| A |
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Requires the insurer to advance defense costs for covered claims after the applicable retention has been satisfied.
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The total amount that an insurer will pay under a policy for defense costs, settlements and judgments.
This amount is not increased by the number of claims made under the policy, the number of Insureds who
seek payment under the policy, or otherwise. The retention or deductible is not included or added in to
the aggregate limit of liability. Any retention or deductible on the policy must be spent by the insured
before any payment will be due under the policy.
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The process by which an insurer evaluates which portion of a loss is covered.
An allocation of coverage is made between (1) the corporate entity and the directors and officers,
(2) covered and uncovered defendants in a claim, and (3) the covered and uncovered allegations of a
claim. An allocation process normally occurs both at the beginning of the claims process to evaluate
how much of the defense costs are advanced and again at the end of the claims process to evaluate how
much of a settlement or judgment is covered. Allocation determinations can be very contentious between
the insurer and the insured.
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A main form application for D&O insurance asks for all pertinent information about the company applying for insurance, including financial information about the company and any subsidiaries, identification of all directors and officers to be covered, current insurance information and claims history, among other things. The most significant feature of a main form application is that it expressly asks about potential claims or circumstances that could lead to claims and requires that the signatory essentially warrants (on behalf of all potential Insureds) that no such potential claims or circumstances exist. (If potential claims or circumstances are indicated on the main form application, the insurance typically would not cover those potential claims or circumstances). For D&O policies that do not provide severability in regard to the application, if it is later determined that any potential insured knew or should have known that a potential claim or circumstance likely to lead to a claim did exist at the time the main form application was signed, the insurer has the right to seek rescission of the entire policy, as to all Insureds, which renders the policy void ab initio (or from the beginning). See also the definition of Severability.
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A renewal application is typically shorter than a main form application and does not require that the signatory provide a warranty that no potential claims or circumstances exist.
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This provision establishes an alternate dispute resolution process when there is a dispute between the insurer and the insured. The outcome of this process may be binding or non-binding. If the process is binding, the parties must abide by the decision of the arbitrators, if not, the parties have the option to take the dispute to trial.
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The policy automatically provides coverage for new subsidiaries when the total asset size of the new subsidiary does not exceed a specified percentage of the Insured's total asset size. A 60 to 90 day coverage window is usually available for new subsidiaries, which are larger than this threshold. The insurer must be given notice of the new subsidiary during this window, and is subject to the insurer's agreement coverage beyond the window.
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| B |
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Can be exercised by the insured regardless of who cancels or refuses to renew coverage. See Discovery Period.
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| C |
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Excludes coverage for claims arising out of the Insured's ownership, operation or maintenance of a captive insurance company.
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Upon the occurrence of certain transactions (such as the acquisition of the insured), the policy ceases providing ongoing acts coverage for the remainder of the policy period. This automatic run off period normally lasts until the natural expiration of the policy, but longer policy periods can be negotiated.
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Requires the insured to report changes in ownership of voting stock or voting rights, which exceed a pre-determined percentage.
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What constitutes a claim has been the subject of much coverage litigation. Some D&O policies now include a definition of a claim so as to avoid any uncertainty. Obviously, lawsuits are claims if duly noticed to the insurer. The definition of a claim, or lack of definition, becomes an issue when something less than a lawsuit occurs. For example, does a complaining or threatening letter from a shareholder constitute a claim? This becomes relevant in several ways. First, the insured may not consider such a letter to be a claim and therefore provides no notice of it, makes no reference to it in renewal discussions, and then when a lawsuit is actually filed, finds out that the insurer believes that it was already a claim that should have been noticed under a prior policy, or referenced on a renewal application, and denies coverage. It can also be relevant if the insured wants to settle with the complainer before a lawsuit is initiated, but the insurer does not believe that it rises to the level of a claim, and thus denies coverage.
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A claims-made policy is one that covers claims that are first made or asserted during the pendency of the policy, without regard to when the acts giving rise to the claim occurred, unless the policy specifically excludes claims arising from acts that occurred prior to a certain identified date. The opposite of a claims-made policy is an occurrence policy, which provides coverage for claims, whenever they are asserted, if they complain of acts that occurred during the policy period. There are no time limitations on an occurrence policy as to when the claim must be asserted. As a result, occurrence policies are significantly more expensive. Insurers on occurrence policies have no certain date by which they can figure out whether a policy was profitable because they do not know when, if ever, a claim might be asserted that alleges wrongful acts during the period of the occurrence policy.
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A claims-made and reported policy is a claims-made policy that specifically requires that any claim made during the policy period also be reported to the insurer during the policy period. D&O policies are usually very specific as to when the insured must provide notice to the insurer of a claim and the notice requirements are typically identified as a condition precedent to coverage. This means that complying with the notice provision is the first hurdle that must be passed before you even consider whether the claim is otherwise covered. Most D&O policies are claims-made and reported policies, although over the last couple of years, the requirements on the timing of notice have been softening. Many policies now require notice as soon as practicable during the policy period or for some identified period (e.g., 90 days) after the end of the policy period.
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The percentage of all loss that is the company's or the insured's sole responsibility, throughout the pendency of a claim. Sometimes co-insurance applies only to defense costs, or only to settlements and judgments, but usually it applies across the board. Many D&O policies do not contain co-insurance. Some states require some minimum amount of co-insurance. If a policy contains a simple co-insurance feature that applies to all loss, including defense costs, then that is the percentage of each dollar spent that the company or the insured must pay.
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Excludes coverage for claims arising from political contributions as well as any payments, gratuities or benefits provided to domestic or foreign government personnel, or to customers of the Insured.
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Continuous coverage without gaps. The issue of continuity arises when an insured switches insurers. The insured needs to know that there will be no gap in coverage for wrongful acts that occur prior to the inception date of the policy that do not result in a claim until after the new policy has incepted. Some insurers in the past put wrongful acts dates on new policies that precluded coverage for acts that occurred prior to the inception date. Now when an insured is considering switching insurers, the broker needs to address continuity to ensure that there will be no gap in coverage. In the current market, most insurers will agree to provide continuity.
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States the monetary amount of costs and/or damages the insured entity must bear before coverage is provided under the policy. Applies to claims against the corporate entity itself as well as indemnifiable claims against the directors and officers of the insured. The retentions may be different for securities and non-securities claims. A separate Corporate Retention applies to each claim or group of interrelated claims. Also called a deductible.
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Typically included as an exemption (or "carveback") from the insured versus insured exclusion. This provision provides coverage for cross claims brought by an insured against another insured for contribution or indemnity as a result of an underlying claim which would be covered if brought directly against such insured.
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| D |
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See Retention.
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D&O policies are generally defense within limits policies. That means that all costs and expenses incurred in the defense of the claim and payable by the insurer reduce the aggregate limit of liability of the policy. Accordingly, if an insured has a $10 million policy, and spends $2 million on defense costs alone, there is only $8 million left to satisfy a settlement or judgment, or deal with other claims. Defense Outside Limits provides a substantial expansion of coverage to the insured because the amount expended in defense of claims does not reduce the limit of liability of the policy. Thus, the limit remains intact for payment of settlements and judgments, regardless of the costs of defense. Few D&O insurers are willing to agree to defense outside limits.
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Pension plans that provide a preset amount of retirement income to the participant based on various factors such as salary, length of service and age at retirement. (Also see defined contribution plans, plans, and pension plans.)
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Pension plans that provide individual accounts for each plan participant based upon the amount contributed to the account (for example, two percent of salary) plus or minus any income, expenses, gains and losses allocated to the account.
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A shareholders action brought on behalf (and in the name) of the corporation against the directors and officers of the corporation for a breach of fiduciary duty.
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Also referred to as extended reporting period. Recognizes claims which are made and reported after the policy's expiration date but are based on wrongful acts which took place on or before the policy's expiration. The option may be unilateral (can only be exercised by the insured if the insurer cancels or refuses to renew coverage) or bilateral (can be exercised by the insured regardless of who cancels or refuses to renew coverage). Normally runs for a period of 12 months beyond the expiration date of the policy and is activated when the insured pays a pre-agreed additional premium.
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States that the insurer will appoint defense counsel and assume defense of a covered claim. This process is more common in errors and omissions (E&O) and employment practices policies liability.
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The Equal Employment Opportunity Commission is a United States federal agency tasked with ending employment discrimination in the United States. Signed into law by President John F. Kennedy by Executive Order 10925, it can bring suit on behalf of alleged victims of discrimination against private employers. It also serves as an adjudicatory for claims of discrimination brought against federal agencies.
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The EEO-1, also called the Standard Form 100, requires employers to use either visual surveys or post-employment records to complete a categorization of employees by race, gender, and job category.
Three categories of employers must file the EEO-1:
1] Private employers with 100 or more employees;
2] Private employers with less than 100 employees if affiliated with, owned, or controlled by another company,
and the employees of the related companies total 100 or more; and
3] Federal contractors if they are not exempt, have fifty (50) or more employees, and qualifies as one of the following:
- Prime contractors or first tier subcontractors with a $50,000 contract or purchase order,
- Depositories of government funds, or
- Financial institutions that are issuing and paying agents for U.S. bonds and notes.
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Extends coverage to directors and officers for claims alleging employment discrimination, sexual harassment, wrongful termination and other related employment torts. Coverage may be extended to cover employees and, in some instances, the corporate entity. Publicly traded companies must generally purchase a stand-alone employment practices liability policy in order to obtain coverage for the entity.
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Until the mid-1990s, claims directly against the corporate entity were not insured under a D&O policy. This resulted in the insured and the insurer conducting an allocation process to determine what portion of a claim was to be covered under the D&O policy. Court decisions have resulted in entity coverage now being available. Depending on the insured, entity coverage may be available for all claims, or securities claims only.
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Extends coverage to the corporate entity for claims alleging violations of the securities laws. A specific definition of securities claim will be included in the extension.
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Extends coverage to the corporate entity for all covered claims. This coverage is normally only available for privately held companies. Exclusions will apply to this extension.
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Broadens the definition of insured persons to include individuals in foreign countries who hold equivalent positions to that of directors and officers of U.S.-domiciled companies.
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An employee stock ownership plan, which is any defined contribution plan that according to its terms must invest its funds primarily into employer company stock. Unlike any other type of plan, ESOPs may borrow from the employer or use the employer's credit to acquire company stock (these are referred to as leveraged ESOPs). Note that defined benefit plans may hold up to 10 percent of their assets in company stock, but are not ESOPs.
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See Discovery Option.
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The annual IRS financial report, including a balance sheet and income statement, required of each plan. Because of the timing involved, they are often at least a year or more out of date. Many Fiduciary Liability underwriters use them as part of their underwriting review.
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Excludes claims arising out of the Insured's failure to effect and maintain adequate insurance coverages to protect corporate assets.
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This term is usually used in an excess policy and means that the excess policy incorporates by reference all of the provisions of the primary policy, except as may be specifically changed in the excess policy itself.
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A fiduciary duty is the highest standard of care imposed at either equity or law. A fiduciary is expected to be extremely loyal to the person to whom they owe the duty (the "principal"): they must not put their personal interests before the duty, and must not profit from their position as a fiduciary, unless the principal consents.
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Excludes claims arising from fraudulent or dishonest acts of the insured persons. The threshold for applying the exclusion can vary among policies.
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Excludes claims arising from the Insured's purchase of its own shares at a premium over their then current market value when such offer is not extended to all shareholders of the insured.
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This is typically found in the defense section of a D&O policy and is the result of the insured's right to consent to a settlement. Most D&O policies give the insured the right to consent, and therefore, to withhold consent, to a settlement. However, the insurer wants to be protected in those instances where it wants to settle a claim so as to limit its liability and the claimant is agreeable, but the insured refuses. In such an instance, the hammer clause generally states that the insurer's liability is limited to that amount for which the case could have been settled, plus defense costs incurred up to the date that the claim could have been settled. In the event that the insured's refusal to settle ends up costing more money (i.e., the case is settled for more later, or results in a judgment for more, or simply more defense costs are incurred) then the insurer is not liable for those additional amounts.
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Excludes coverage for claims arising out of an actual or attempted hostile takeover of the insured.
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Amends the hostile takeover exclusion such that the exclusion will not apply when outside legal counsel affirms that the board's actions are a fair exercise of the business judgment rule and an outside financial advisor states the offering price is inadequate, prior to the board declining the offer.
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Precludes coverage for claims arising from the Insured's payment of an inadequate price for the purchase of its own (or, in some policies, another company's) securities.
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States how the policy responds to claims brought against the insured persons when they are not indemnified by the insured organization.
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States the monetary amount of costs and/or damages the individual insured must bear before coverage is provided under the policy. This retention, which is generally $0 unless a state's law requires a minimum retention, applies to claims that are legally not indemnifiable by the corporate insured.
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Excludes coverage for claims brought against the Insureds by or on behalf of other Insureds. Carve backs from this exclusion are routinely obtained for derivative suits, cross claims, and employment practices claims.
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Most D&O policies include a definition of what is interrelated wrongful acts because the insurers want all such interrelated acts that result in claims to be dealt with at one time. This means that if more than one claim is asserted that alleges the same or similar acts, then even if the claims are not consolidated by their respective courts, they will be treated by the insurer as if they were consolidated into a single claim.
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As opposed to a securities exclusion, this restriction excludes only claims arising from an initial public offering of securities.
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Excludes claims brought by shareholders who own greater than a specified percentage of the stock of the insured.
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Excludes claims arising from the sale of the parent corporation or any subsidiary to any directors, officers, or employees of the insured.
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| N |
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States the number of days of notice which the insurer must give to the insured when the insurer wishes to cancel the policy.
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Notice of circumstance arise when an insured is cognizant of any fact, circumstance or situation which they have reason to suppose might afford valid grounds for a claim. Reported circumstances that later give rise to a claim will be considered reported at the time an adequate notice of circumstance was given. Notice requirements vary from policy to policy.
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States the period of time and the manner in which an insured must provide notice to the insurer that a claim has been made.
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Requires that the insured provide the insurer with notice of a public offering of securities in order for claims arising from the offering to be covered under the policy.
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Provides coverage for claims brought against the Insured's directors and officers while serving as a director or officer of an outside entity (any non-profit organization or scheduled for-profit organization) when the insured has requested that they serve in such capacity. The coverage applies on either a triple or double excess basis. Triple excess means that the insurer's policy applies excess of the outside entity's indemnification provisions, the outside entity's applicable insurance, and the Insured's indemnification provisions. Double excess means that the insurer's policy applies excess of any applicable insurance or indemnification available to the director or officer from the outside entity.
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Requires use of a pre-approved list of defense counsel for certain claims.
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Excludes coverage for claims arising from a suit filed against the company and/or its directors and officers for patent infringement/intellectual property violations.
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As opposed to reimbursement language, this element of the insuring agreement(s) states that the insurer will directly pay covered costs, judgments and settlements on behalf of the Insureds unless contradicted elsewhere in the policy.
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Excludes claims arising from litigation prior to or pending as of a specific date
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The insurer presumes that the company will indemnify its directors and officers to the fullest extent allowed by law. The D&O insurer not only hopes that the company will take care of its directors and officers in the event of a claim, it wants to come as close as possible to requiring it. There are two primary reasons for this: the first is that the insurer wants the company to have a stake in the litigation so that the company will use its best efforts to resolve the litigation in a reasonable manner. The second is that the company can better afford to pay defense costs until such time as the policy retention or deductible has been spent. Most D&O policies now have low retentions for claims against directors and officers that are not being indemnified by the company or no retention at all.
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The prior acts exclusion excludes claims arising from wrongful acts occurring before the retroactive date.
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Excludes claims arising from the rendering of professional services.
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A written authorization by a shareholder for another person to represent him/her at a shareholders' meeting and exercise voting rights.
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Provides coverage for punitive damages where insurable by law (i.e. coverage will not apply if such coverage is against public policy in the jurisdiction of the claim).
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As opposed to pay on behalf of language, this element of the insuring agreement(s) states that the insured is responsible for paying their loss and the insurer will then reimburse them for covered costs, judgments, and settlements.
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Excludes coverage for claims arising from transactions with a specified named party.
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As in securities parlance, this means undoing a transaction so that each side to the transaction is back to where they started before the transaction took place. In the D&O insurance context, an insurer attempting to rescind wants to negate a policy, as if it never existed, by giving the insured its premium back. Rescission is an extreme remedy that is not often asserted. Proving a basis for rescission differs from state to state but generally requires that the insurer be able to show that the insured made material misrepresentations regarding the risk being insured and that, without those misrepresentations, the insurer would not have issued the policy.
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Under a D&O policy, the terms deductible and retention are interchangeable and mean the amount of covered loss that the company has to pay before the policy will come into play. It should be stressed that these terms are NOT interchangeable on other types of insurance. In the case of D&O policies, the deductible or retention only applies to covered loss. Accordingly, if there is an allocation because some part of the claim is not covered by the policy (See: Allocation), then the allocation must be determined before the deductible or retention is subtracted. Say, for example, several defendants are sued, some of which are insured under a D&O policy. It costs $5 million to defend and settle the suit and the insurer and insured agree to allocate 50 percent of the costs of defense and settlement to the Insureds. Since the deductible or retention only applies to "covered loss", the allocation must occur before the deductible or retention is applied. In this case, the allocation results in $2.5 million being covered by the insurance. After the deductible or retention of $500,000 is applied to the covered loss, the insurer should pay the remaining $2 million.
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Amends the retention for securities claims to apply only to defense costs. Also states that if the securities claim is settled or adjudicated with no liability to any of the Insureds, no retention will apply.
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Also called the retro date. Claims arising out of wrongful acts committed prior to this date are not covered under the policy.
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Excludes claims arising from a violation of the Federal Racketeer Influenced and Corrupt Organization Act.
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As opposed to an initial public offering exclusion, this restriction excludes coverage arising out of violations of any securities law.
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States that knowledge of a misrepresentation in the application possessed by one insured shall not be imputed to other Insureds for the purposes of determining if coverage is available.
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States that only material misrepresentations made by the insured(s) who signed the application will be imputed to other Insureds for the purposes of determining if coverage is available under the policy. If the signer(s) of the application make a material misrepresentation, coverage may be voided for all Insureds.
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Provides that the wrongful act of any director or officer shall not be imputed to another director or officer in the determination of the applicability of a given exclusion. May apply to all policy exclusions or only key exclusions.
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Extends coverage under the policy to the spouses of insured persons for liability, which they incur solely as a result of their status as spouses. Does not cover the spouses for liability, which they may incur as a result of their own actions.
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Coverage should apply to companies in which the named insured owns, directly or through one or more subsidiaries, more than 50% of the outstanding securities.
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Can only be exercised by the insured if the insurer cancels or refuses to renew coverage. See Discovery Period.
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Warranties are legal representations that the insured is not aware of any facts or circumstances that would give rise to a claim under a proposed policy. Warranties are generally signed once with a given carrier when the insured first purchases coverage from that carrier. The older a warranty is, the less likely the carrier could invoke it to deny coverage. Warranties are usually necessary when limits of liability are increased.
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