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Directors and Officers Liability
Private Company
What are Insured Events under a typical policy?
Private Directors and Officers Liability policies are designed to protect corporate and personal assets in the event of allegations of wrongdoing against the individual or entity. The typical policy will include three insuring agreements.
Side A – coverage for the individual insured in the event that no indemnification is provided by the entity.
Indemnification may not be made by the entity in the following circumstances:
- Entity can not pay due to financial insolvency or bankruptcy
- Entity refuses to pay due to “wiggle room” in indemnification provision
- Entity is forbidden to pay due to public policy
Side B – reimbursement coverage for the entity in the event that indemnification has been provided to an individual insured
Side C – coverage for claims first made against the entity.
Most Private DO policies today have been expanded to include coverage for Employment Practice Wrongful acts. Policies may provide separate or shared limits for Directors and Officers liability and Employment Practices Liability.
Who is an Insured?
Individual Insured - past, present or future duly elected or appointed directors, officers, management committee members or members of the Board of Managers of the Company (foreign equivalency wording and outside director wording often clarifies this definition). Individual insured also includes Employees.
Employees - past, present or future employee, inclusive of supervisory, co-worker or subordinate positions, including any part-time, seasonal and temporary employees or applicant for employment and often amended to include leased employees, independent contractors (to the extent they are indemnified by the insured).
The Company – Named Insured and any subsidiary
What is a Claim?
A claim is generally defined as a written demand for monetary or non monetary relief. Also, civil, criminal, administrative, regulatory or arbitration proceedings commenced by the service of a complaint, return of an indictment or filing of a notice of charges fall under most definitions of Claim.
It is important to note that policies have been broadened in the past few years to include the notice of filing of charges by the Equal Employment Opportunity Commission. While this breadth of coverage is desirable, the notice provision of policies clearly put the onus of timely reporting on the insured. In the event that these notices are not reported in a timely manner, there exists the potential for claim declination once a formal claim arises from matters described in the EEOC notice of charges.
What is a Wrongful Act?
With respect to Individual Insured’s, any breach of duty, neglect, error, misstatement, misleading statement, omission or act by such Insured in their respective duties.
With respect to the Company, any breach of duty, neglect, error, misstatement, misleading statement, omission or act by the company.
What is an Employment Practices Wrongful Act?
Broad employment practices liability coverage is often granted on a private Directors and Officers Liability policy. One should consider the breadth of the definition of employment practices violation or wrongful act when reviewing a form. Standard definitions of EPLI wrongful act will include:
- wrongful dismissal, discharge or termination (either actual or constructive) of employment, including breach of an implied contract;
- harassment (including sexual harassment whether “quid pro quo”, hostile work environment or otherwise);
- discrimination, (including but not limited to discrimination based upon age, gender, race, color, national origin, religion, sexual orientation or preference, pregnancy, or disability);
- Retaliation (including lockouts);
- employment-related misrepresentation(s) to an Employee or applicant for employment with the Company;
- employment-related libel, slander, humiliation, defamation, invasion of privacy;
- wrongful failure to employ or promote;
- wrongful deprivation of career opportunity, wrongful demotion or negligent employee evaluation, including the giving of negative or defamatory statements in connection with an employee reference;
- wrongful discipline;
- failure to grant tenure;
- failure to provide or enforce adequate or consistent corporate policies and procedure relating to any Employment Practices Violation;
- violation of an individual’s civil rights relating to any of the above,
Several policies afford third party employment practices liability which is coverage that responds in the event of a third party claim (ie. Claim of a vendor or customer) that sexual harassment or discrimination has been perpetrated against them while dealing with the named insured. Often time’s carriers will offer full third party coverage inclusive of both elements or they may narrow the coverage to respond to only third party claims of discrimination.
What is considered a Loss?
- Damages (including back pay and front pay)
- Punitive damages (may need to be added by endorsement)
- Judgments
- Settlements
- Pre- and post-judgment interest
- Defense Costs – usually with in the limits of liability
What may be excluded form Loss?
- civil or criminal fines or penalties imposed by law
- taxes
- any amount for which the Insureds are not financially liable or which are without legal recourse to the Insureds
- employment-related benefits, stock options, perquisites, deferred compensation
- any liability or costs incurred by any Insured to modify any building ( ADA)
- costs incurred in connection with any educational, sensitivity or other corporate program, policy or seminar relating to an Employment Practices Claim
- matters which may be deemed uninsurable under by law
Standard Policy Exclusions:
- gaining in fact of a profit or advantage not entitled to
- illegal remuneration
- fraudulent and dishonest acts
- prior notice of claims exclusion
- Contract exclusion (EPLI wording modified)
- Insured vs Insured Exclusion (carve outs for cross claims, bankruptcy trustees and certain EPLI events)
- Public Offering Exclusion (carve out for exempt offerings)
- BI/PD exclusion (security claim carve out)
- Pollution Exclusion
- ERISA exclusion
- Workers Compensation exclusion
- Professional Services Exclusion
Standard General Conditions:
- Spousal and estate extensions
- Reinstated limit of liability in the event of claim
- Retention applicable to all claims except non indemnifiable claims
- Duty to defend form vs reimbursement form (choice of counsel)
- Notice and claim reporting provision
- Hammer Clause / Settlement provision (may be modified or deleted)
- Extended Reporting Period Provision
- Cancellation Clause
- Change in control Provision
- Automatic Subsidiary Threshold (variable)
- Worldwide Territory
- Outside Entity Coverage
- Severability
Example of Private Company Directors and Officers Claim:
(These are generic claims examples that are shared by various carriers to illustrate possible claims scenarios, not all policies are intended or drafted to cover all exposures cited)
The Vice President of a manufacturer determined that diversification into a different product line presented tremendous sales potential for his company. Instead of presenting that opportunity to his employer, the VP shared it with his brother who formed a new company to produce that product. On behalf of the company, a shareholder sued the VP alleging that he wrongfully took advantage of an opportunity belonging to the corporation. The suit eventually settled for $2.5 million.
An employee of a small business convinced the board of directors that he was qualified to step into the role of President of the company, and he was appointed. Under his leadership, the company’s financial position substantially weakened. On behalf of the company, a shareholder sued the board of directors alleging that they used poor judgment and did not act in the best interests of the company when they appointed the new president. The case eventually settled for $1,500,000 and legal fees totaled $300,000.
A retailer advised one of its suppliers that it ought to increase inventory because business was expected to increase significantly. Business did increase for the retailer but it decided to use a different supplier for the increased inventory. The original supplier sued the retailer alleging that he relied on the retailer’s promise of more business and suffered damages as a result of having relied on that promise. The matter was eventually settled for $500,000.
A shareholder derivative action against a wholesaler and its directors alleged breach of fiduciary duty. The plaintiff alleged the directors breached their fiduciary duties and wasted corporate assets in connection with certain business transactions with affiliated companies. The case settled for $1,100,000 and attorneys’ fees amounted to $150,000.
Investors filed a $5 million derivative lawsuit against a private company alleging breach of fiduciary duty. The investors claimed that some of the company’s officers had personal connections to the third party contractor hired to re-tool the company’s assembly line and hired that contractor to further their personal interests, not the interests of the company. Other officers and directors were alleged to have either knowingly colluded with one another, or at least breached their duty of care in undertaking the project without properly investigating the qualifications of the contractor. The suit settled for $1.5 million with an additional $150,000 for attorneys’ fees.
During a press conference the President of a service company stated that the success of his company was due in large part to a competitor’s lack of customer service and inferior product. The competitor filed suit alleging that the president had negligently interfered with business relations. The jury agreed and awarded the competitor $2 million in damages. The attorneys’ fees for this case amounted to $150,000.
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