Your D&O coverage: do you have what you need ... and expect?

• Author: Bennett, Lynda A.
• Position: D&O INSURANCE - Directors and officers - Column

Many directors and officers are vaguely familiar with the general nature of D&O insurance but they do not really understand how the coverage works. Here are five things you should know about your D&O insurance coverage.

Any person who serves as a director or officer knows that a D&O policy should be purchased to protect the individual assets of those who serve the company as board members or executive officers. However, other than asking whether a D&O policy exists, most directors and officers do not know how D&O insurance works, who has access to that coverage, and whether the policy really will serve as the last line of defense against their homes, personal assets, and life savings.

In fact, D&O insurance is one of the most complicated coverage lines available in the insurance market today, and there is wide variation in terms of the coverage provided, the ease with which the defense cost coverage may be accessed, and the ways in which corporate changes may impact coverage rights. This article identifies five important issues that every director and officer should know about their D&O coverage to determine whether they have the insurance protection they expect and need in the event of a claim. However, to secure real peace of mind, directors and officer; are best served to consult with their insurance professionals and coverage counsel to review the precise terms of their policies to avoid unwelcome surprises after a claim has been made.

Who is covered by the D&O policy?

Most people assume that a D&O policy provide; coverage only to the directors and officers of the company and all available limits are in place to protect only those individuals. Not so. In fact, most D&O policy forms on the market today define "Insured Individual" so broadly that all past, present and future employees of the company have access to the D&O policy. Not only that, the defined term "Insured Individual" can also include independent contractors, part-time employees, and seasonal workers. Importantly, the D&O policy does not differentiate between directors, officers, employees, independent contractors, or seasonal workers when it comes to providing access to the policy limits. In other words, each and every one of those individuals has equal and immediate access to the limits of the policy when a claim is made.

While there may be good reason to include individuals other than directors or officers within the definition of "Insured Individual," companies and their boards must carefully consider the impact of this broad access vis-a-vis the policy limits that are secured. Consider a claim where several corporate representatives are named as defendants in a lawsuit and each one wants to have their own lawyer to defend the case. Defense costs erode the limits of D&O policies. Under this scenario, the board must be sure that it...