California Directors and Officers Liability Insurance

As an officer or director at your organization, you encounter a myriad of employment-related exposures. New Sarbanes-Oxley regulatory mandates and increased shareholder activism mean directors are more frequently at risk, translating to rising claims and escalating settlement costs. Protect yourself with a D&O Insurance Policy.

The legal cost to defend a director is substantial, as are the potential penalties that can be personally incurred. Due to the personal liability risk—which is not covered under a personal insurance policy—protecting boardroom talent can be a challenge. A Directors and Officers liability insurance policy, or D&O Insurance Policy is part of a comprehensive risk financing strategy.

D&O Insurance Fills the Coverage Gap

Unlike a commercial general liability insurance policy that provides coverage for claims arising from property damage and bodily injury, a D&O policy specifically provides coverage for a “wrongful act,” such as an actual or alleged error, omission, misleading statement, neglect or breach of duty. A D&O policy provides defense costs and indemnity coverage to the entity listed on the policy declarations, which may include:

• Coverage for individual directors and officers
• Reimbursement to the organization for a contractual obligation to indemnify directorsand officers that serve on the board
• Protection for the organization or entity itself.

Indemnification provisions are typically included in the charter/bylaws of a corporation. While an important risk component, small to midsize privately held companies or nonprofit organizations often do not have the financial resources to fund the indemnity provisions, making the bylaws hollow. A D&O policy can provide an extra blanket of security in the event of a covered loss.

A “fraud” exclusion is typically included in a D&O policy, which eliminates coverage for losses due to dishonest or fraudulent acts or omission, or willful violations of any statute, rule or law.

Protection for Your Directors and Officers

There are additional forms of coverage to adequately protect directors and officers, including:

• Entity coverage
• Payment priority for insured persons
• Severability of the insured as well as severability of the application
• Coverage over time, meaning coverage responds to past, present and future directors and officers;
• Pay on behalf clause
• Duty to defend clause.

In addition, some D&O polices can be endorsed to provide employment practices liability insurance (EPL) coverage and/or fiduciary liability.

• While EPL endorsements under a D&O policy broaden coverage, they often do not provide a duty to defend clause and are subject to a substantial deductible. Many EPL endorsements do not provide for a separate limit of liability in addition to the limit available under the D&O policy. If the D&O limit is reduced or exhausted by payment of an employment practices claim involving the wrongful conduct of an employee, a director’s or officer’s personal assets may be at risk.
• Fiduciary liability provides coverage for liabilities arising out of ERISA, where fiduciaries can be held personally liable for losses to a benefit plan incurred as a result of alleged errors, omissions, or breach of their fiduciary duties.

The Cost Drivers of Directors & Officers Liability Insurance

Directors and Officers Liability Insurance is a fundamental component of any company’s risk management program. A lack of D&O insurance may dissuade talented individuals from seeking an executive position at your company, as they don’t want to put their personal assets at risk in the event of a lawsuit.

As a savvy business owner looking to protect your bottom line, how do you weigh the cost of insurance to protect your senior leadership with the potential risk of a lawsuit? As regulatory investigations and defense expenses increase, prices for D&O insurance have gone up as well. Corporate indemnification provides the first line of liability protection; but certain circumstances—most notably, if the company goes bankrupt—necessitates that additional protection is offered to directors and officers.

A variety of factors determine the price of a company’s D&O insurance. Some low-risk companies pay pennies on the dollar; others pay a lot more, but they understand it’s a lot less than the expenses they’d incur in a lawsuit. Recognizing the cost drivers of D&O insurance—a company’s exposures, legislation and trends in D&O lawsuits—can help you decide what coverage your company needs to mitigate its unique exposures.

Company Characteristics and Exposures

Public, private and nonprofit corporations with assets of all sizes purchase D&O Liability insurance. To determine the cost of premiums and the limits of coverage, insurers review several facets of the company’s structure and price D&O insurance accordingly. Some of these attributes include the following:

Trends in D & O Lawsuits

Even after a thorough assessment of a company’s risks, D&O insurance continues to be a high-severity product, as carriers are often hit unexpectedly with catastrophic claims. It’s no surprise that as litigation increases, the price of D&O insurance increases as well. In addition, as the litigation process grows lengthier and if multiple lawsuits erupt from a single transaction, a company can quickly exhaust its primary layer of D&O coverage.

Some types of lawsuits occur less often, but result in catastrophic losses. Other types result in smaller payouts, but occur more frequently. Nonetheless, defense expenses can cost millions of dollars, even if the director or officer is not found liable. Some of the types of lawsuits that affect directors and officers include:

• Breach of fiduciary duty lawsuits
• Employee Retirement Income Security Act (ERISA) lawsuits
• Employment-related lawsuits
• Mergers and acquisitions (M&A) and “merger objection” lawsuits
• Securities class-action lawsuits
• Shareholder derivative suits

Within the last few years, there has been an increase in M&A lawsuits. In 2011, there were more than 350 lawsuits regarding M&A. Some M&A cases involve multiple lawsuits and a lengthy litigation process, which can deeply cut into a company’s primary D&O policy.

Know What Your Policy Covers

While many companies usually focus on the cost of their D&O policy, understanding the scope of the policy is even more critical. Most D&O policies are renewed yearly, and the terms and conditions can change. Read through your policy carefully. Be aware of the following:

• Look at the limits of your liability. Are they enough to cover your exposures? Companies with a lot of risk exposures usually find that they need more than just the primary coverage, and purchase excess insurance as well.
• Be aware of exclusions; most D&O policies do not cover claims that arise from fraudulent or criminal acts.
• For some insurance carriers, Employment Practices Liability (EPL) insurance and Fiduciary Liability insurance are policies that are purchased separately from primary D&O insurance. Don’t assume they are automatically included in your D&O policy.

For more information on D&O coverage options for your company, contact GDI today.

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GDI Insurance Agency, Inc. Your Trusted Business Insurance Experts

At GDI Insurance Agency, Inc. we will do the work for you to ensure you have the best protection plan for your California business automobiles.  Not only that, but as you can see, we will go the extra mile to make sure your business is protected from the inside-out. 

Located in Turlock, CA we have offices throughout California’s Central Valley, Northern California and beyond.

To put the GDI Insurance Agency, Inc. experts to work for you, simply fill click our quote button above or call our office today at 1-888-991-2929 to learn more about GDI’s D & O Insurance Program!