Getting the best D&O coverage.

• Author: Weiss, Stephen J.
• Position: Directors and officers liability insurance

Knowledgeable insureds today have the best opportunity in 10 years to substantially increase, through smart negotiating, the value of their D&O policies.

Directors and Officers (D&O) Liability Insurance is expensive. There is little dispute over this point. The key question really is one of value. Is D&O insurance worth the cost?

Some commentators on D&O insurance have concluded that many corporations have purchased insurance that is of questionable value. One has even observed, "Being a D&O insurance policyholder is a little like being the emperor who proudly wore his new clothes: Both think they are well-protected, when in reality their every weakness may be exposed."

The conclusions expressed by these commentators are no longer true. Knowledgeable insureds today have the best opportunity they have had in the last 10 years to substantially increase the value of their D&O policies by negotiating broader coverage, narrower exclusions, and lower premiums. This is possible because the D&O insurance marketplace has seen:

* additional insurers enter the market,

* increased capacity,

* new endorsements, and

* improved policy forms.

D&O insurers are increasingly competing on the basis of the scope of coverage, not just premium levels. Enhanced coverage, however, generally is not volunteered by the insurers; it must be negotiated. The time spent in comparative policy analysis and then the effective negotiation of policy features of the sort discussed below can produce potential returns to insureds, measured in terms of coverage available in additional circumstances, of many hundreds of thousands of dollars.

The purpose of this article is to identify some of the substantial coverage enhancements to D&O insurance that, subject to underwriting considerations, can be obtained and to discuss some other significant coverage issues.

D&O insurance is intended to protect corporate directors and officers from personal loss and to reimburse a corporation for indemnity payments made to its directors and officers. This insurance does not cover a corporation for its direct liability except to the extent that the corporation has suffered a loss as a result of lawful indemnification payments made to its directors and officers.

D&O insurance is written on a "claims made" basis. Coverage is provided only for claims made against an insured during the policy period. This structure creates a need for the policy to allow an insured to notify the insurer of potential claims before the end of the policy period with the same effect for coverage purposes as if the notice related to an actual claim and to give an insured the right to extend the term of the policy after the initial policy period for an agreed period of time upon payment of an agreed premium.

Definition of Claim

One of the key terms in a D&O insurance policy is "claim." For coverage to begin, a "claim" must have been made against the directors and officers, the "claim" must be for "wrongful acts," and the insureds must have experienced a "loss." Coverage does not begin simply because an insured incurs a "loss" in the nature of defense costs; rather, the defense costs must be "incurred in defending or investigating a 'claim'" (Chubb Executive Protection Form 14-02-0941 [1-92], Clause 18). Surprisingly, several insurers do not define "claim" notwithstanding the central role of the term. For example, National Union Form 47353 [8/88] uses, but does not define, the term "claim"; this is significant because...