See Client Communications article Independent Directors Need a Liability Safety Net.
If one of your customers has been asked to serve on the board of a for-profit or non-profit organization, you should offer them more than just your congratulations. Considering the types of liability exposures an individual director faces, you will serve your customer well by offering an Independent Directors Liability Policy.
Corporate directors can be sued individually for acts they perform (or fail to perform) or decisions they make while serving. If someone alleges the corporate leadership harmed the organization or another individual in the course of managing financial affairs or establishing policies, the resulting legal fees and potential judgments or settlements can devastate the organization as well as the individuals.
For example, a stockholder of a corporation or a member of a charitable or non-profit organization may allege financial loss as a result of a director's breach of the duty of care or loyalty to the organization. Employees, governmental entities, competitors, or creditors may allege negligence or some other breach of duty.
Directors and Officers (D&O) Liability insurance policies were developed to protect organizations and their directors and officers against these potential losses. However, the following points expose the reality that the organization's D&O policy may not be the only coverage your customer needs to consider to adequately protect his or her personal assets.
Limits of liability. The limits of liability on the D&O policy belong to all covered persons and entities combined, and they apply to all claims during the policy period, including defense costs incurred to defend those claims. When the limits have been exhausted by payment of defense costs, settlements or judgments related to one or more claims during the policy period, there is nothing left for any subsequent claims.
Exclusions. The exclusions found in a D&O policy can have a profound effect on the scope of coverage provided by the policy. The typical policy contains the following exclusions:
- Insured versus insured: The policy may exclude claims brought by one director against another director, or by the organization against a director.
- Failure to Maintain Insurance: The policy may exclude the consequences of board decisions regarding insurance. If a property or liability insurance policy proves to be inadequate to cover a loss to the organization, the D&O policy will generally not cover a claim against the organization or its directors that they failed to purchase adequate insurance coverage to protect the organization's assets.
Application warranties and policy conditions. The D&O policy can be rescinded after a claim is reported if the application for the policy contained false or misleading information. A claim may be denied if the claim is not reported to the insurance company in a timely manner.
Cancellation. The D&O policy can be canceled for a number of reasons without the director's knowledge, including cancellation for non-payment, change of control or change of risk.
Independent Directors Liability Insurance
When the individual director purchases an Independent Directors Liability (IDL) insurance policy, these concerns can be addressed by providing coverage and limits dedicated to only one director – the named insured on the policy.
The typical IDL policy contains the following important features.
Dedicated Limits of Liability. The limits of liability on your IDL policy belong only to the independent director named on the policy. If the corporate D&O policy limits are exhausted due to claim expenses, judgments or settlements, the IDL policy steps in and takes over on the insured's behalf.
Non-Rescindable and Non-Cancellable. The IDL policy can't be canceled or rescinded except for non-payment of the premium. If the D&O policy is canceled or rescinded, the IDL policy drops down to protect the individual named insured.
Fewer Coverage Exclusions. The IDL policy is unencumbered by the large number of exclusions that are necessarily found in the typical D&O policy. In other words, the IDL policy does not "follow form" with the corporate D&O policy.
Portable. The IDL policy can cover the insured's service on more than one board. In addition, it can cover past service on other boards, should a claim arise after the individual leaves that board.
Shadow Defense Coverage. When a suit is filed against the corporation and/or a number of directors, the defense counsel appointed by the D&O insurance company is responsible for representing the potentially diverse interests of all defendants. When the same claim is reported under the IDL policy, the IDL insurance company may appoint an attorney to monitor the proceedings to be sure the individual interests are protected.
The points listed above are some of the major benefits of purchasing an IDL policy. IDL policies are available from a number of different insurers, but these policies have different terms and conditions and must be reviewed carefully to determine how they suit the needs of a prospective purchaser.
Some organizations agree to procure and pay for IDL policies for their independent directors, but a policy obtained in this manner may not be the best policy for the individual.