The Rodney Dangerfield of D & O policies: excess D & O insurance policies get no respect. Here's why they should.

• Author: Weiss, Stephen J.
• Position: D & O Insurance Update - Directors' and officers' insurance

IN TODAY's hard insurance market, few D & O insurers will provide more than $20 million in coverage to one company. To get more, a company must purchase one or more excess policies to supplement its primary policy. Companies rarely give their excess policies the careful analysis that they give to their primary D & O policies.

This lack of respect for excess policies is dangerous for two reasons. First, most of the aggregate policy limit in a large D & O insurance program is provided by the excess policies. It is not unusual for a $100 million D & O insurance program to consist of a primary policy with a $20 million policy limit and excess policies with $80 million. With 80% of the aggregate policy limit being provided by the excess layers, wouldn't you expect that the excess policies would get at least as much scrutiny as the primary layer? Second, once the primary layer has been exhausted by claim payouts, an excess policy will become, in effect, the primary policy. So, if the excess policy has more restrictive terms than the primary, the more restrictive terms will govern.

The most likely reason for the lack of respect accorded excess D & O policies is that people often mistakenly believe that excess policies automatically adopt the same terms as the primary policy and therefore do not require additional negotiation. Why is this mistaken view so common? It comes from an incomplete reading of the policy language.

Most excess policies do, in fact, state that they will provide the insureds with coverage in accordance with the same terms as in the primary policy except, of course, for premium and policy limits. However--and here's the rub--virtually all excess D & O policies go on to state that they are also subject to their own "special terms." These special terms can inject very serious coverage shortcomings into the D & O program. Consider the following examples.

Appeals

In a recent negotiation of a complex D & O program with eight excess policies, we focused on special terms inserted in an excess policy that would allow an insurer to appeal an adverse judgment against the insureds even if the insureds had no wish to do so. We envisioned a future scenario in which, just when the insureds were breathing a sigh of relief because a multi-year court fight was finally over, they could be told by the excess insurer that it is time to put on the boxing gloves again for an appeal and possibly another trial.

Only a minority of D & O excess policies...