Considering the fact that its inception about fifty many years back Davison Auto Insurance, D&O insurance policies has evolved into a family of products responding differently to the needs of publicly traded companies, privately held businesses and not-for-profit entities and their respective board members, officers and trustees.
Directors’ & Officers’ Legal responsibility, Executive Legal responsibility or Management Legal responsibility insurance plan are essentially interchangeable terms. However, insuring agreements, definitions, exclusions and coverage options vary materially depending upon the type of policyholder being insured and the insurer underwriting the risk. Executive Liability insurance coverage, once considered a necessity solely for publicly traded providers, particularly due to their exposure to shareholder litigation, has become recognized as an essential part of a risk transfer program for privately held firms and not-for-profit organizations.
Optimization of protection is a common goal shared by all types of organizations. In our opinion, the best way to achieve that objective is through engagement of highly experienced coverage, legal and financial advisors who work collaboratively with management to continually assess and treat these specialized enterprise risk exposures.
Non-public Company D&O Exposures
In 2005, Chubb Insurance coverage Group, one of the largest underwriters of D&O insurance coverage, conducted a survey of the D&O insurance plan purchasing trends of 450 non-public businesses. A significant percentage of respondents gave the following reasons for not purchasing D&O insurance policies:
• did not see the need to have for D&O insurance coverage,
• their D&O legal responsibility risk was low,
• thought D&O risk is covered under other liability policies
The corporations responding as non-purchasers of D&O coverage experienced at least one D&O claim in the five yrs preceding the survey. Results showed that personal businesses with 250 or more employees, were the subject of D&O litigation during the preceding five yrs and 20% of businesses with 25 to 49 employees, experienced a D&O claim.
The survey revealed 43% of D&O litigation was brought by customers, 29% from regulatory agencies, and 11% from non-publicly traded equity securities holders. The average loss reported by the personal organizations was $380,000. Providers with D&O coverage experienced an average loss of $129,000. Businesses without D&O coverage experienced an average loss of $480,000.
Some Common Examples of Personal Company D&O Claims
• Major shareholder led buy-outs of minority shareholders alleging misrepresentations of the company’s fair market value
• purchaser of a company or its assets alleging misrepresentation
• sale of company assets to entities controlled by the majority shareholder
• creditors’ committee or bankruptcy trustee claims
• non-public equity investors and lenders’ claims
• vendors alleging misrepresentation in connection with an extension of credit
• consumer protection and privacy claims
Non-public Company D&O Policy Considerations
Govt Legal responsibility insurance policies policies for privately held organizations typically provide a combination or package of coverage that includes, but may not be limited to: Directors’ & Officers’ Liability, Employment Practices Liability, ERISA Fiduciary Legal responsibility and Commercial Crime/ Fidelity insurance.
D&O policies, whether underwritten on a stand-alone basis or in the form of a combination-type policy form, are underwritten on a “claims-made” basis. This means the claim must be made against the Insured and reported to the insurer during the same effective policy period, or under a specified Extended (claims) Reporting Period following the policy’s expiration. This is a completely different coverage trigger from other legal responsibility policies such as Commercial General Legal responsibility that are traditionally underwritten with an “occurrence” trigger, which implicates the insurance policies policy that was in effect at the time of the accident, even if the claim is not reported until yrs later.