D&O Liability Insurance Claim against D&O and Directors and Officers Liability Insurance Claims

Directors and Officers Liability Insurance Claims

D&O Liability Insurance Claim against D&O

As noted above, claims against directors and officers generally have been increasing over time. As of the most recent Wyatt survey, 30% of all companies could expect to have at least one claim made against its directors or officers, and each company averaged 0.9 claims - also an all time high. Watson Wyatt Worldwide, D&O Liability Survey Report (the “1997 Wyatt Report”).

Liability Claims against Directors and Officers

The frequency of claims against officers and directors, and the susceptibility of officers and directors to claims corresponds to a number of factors, including the size of the company, the company’s type of business, whether the company is publicly or privately owned, and its number of shareholders. However, companies with greater than 500 shareholders have a higher claim frequency than smaller companies, regardless of private or public status. Id.

Specifically, according to the 1999 Wyatt Report, companies with assets less than $100 million had a 15% susceptibility to claims, but companies with assets greater than $10 billion had a 65% chance of having a claim made against its directors or officers, and companies with assets greater than $1 billion averaged 1.72 claims per company in 1998. Large banking companies are the most likely type of business to have officers and directors liability insurance claims made against their directors and officers and average the most claims per business company. Forty-two percent of large banks will have at least one claim made, while the large banking industry as a whole can expect an average of 6.7 claims per company. With the explosion of technology companies in the last ten years, and the corresponding fluctuations in their stock prices, claims against technology companies have also increased dramatically.

Director and Officer Liability Insurance Claim

Common to all directors and officers liability insurance coverages in a D&O policy is that each insuring clause generally provides coverage on a “claims-made” basis. In other words, it provides the coverage described for claims made during the period for which the coverage is purchased. Additionally, the insured typically must report the claim to the insurer during the policy period or within a reasonable time.

D&O policies generally define liability claim as any (1) civil, criminal or administrative proceeding, or (2) written demand for damages against an insured. Who is included as an insured will depend on which coverages are implicated and how the term is defined in the policy. That is, if it is a securities claim, and the policy so provides, a claim may be made against the company or against a director or officer. If it is an employment claim, and the policy so provides, a claim may be made against the company, a director or officer, or an employee.

Some D&O liability insurance policies offer more detailed definitions of claim. For example, a policy may state that a civil proceeding includes arbitration, mediation or other alternative dispute resolution. A policy may also explain that an administrative proceeding includes a formal investigation.

Many directors and officers policies also include limiting a claim to those proceedings or demands made against an insured in his or her capacity as an insured. The capacity issue may be stated directly in the definition of claim, or may be stated in the definitions of “insured” or “wrongful act,” either of which may be part of the definition of claim.

Definition of Loss in Typical Officers and Directors Insurance Claim.

Loss generally includes damages, judgments, awards, settlements and defense costs. Loss usually excludes fines or penalties, taxes, treble (or other multiplied) damages, and matters uninsurable under law. Where treble or multiplied damages are assessed, a D&O insurance policy generally will cover the base amount, but not the multiplied portion of the loss. Some policies include punitive and exemplary damages in the definition of loss. Where included, coverage of punitive and exemplary damages explicitly is effective only where permitted by applicable law.

Some states do not permit punitive or exemplary damages to be assessed at all. See Distinctive Printing and Packaging Co. Those states that do permit punitive damages to be assessed may not permit insurance against them. See City Products Corp. v. Globe Indem. Co. Those states prohibiting coverage of punitive damages generally base the prohibition on public liability insurance policy concerns. The longstanding reasoning is that the assessment of punitive damages is intended to set an example or punish the wrongdoer, and permitting D&O liability insurance against such punishment would render such punishment ineffective.

Directors and Officers Liability Insurance Claims

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