March 1, 2016

D&O Insurance — The True Value of Entity Coverage

In today’s post, Mark Miller discusses some of the basics of D&O insurance, and the fact that some kinds of D&O insurance afford the broadest kind of coverage available.  At its core, directors and officers insurance covers wrongful acts of individual directors and officers of an organization.   It protects management and board members from personal liability when sued.  Properly tailored, and properly handled, D&O insurance pays for an individual’s defense, as well as settlements reached in any lawsuit. 

D&O insurance typically has a dual purpose, though.  In addition to protecting individuals, D&O Insurance also contains important coverage for the company.  One of the most important coverages for the company is entity coverage, which, in its purest form, covers all claims against the corporation, unless otherwise excluded.  This kind of coverage is perhaps the broadest coverage currently offered in the insurance marketplace.  It covers most kinds of lawsuits brought against the company for alleged wrongdoing. It covers the corporation irrespective of whether individuals are also named in a lawsuit.  It covers governmental investigations.  And, it covers both securities related and non-securities related lawsuits, including business competitor claims alleging a wide variety of business torts.  The all-encompassing coverage provided by this kind of pure entity insurance coverage means that D&O insurance is one of the first places that corporations should look when a claim is made against them. 

In the video Mark tells the story of an exchange with a judge, who marveled at the scope and value of D&O entity insurance coverage.  In that case, the underlying lawsuits were class action lawsuits that threatened the very existence of a well-known business.  Given the breath of coverage, the judge found in favor of our client under a tower of D&O insurance policies.  The exchange sheds light on just how important and valuable this kind of pure entity D&O insurance coverage can be for a business. 

Please let us know if you have any questions or concerns about claims, lawsuits, or governmental investigations made against your businesses.  D&O insurance may afford a solution to the problem, but, as with any claims-made policy, it is imperative that coverage be investigated as soon as a claim is made.  We can be reached in our Washington, DC office at 202-760-3160.

Here’s a transcript of the video:

Understanding the nuances of D&O insurance, coverage for Directors and Officers of a company’s board.

One of the other topics we would like to cover is D&O insurance. It’s a very big issue nowadays. When you think of D&O insurance, you might think of it in the classic sense. It covers the Directors and Officers of the company. So if I’m sitting on the board of a company I want D&O insurance. Why do I want it? In case some other yahoo brings me into a lawsuit and I gotta deal with it and I don’t want my personal assets having to pay lawyers to cover that. In fact, I’m doing you a favor. I’m sitting on your board, I’m giving you advice, you are paying me some small amount of money for it, but I’m basically stepping up and trying to do something good for your company and that’s why I’m sitting on your board. So that’s sort of the perspective of a board member. At the same time you say, you guys or your people should buy me insurance, I need to have insurance. So what do you buy, D&O insurance, Directors and Officers insurance. And that’s at its core to cover the D’s and O’s, Directors and Officers. So you may think of it in that context and if that was the only context that insurance covered might be much simpler issues to deal with. Because Directors and Officers would dictate what kind of insurance they want and they would get that insurance. And if the Directors and Officers ever got into trouble, then they would deal with it.

What happened years ago was that the insurance industry realized that obviously a Director and Officer isn’t going to get sued alone, most likely, he’s going to get sued along with the company. He and she will get sued along with the company. So you get a lawsuit against the company and the Directors and Officers, one lawsuit. So what’s D&O policy going to do? It got into all of these issues as far as how are you going to divide up the defense. It’s 100% defense. You cannot cut it in half. We cannot separate individuals from the company. So the better insurance company said, I’ve got a way to handle it.  We’re just gonna cover everyone. Find and simple, we’ll cover the company, we’ll cover the D’s, we’ll cover the O’s, we’ll cover them all. And that’s called Pure Entity coverage. If you have that coverage, first of all you’re going to be a non-public company, but if your non-public company with D&O insurance, and it’s got Pure Entity coverage, you’re golden. It covers most every wrongful act under the sun, unless excluded. So anything the company does wrong covered, unless excluded. There’s a series of exclusions but it’s the broadest possible coverage you can buy.

So I making this argument to this judge, of 40 years, in a mediation. I said, your Honor this coverage is exceedingly broad. It covers all wrongful acts of the company, unless excluded. He just looks up from his glasses and says oh. And then I keep going on, I said, here’s how broad it is. And I’m giving him examples and I’m telling him how broad it is. He pulls his glasses off and he looks at me and says, do you realize what you’re saying? And I said I certainly do your Honor. That’s our point and he goes, no, no. That’s not what I’m thinking about. What I’m thinking about is, if you’re right, just think about how much that insurance would cost. And I was like, stop, you’re going in the wrong direction. But his point was, he didn’t quite believe how broad it was because in our situation, the company had paid $20,000 for the policy. He’s like you paid to 20,000 for this and you want 20 million in coverage. I don’t get it. The bottom line is it’s a fact. The coverage is that broad. It’s the first place you need to look, if you’re a nonpublic, for any sort of lawsuit against the company.

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