Start off right with your D & O application: a strong D & O insurance policy needs a solid foundation.

• Author: Weiss, Stephen J.
• Position: D & O INSURANCE UPDATE

A MATERIAL misstatement or omission in a D & O insurance application may give your insurer the right to void the policy. Notwithstanding this possibility, some corporate managers complete an application with too little appreciation for the devastation that can result from an error and too little knowledge of the different ways to address issues raised by the questions in an application.

Obtaining a strong D & O insurance policy begins with negotiating the terms of the application and related policy provisions. This is critical to putting your D & O policy on a solid foundation.

Warranty Statements. A first-time buyer of D & O insurance typically must complete a "main-form" application that includes this question: "Does any director or officer have information or knowledge of any act, error or omission, fact or circumstance that might give rise to a claim under the proposed policy?" Answering this question is tricky because it is not always clear when particular circumstances "might give rise to a claim." Does the "might" standard catch a circumstance with as little as a 1% chance of giving rise to a claim? If so, the application would have to disclose a large number of corporate actions, perhaps every major action taken by the directors and officers over the past few years. Apart from the difficulty of describing so many actions, to do so would defeat the purpose of obtaining D & O insurance, since any claim that arises from the disclosed actions would be excluded from coverage.

To avoid such an unreasonable result, we suggest rephrasing the question (on the application or in an appendix) to say, for example: "Does any director or officer have information or knowledge of any act, error or omission, fact or circumstance that they believe is reasonably likely to give rise to a claim under the proposed policy?" This change provides two benefits to the insureds. First, it introduces a "reasonableness" standard so that it is no longer necessary to describe a situation with a 1 percent (or even a 5 percent or greater) chance of giving rise to a claim in order to be responsive to the question. Second, the revised question uses a subjective standard (what the insured believes), rather than an objective standard.

Proposed Mergers. Most D & O insurance applications ask: "Are there any plans being considered for a merger, an acquisition, or a consolidation of or by the applicant?" Unless your company has publicly announced such a deal, answering this...