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Executive Liability Insurance - Why Private Companies Need It

Since its inception about fifty years ago, D&O insurance has evolved into a family of products responding differently to the requirements of publicly traded companies, privately held businesses and not-for-profit entities and their respective board members, officers and trustees.

Directors' & Officers' Liability, Executive Liability or Management insurance are essentially interchangeable terms. However, insuring agreements, definitions, exclusions and coverage options vary materially depending upon the sort of policyholder being insured and therefore the insurer underwriting the danger . Executive insurance , once considered a necessity solely for publicly traded companies, particularly thanks to their exposure to shareholder litigation, has become recognized as an important a part of a risk transfer program for privately held companies and not-for-profit organizations.

Optimization of protection may be a common goal shared by all kinds of organizations. In our opinion, the simplest thanks to achieve that objective is thru engagement of highly experienced insurance, legal and financial advisors who work collaboratively with management to repeatedly assess and treat these specialized enterprise risk exposures.

Private Company D&O Exposures

In 2005, Chubb Insurance Group, one among the most important underwriters of D&O insurance, conducted a survey of the D&O insurance purchasing trends of 450 private companies. a big percentage of respondents gave the subsequent reasons for not purchasing D&O insurance:
• didn't see the necessity for D&O insurance,
• their D&O liability risk was low,
• thought D&O risk is roofed under other liability policies

The companies responding as non-purchasers of D&O insurance experienced a minimum of one D&O claim within the five years preceding the survey. Results showed that non-public companies with 250 or more employees, were the topic of D&O litigation during the preceding five years and 20% of companies 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 typical loss reported by the private companies was $380,000. Companies with D&O insurance experienced a mean loss of $129,000. Companies without D&O insurance experienced a mean loss of $480,000.

Some Common samples of Private Company D&O Claims

• Major shareholder led buy-outs of minority shareholders alleging misrepresentations of the company's fair market price
• purchaser of a corporation or its assets alleging misrepresentation
• sale of company assets to entities controlled by the bulk shareholder
• creditors' committee or bankruptcy trustee claims
• private equity investors and lenders' claims
• vendors alleging misrepresentation in reference to an extension of credit
• consumer protection and privacy claims

Private Company D&O Policy Considerations

Executive insurance policies for privately held companies typically provide a mixture or package of coverage that has , but might not be limited to: Directors' & Officers' Liability, Employment Practices Liability, ERISA Fiduciary Liability and Commercial Crime/ Fidelity insurance.

D&O policies, whether underwritten on a stand-alone basis or within the sort of a combination-type policy form, are underwritten on a "claims-made" basis. this suggests the claim must be made against the Insured and reported to the insurer during an equivalent effective policy period, or under a specified Extended (claims) Reporting Period following the policy's expiration. this is often a totally different coverage trigger from other liability policies like Commercial General Liability that are traditionally underwritten with an "occurrence" trigger, which implicates the policy that was in effect at the time of the accident, albeit the claim isn't reported until years later.

"Side A" coverage, which protects individual Insureds within the event the Insured entity is unable to indemnify individuals, may be a standard agreement contained within many private company policy forms. These policies are generally structured with a shared policy limit among the varied insuring agreements leading to a cheaper insurance product tailored to small and mid-sized enterprises. For a further premium, separate policy limits could also be purchased for one or more of every distinct insuring agreement affording a more customized insurance package.

Also, policies should be evaluated to work out whether or not they extend coverage for covered "wrongful acts" committed by non-officers or directors, like employees, independent contractors, leased, and part-time employees.

Imputation of data & Severability

Coverage are often materially affected if an Insured individual has knowledge of facts or circumstances or was involved in wrongdoing that gave rise to the claim, before the effective date of policy under which the claim was reported. Policies differ on whether and to what extent, the knowledge or conduct of 1 "bad actor" could also be imputed to "innocent "individual Insureds and / or to the Insured entity.

"Severability", is a crucial provision in D&O policies that's often overlooked by policyholders until it threatens to void coverage during a significant pending claim. The severability clause are often drafted with varying degrees of flexibility-- from "partial" to "full severability." A "full severability" provision is usually most preferable from an Insured's standpoint. Many D&O policies, impute the knowledge of certain policy-specified senior level officer positions to the Insured entity. That imputation of data can operate to void coverage which may have otherwise been available to the Insured entity.

M&A and "Tail Coverage" Considerations

The "claims-made" coverage trigger is critically important in an M&A context where contingent liability risks are inherent. In these contexts, it is vital to guage the seller's policies' options to get a "tail" or "extended reporting period" for every of the target company's policies containing a "claims-made" trigger.

A "tail" coverage option allows for the reporting of claims alleging "wrongful acts" that occurred during the expired policy period, yet weren't actually asserted against the Insured until after the policy's expiration, but instead were asserted during the "extended reporting" or "tail" period. An acquiring company's insurance professional should work closely with legal counsel's due diligence team to spot and present alternatives to manage contingent exposures.

What a Director or Officer Doesn't Know Will Hurt Them

Directors' & Officers' insurance policies were originally created solely to guard the private assets of the individuals serving on public company boards and executive officers. In 1992, one among the foremost prominent D&O insurers led a serious transformational change in D&O underwriting by expanding coverage to incorporate certain claims against the insured entity. Entity coverage for publicly traded companies is usually restricted to securities claims, while privately held companies and not-for-profit organizations enjoy more comprehensive entity coverage because they lack the general public securities risk exposure of publicly traded companies.

The "Claims- Made" Coverage Trigger

D&O policies are universally underwritten on a 'claims-made' basis. This translates to an unequivocal contractual requirement that the policyholder report claims made against an Insured to the insurer during the effective policy period. the sole exception is within the case where an optional reporting 'tail' is purchased which affords the Insured the power to report claims during a specified "extended reporting period," as long because the wrongful act occurred during the effective period of the immediately preceding policy.

D&O policies issued to public companies generally contain no explicit duty to defend and a few require the Insured to pick from a pre-approved panel of pre-qualified defense counsel. In contrast, many private company D&O policies do contain a provision placing the defense obligation squarely upon the insurer, and still other policies contain options allowing the defense to be tendered by the Insured to the insurer within a selected period of your time . Some D&O policies contain defense cost provisions that need an allocation or sharing of the defense costs between the Insured and Insurer, based upon a determination of covered versus non-covered allegations.

Settlement Hammer

D&O policies typically contain a "settlement hammer" provision. This clause operates to limit an insurer's obligation to indemnify within the event the Insured refuses to consent to a settlement that's acceptable to the insurer. Some policies may express the quantity the insurer can pay for covered loss under this circumstance as a percentage of the last word covered settlement or judgment. Other D&O policies may limit their economic exposure to the quantity that the case could have historically settled, except for the Insured's refusal.

Regulatory Proceedings and Investigations

Most D&O insurance policies afford qualified protection against "regulatory and governmental" investigations, "administrative or regulatory proceedings," and criminal proceedings. Policies often require the proceedings to be directed against a natural person Insured, to be commenced and maintained during a manner laid out in the policy, like a 'formal' order of investigation, and just for policy-defined defense expenses incurred after the issuance of a proper order or an indictment.

D&O policies' definitions and other corresponding provisions and exclusions vary, and will be carefully evaluated to work out whether or not they encompass informal investigations from the time a subpoena is received, or from the time an insured is identified in writing as an individual against whom charges could also be filed.

Learning the A,B,C's and D's of D&O Coverage

The three main Insuring Agreements found publicly company D&O policies, are typically referenced as "Side A, B, and C coverage". they're sometime supplemented with an optional Coverage D.

"Side A "Coverage - Individual Insured Coverage

"Side A Coverage," also referred to as the "Non-Indemnifiable Loss Insuring Agreement," provides coverage to individual officers and directors against claims for his or her policy-defined wrongful acts in their official capacities, under fairly rare circumstances during which the Insured entity either cannot or won't provided indemnification.

The policy's "Side A" coverage for non-indemnifiable claims against directors and officers, almost universally provides that no retention is required to be paid by individual Insureds. A separate "Side A" limit could also be available additionally to the normal D&O policy's aggregate limit of liability. "Side A" excess D&O policies became more commonplace within the past several years, and certain "Side A" excess policies can also offer "difference in conditions" ('DIC') coverage that generally provides a feature of 'dropping down' to reply to claims either not paid by the first or underlying D&O policy insurer, or within the event indemnification is unavailable from the Insured entity, the underlying limits are eroded by covered claims against the entity, or the underlying D&O insurers deny coverage to the administrators . Some Side A policies are underwritten as non-rescindable by the insurer. Purchasers of this coverage should also consider, if available, an option for reinstatement of policy limits for the surface directors, within the event of premature policy limit exhaustion.

"Side B" Coverage - Corporate Reimbursement Coverage
This insuring agreement reimburses the Insured entity for covered loss under claim circumstances where the corporation is indemnifying its directors and officers. This provision doesn't afford any coverage to the Insured entity for its own potential liability, and is subject to a self-insured retention ("SIR") that has got to be paid by the Insured entity before an Insurer will make any payments. it is vital to notice that a lot of Insureds don't realize they're contractually obligated to get the insurer's prior consent to incur costs and expenses, and only those costs and expenses approved beforehand by the insurer are going to be deemed to possess satisfied the Insured entity's SIR obligation. it is vital for policyholders to know they run a significant risk of losing some or all of their otherwise available coverage, if they incur legal expenses before reporting the claim, or if they enter into negotiations or reach a settlement agreement in theory without the insurer's prior knowledge and consent.

"Side C" Coverage - Entity Coverage

This insuring agreement affords coverage to the publicly traded Insured entity just for it own liability and is usually restricted to coverage for securities-related claims. "Securities Claims" may be a policy-defined term, encompassing only claims arising from the Insured entity's own securities. Privately held companies and organizations are afforded substantively different coverage under this insuring agreement.

"Side D" Coverage - Outside Entity insured Coverage

This insuring clause is out there as an option on most D&O policies. It provides coverage to designated "Insured Persons", for his or her liability as a results of their membership on an "Outside Entity" board. This coverage applies on a "double excess" basis, meaning it's triggered after the exhaustion of any indemnification provided by the surface Entity to the surface Entity director, also as any coverage available from the surface Entity. Traditional D&O policies typically extend automatic coverage to insured Individuals who are designated by the policyholder to participate as a member of a not-for-profit organization.

Some Additional Considerations
In addition to the topics highlighted earlier, D&O insurance purchasers should gain familiarity with how their policies may respond under bankruptcy situations, potential coverage issues arising from a Special Committee's investigative activity, potential issues involving priority of payments among Insureds, hidden D&O insurance program design flaws which will render excess D&O policies unresponsive to catastrophic claims, and therefore the changing requirements of international D&O coverage to stay compliant with local country regulations. These topics are going to be covered during a future article.

This article provides general information and is neither intended to supply any legal advice nor to supply any advice with reference to the precise interpretation or operation of any policy . Any insurance policy's applicability is very fact specific. Qualified legal counsel should be consulted regarding laws which will apply with reference to policy coverage interpretation within the state during which the policy are going to be interpreted.

The author, James J. Ilardi, CPCU, may be a Chartered Property and Casualty Underwriter and President of SECURA RISK GROUP, LLC.

SECURA RISK GROUP may be a ny based, independent commercial insurance brokerage and advisory firm. The firm focuses on the evaluation, design and procurement of business insurance policies and insurance programs for privately held enterprises, publicly traded companies, non-profit organizations and professional service firms. SECURA RISK GROUP also provides claims advisory and support services.

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