What do you need to know about Directors & Officers Liability Insurance (commonly called D&O Insurance)? Isn’t having a commercial liability insurance policy enough? No, here’s why.

D&O Insurance usually covers all current and former directors and officers of a company for attorney fees that result from defending lawsuits that allege wrongful actions on the part of those persons acting in their official capacities covering discrete wrongful conduct typically not covered by commercial liability insurance, including the direct liability of the corporation itself for securities fraud.  However, D&O policy forms change from one insurer to the next, which can cause confusion at the moment your company desperately needs clarity.

Here are a few answers to some common questions:

Why buy D&O insurance?

Lawsuits against officers and directors have of a company have exploded in recent years. In some cases, companies are financially unable indemnify their officers and directors. In these situations, directors and officers would have to use their own personal funds to defend themselves against lawsuits. It is therefore usually important to buy this insurance to protect themselves.  Further providing this insurance assists companies in attracting talent to the company as often outside directors demand D&O coverage before agreeing to sit on a company’s board.

What does a D&O policy NOT cover?

Generally, exclusions include accounting of profits, fraud, pending and prior litigation, personal profiting, pollution and late claim notice, among others. Again, because each policy is unique, insurers may elect to specify other exclusions. Such policies usually cover “Wrongful acts” which are usually defined to include “any breach of duty, neglect, error, misstatement, misleading statement, omission or act by directors or officers in their capacity as such.”

Can you explain the “insured versus insured” exclusion?

A D&O policy is meant to operate as third-party coverage or to insure claims brought against the officers and directors by outside parties – but not any claims brought by one insured against another. This would simply be a case of one insider fighting another, which is generally not viewed as the purpose of a D&O policy. Again, there are exceptions, which is another reason to seek expert advice for your particular situation.

When do claims need to be reported?

Usually, claims need to be made and reported during the period in which the policy is effective. Some policies may require that claims be brought to the attention of the insurer during the same policy period. Some policies allow for a reporting “tail”—a brief period of time after the policy expires during which notice of claims can be provided.

It should be noted that, while some D&O insurance situations may seem relatively open and shut, any claim brought against an insurance company must be carefully examined in light of the above issues, as well as others that might apply. This is why you should always seek expert advice on D&O matters from a qualified attorney.