The Basics of Your Directors & Officers Insurance Policy (D&O Insurance)

Federal regulatory agencies have been increasing investigations and enforcement in the past few years, and recent reforms in health care, banking, and consumer protection will likely generate new liabilities for companies.

Most mid-market for profit and not for profit businesses carry some form of directors and officers liability insurance to protect the company and its executives in the event of a regulatory investigation or penalty. But those policies often have limits or exclusions to the coverage based on corporate structure, industry, and the nature of the investigation itself. Many companies that we have spoken to didn’t know how their D&O policies were structured.

Because insurance buyers at mid-market companies may not fully understand their D&O coverage, they expect that it’s all-inclusive, and that anything that comes about is going to be picked up. So when they receive a denial or a reservation of rights letter from the carrier, they are obviously surprised and disappointed.

Lets go over the basics:

  1. Costs from an investigation in which a company is merely a party of interest, and not the target of the investigation itself, are typically not covered by most D&O policies.
  1. Do not limit your coverage to any specific agency by listing them, as you could run into a problem with interpretation. If you’re investigated, but not by the particular named agency in the policy, the implication is that it’s not covered.
  1. Until recently, legal fees and other costs associated with an investigation prior to the issuance of a subpoena or official notice of an accusation, known as “pre-claim” costs, were the responsibility of the company or its directors. Private companies could only obtain coverage for costs after an official notice of investigation was received. Insurers have recently begun offering products to cover pre-claim costs in certain situations but have yet to form a comprehensive coverage package for costs on both sides of an official agency action.
  1. It would certainly benefit you to hire a lawyer before you sit down with any federal or state regulatory agency. Your policy may be limited to formal investigations only.  If so you may not be covered for costs, or at the very least you’re going to have a dispute over what constitutes a formal investigation.


Now that you know the basics, let’s go over some common mistakes that are made:

 

  1. One common mistake is failing to notify your broker/insurer when contacted by a regulator. Most policies have a fixed time period within which a client must report a claim. As a result failing to do so at the earliest possible opportunity could jeopardize coverage for the investigation and subsequent claims arising from the original event.
  1. Employers worried about their company’s profits may assume that simply fulfilling an agency’s initial request for information will satisfy their obligations under their D&O policy. Then they may decide not to report the contact to their insurer, hoping to improve their chances at favorable renewal rates.
  2. Employers sometimes struggle to file claims in a timely manner if their staff has not been properly instructed on the matter. The problem we see all the time is a human resource director often won’t know that they need to inform their CEO or CFO that they were contacted by a regulator, because that’s what triggers coverage.
  3. A final mistake lies in the selection of counsel once a director has been contacted by a regulator. Smaller companies often turn to an in-house legal adviser or an external general practice lawyer that they’ve worked with before. General business litigation experience likely will not prepare a company or its lawyers for the intricacies of regulatory investigations and the insurance policies that guard against the damage they can inflict.


We hope you come away from this article with a greater education on D&O Insurance policies. If you have any more questions on directors and officers insurance please feel free to contact one of our experts.

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