D&O insurance may provide coverage for these types of non-indemnifiable claims, as well as defend and reimburse the company for its indemnification obligations to directors and officers when it is permitted to do so.

The 12 key coverage features to consider when looking at your current or prospective D&O policies are outlined below.

1. Coverage for defense costs and/or other claim expenses
Make sure you understand when and how the legal bills and retentions are paid, before a claim occurs. More often than not, lawsuits will contain a variety of allegations, some of which will be covered, while others are not. A “duty to defend” policy should obligate the insurer to defend the entire lot. When it comes to settlements and judgments, the carrier will usually allocate amounts attributable to covered and uncovered matters based on the relative legal exposures of the parties to such matters. Additional allocations may be made for covered versus uncovered persons or entities under the terms of the policy. Most carriers will assign their own counsel upon notice of a covered claim, but if you feel strongly about using a specific counsel, depending on the carrier, it is vital you and your broker make the effort to negotiate this upfront, prior to binding, at agreed-upon rates. Also ensure that the policy has no “hammer” clause and, if possible, your retention will be waived upon a determination of “no liability.”

Clearly, a company providing a professional or technology service of any kind should consider carrying a separate and broader errors and omissions or professional liability policy. However, since the terms of these policies vary greatly, a proper examination of both policies is critical for managing any possible overlap and/or gray areas in litigation that contain both D&O and errors-and-omissions allegations.

6. Coverage for innocent insureds
A good D&O policy will always contain “full severability” of the application and all exclusions for all insureds, including the company (entity coverage) itself. Insureds that are not aware of any unethical or fraudulent activities within the company that may result in litigation, or be discovered during an investigation of any sort, should be afforded full protection under the policy. Ensure “final adjudication” wording is written into “dishonesty and personal profit (conduct)” exclusions.

7. Coverage for “Side A” claims
“Side A” is included on every D&O policy and responds in instances when the company cannot indemnify its directors and officers. This coverage addresses only the personal liability of directors and officers and not the liability of the company itself nor its indemnification responsibility. To provide the broadest protection in this area, consider carrying a separate Side A-only excess policy with a different carrier, which applies on a difference-in-conditions, non-rescindable basis with a “drop down” feature, should underlying coverage be non-responsive. Or, seek to make the Side A portion of your policy non-rescindable via endorsement if it is not in the standard policy language. Most policies today should contain an order of payments provision, which specifies that in the event of a claim, proceeds of the policy first go to the directors and officers, and then to the company, somewhat mitigating the need for extra Side A limits.

8. Coverage for unfair business practices and antitrust claims
Competitors can bring claims, and defense and settlement costs of such claims can be particularly high since they involve complex allegations such as anti-trust violations, unfair competition, and often IP allegations as well. Private companies are subject to the scrutiny of regulatory agencies such as the Equal Opportunity Employment Commission, the Internal Revenue Service, the Federal Drug Administration, the Environmental Protection Agency, the Federal Trade Commission, and so on. Investigations and claims brought by these agencies can result in enormous defense costs for directors and officers, even if it is ultimately established that no wrongdoing occurred.

9. Coverage for past, present, and future directors, officers, employees, and advisory board members
If employees are automatically included as insureds on your D&O policy, ensure that they, along with a bankruptcy trustee, are not precluded from coverage if they bring a derivative lawsuit because they are an “insured” under the policy, as outlined in the insured vs. insured exclusion. Further, clarify up front whether you want D&O coverage to extend to independent contractors and temporary employees. If minority shareholders serve on your advisory board, remember that coverage for suits brought by them will be precluded by the insured vs. insured exclusion if you elect to include them as insureds on the policy.

10. Coverage for acquisitions
Whether or not there are current acquisition plans, ensure the policy has automatic coverage for newly acquired subsidiaries for at least three months without having to notify your carrier, regardless of size. Also make sure to clarify whether you have coverage for any joint venture activity, since some carriers do not address this in their D&O policy form. If you may be acquired, ensure the policy has pre-negotiated pricing for purchasing extended reporting period or “tail” coverage for up to six years, and that policy wording is clear as to whether this is available upon an equity or asset sale or both, and what constitutes each type of sale.

11. Coverage for full prior acts and continuity
If changing D&O carriers, ensure the new carrier does not require you to “re-warrant,” or disclose any known circumstances or facts that might give rise to a claim on the application. If continuity is granted, the underwriter will not require this, and will backdate the “prior and pending litigation” exclusion (sometimes referred to as a “continuity date”) to match the expiring policy. If you are required to re-warrant—for example if you are increasing your limit of liability—ensure that you poll all of the directors and officers for knowledge of this. Full “prior acts” coverage can and should be obtained back to incorporation of company, even for first-time buyers, with warranty questions answered.

12. Coverage for claims and notices thereof
Ensure that the requirement to report circumstances that might give rise to a claim is at your sole discretion with no time limit, since it might not always be prudent to notify your carrier unless an actual claim develops. In addition, ensure that the requirement to report an actual claim—which should include written demands for monetary and non-monetary relief, coverage for regulatory investigations, and other civil or criminal proceedings—need only be reported “as soon as practicable, ”or at a minimum before the automatic discovery period of preferably 60 days ends.

Conclusion
The D&O liability insurance market today remains competitive and dynamic, but as with all cyclical markets, it will not last forever. The current climate creates opportunities for companies to maximize D&O coverage terms, manage costs, and effectively transfer some of the risks of doing business in today’s environment to insurance.

David Schaefer, CPCU, RPLU is a Principal and Executive Vice President of AH&T Insurance, an employee-owned insurance brokerage and risk management consultant headquartered outside of Washington, D.C. Mr. Schaefer specializes in liability protection for directors and officers of public and private companies, and can be reached at dschaefer@ahtins.com.