Professional Liability insurance is a form of insurance designed to protect professionals and organizations from financial loss from negligence. Professional liability insurance is made up of four major segments: professional liability (also called "errors and omissions", "E&O", or "malpractice"), directors & officers (D&O), employment practices liability (EPL) insurance and cyber risk insurance. This page discusses the D&O segment.
Directors and Officers (D&O) coverage is the segment of professional liability insurance which protects the directors and officers of corporations and other entities against legal judgments and related expenses resulting from allegations of wrongful acts committed in their individual capacity as directors and officers. Tennant Risk Services writes all types of D&O Insurance coverage, including public companies, private companies and non-profit companies.
The "individual capacity" is the most important aspect of this coverage. Directors and officers are fiduciaries of corporations or other organizations, and are responsible for managing the affairs of these organizations. They must act with due diligence in carrying out their responsibilities and can be held personally liable if their neglect results in a loss to the corporation or its shareholders or interested parties.
The larger a company, the more susceptible it is to claims against its directors and officers. Anyone with an interest in a corporation – shareholders and stakeholders alike – can file a claim if they feel wronged by corporate directors or officers. Defending a D&O claim, even when it's not valid, is a financial and emotional drain on all involved individuals and their companies.
The exposures presented by directors and officers accounts vary considerably. Account types can include:
In selecting and pricing D&O accounts, underwriters look at a variety of factors. These include the obvious ones, such as corporate form and size. Other factors include location, industry, mergers and acquisitions, and loss experience.
Because of these variables, D&O policies come in a variety of types and are offered by a wide range of specialty insurers. Often, the best price, coverage and service option may be provided by a smaller specialty insurer rather than a well-known multi-lines insurer. Because of the specialty nature of the business, D&O coverage is traditionally considered to be part of the specialty lines insurance market. In many cases, coverage is provided in the surplus lines insurance market rather than the admitted market.
D&O is provided on a claims-made basis. Coverage is typically provided in two parts: direct coverage to the directors and officers (Side A) and corporate reimbursement, although additional coverage parts can provide direct organizational protection (entity) and employment practices coverage as well. The direct coverage part is only utilized when the corporate entity is not permitted to reimburse the directors and officers.
D&O coverage can become complicated and coverage changes depending upon the type of insured entity. For example, volunteers are often covered under D&O policies for non-profit entities, but not usually provided under other policies. Some policies include entity coverage, and some include employment practices (EPL) coverage.
Except for some very specialized policies, D&O coverage does not provide protection to the directors and officers of a professional organization for professional liability claims. This is because underwriters expect the organization to buy a separate professional liability policy for these exposures.
Within D&O coverage, broader policies are not necessarily better. For example, employment practices coverage (EPL) can be purchased for medium sized firms for a low price with deductibles lower than most D&O policies. Rather than allow an EPL claim to erode D&O limits, it is often better to purchase a stand-alone EPL policy or separate EPL limits and leave the D&O policy or coverage part separate to respond only to D&O claims. Alternatively, it may be preferable to combine D&O & EPL in the same policy for a small company with few shareholder or for a non-profit entity.
Direct reimbursement of the directors and officers by the D&O policy is necessary because there are situations where, despite corporate indemnification provisions in the company by-laws, corporate reimbursement of directors and officers for claims and defense costs may be disallowed or unavailable. This can occur in situations such as shareholder derivative actions, where the shareholders as a class sue the directors and officers on behalf of the company. In this case, as a matter of public policy in most states, the corporate entity is not permitted to reimburse the directors and officers and the policy responds directly. Another example is bankruptcy. There are usually no funds available to directors and officers for legal expenses when a company has gone bankrupt or has been liquidated.
Note that the exposures and mechanics of D&O liability should preclude a decision to self insure D&O – this a very bad idea. Directors and officers can be left with no resources to pay a D&O claim if a D&O policy is not in force.
Certain types of entities are protected under safe harbor statutes. For example, some states have provisions protecting directors of non-profit entities from losses. Unfortunately, these safe harbor statutes do not eliminate the need for insurance. The provisions only protect the target from a final adjudication, not from a lawsuit being filed. In addition, plaintiff attorneys have become adept at structuring their complaints so as to avoid the safe harbor provisions.
Directors and officers are being held to higher standards of conduct than in the past, and lawsuits without merit have grown considerably throughout the recent past. They are continually exposed to the possibility of claims being made against them for negligent acts, errors, or omissions in connection with the services they provide.
Private company and non-profit D&O can be quoted easily, and many proposals are provided with admitted insurers. For most accounts, we indicate terms and conditions with minimal information - reducing your work and speeding up your client response. We also have online quoting options.
Tennant Risk Services is a wholesale broker providing directors and officers coverage for all different companies and organizations. We offer a broad portfolio of D&O products, in many cases customized to meet the specific needs of a corporate or non-profit entity. Coverage is designed to provide protection for those situations where the company or an individual is alleged to have been negligent in performing their duties. From small non-profits to large publicly traded corporations, Tennant Risk Services can provide comprehensive and competitive D&O insurance coverage.
Tennant Risk Services
124 LaSalle Road
West Hartford, CT 06107
Phone: (860) 519-1301
Fax: (860) 216-5845