover "wrongful acts," a term that typically includes coverage for actual or alleged errors, misleading statements, and neglect or breach of duty. Coverage is then narrowed by a list of limitations and exclusions. Any exclusion must be examined to determine the full extent of its impact.

A common exclusion with potentially unrecognized adverse consequences is generally called the "insured versus insured" exclusion. Initially designed to eliminate coverage for struggles over organizational control, which can be intractable, this exclusion may eliminate coverage for employment-related suits. For instance, if the nonprofit's executive director is insured under the policy, his or her wrongful termination claim against the board members would be excluded by the "insured versus insured" exclusion. If so excluded, coverage might be available in a separate Employment Practices Liability Policy.

Although the insurance industry does not have a "standard" form," a D & O policy might include coverage for:

a wrongful termination lawsuit (on the grounds of breach of an employment contract or unlawful discrimination);

a lawsuit alleging that a board decision to sell an older building to purchase a new, more luxurious building was ill-advised and a waste of charitable assets;

a lawsuit against the directors for failing to prevent political, partisan activities that resulted in the revocation of the organization's tax-exempt status;

a lawsuit against the directors for failing to purchase an adequate insurance safety net;

a charge of neglect based upon use of targeted donations to pay general operating expenses or failure to prevent misappropriation of funds; and

errors in a newsletter or nonprofit publication

In summary, a D & O insurance policy typically covers claims arising from governance and management.

Shareholder lawsuits. They can be your worst nightmare. The source of 50% of all directors and officers liability (D&O) claims, shareholder suits typically name the corporation in addition to personally naming the directors and officers. According to the most recent Watson Wyatt survey, settlements in these cases average $7.6 million, with defense costs often adding another $1 million to the bill. Most companies and their executives count on their D&O policy to respond. What they don't anticipate is allocation, a common bone of contention between insured's and their insurer. Allocation is the process of dividing -costs between covered parties (typically the executives) and uncovered parties (typically the corporation or other third parties), and covered and uncovered allegations.

Before a shareholder lawsuit arises, directors, officers and the corporation can secure a comprehensive D&O liability insurance program that addresses the allocation issue up front. Chubb, a leading provider of directors and officers liability insurance, provides its customers with several solutions in addressing allocation. Read these directors and officers loss scenarios, and then ask your agent or broker about D&O insurance from Chubb and our creative allocation coverage solutions.

Click here for a look at our D & O Glossary of Terms.

Shareholder Lawsuits : Loss Scenarios From Chubb

Acquisition
Following an acquisition, a company reported a quarterly loss. Shortly thereafter, shareholders sued the company and its senior managers. The shareholders alleged that the company and its senior management improperly booked as goodwill the value of the acquired company, which had yet to produce any revenue. Subsequently, the company wrote down the goodwill, which led to the quarterly loss. 'Me shareholders further alleged that the CEO confirmed analysts' earnings projections while in possession of sales and earnings information to the contrary. The case could not be settled before trial, and the subsequent jury decision found the defendants not liable, and the verdict was upheld on appeal. The ordeal took more than six years.
Defense costs paid. $2,600, 000 Allocation level of directors and officers for defense costs: 60%
Inadequate/Inaccurate disclosure
Shareholders sued a company and its senior management alleging that they misled the market and artificially inflated the company's stock price by failing to disclose dangerous side effects of a newly approved prescription drug. Ultimately, the drug was removed from the market and the stock value dropped significantly. The case took almost three years to settle.

Indemnity paid. $17,500,000
Allocation level of directors (within deductible) and officers for damages: 70%

Defense costs paid. $0
Allocation level of directors and officers for defense costs: 70%
Failure to disclose the impact of a competitor's product
Shareholders alleged that a company failed to disclose material financial information about the impact of a competitor's new products on the company's business plan. Subsequent disclosure led to a significant drop in the stock price. The suit lasted more than two years.

Indemnity paid., $5,000,000
Allocation level of directors (within deductible) and officers for damages: 67%

Defense costs paid. $0
Allocation level of directors and officers for defense costs: 67%
Bankruptcy
Shareholders alleged that a company and its management failed to disclose the severe impact of long-term fixed supplier contracts, government deregulation of the industry and decreasing customer demand which, in combination, forced the company into bankruptcy. The parties were in litigation for five years.

Indemnity paid. $16,000,000
Allocation level of directors and officers for damages: 50%
(company had separate counsel.)

Defense costs paid.- $2,100,000
Allocation level of directors and officers for defense costs: 50%
Spin-off
Bondholders and preferred shareholders alleged that a company and its board violated securities laws and breached their fiduciary duties. Shortly after issuing several hundred million dollars of additional debt, the company spun-off its less profitable division together with the debt. The more profitable division was retained. The shareholders of the spun-off division alleged that the transaction drove down the value of their holdings because the debt was not supported by a company with the earning power of the original company.

Indemnity paid. $5,000,000
Allocation level of directors and officers for damages: 70%
(company also provided warrants.)

Defense costs paid. $2,200,000
Allocation level of directors and officers for defense costs: 50%
Chubb Group of Insurance Companies
This literature is descriptive only. The precise coverage afforded is subject to the terms, conditions and exclusions of the policies as issued.

Please read the insurance Glossary of terms