Insurance Terms - Directors & Officers Liability

DISCLAIMER - The abbreviated outlines of coverage provided in this site are not intended to express any legal opinion as to the nature of insurance coverage. The terms shown on this site provide only the most basic and general description of some common terms used by the insurance industry. Please read your policy for specific details of your coverage. ONLY your policy provides coverage.

Directors and Officers Liability – Directors, officers and board members of an organization are protected for wrongful acts through a Directors and Officers Liability policy. This is also known as an Executive Protection Policy or D&O. A Wrongful Act includes actual or alleged error, misstatement, misleading statement, act or omission, neglect or breach of duty of officers, directors and board members acting in their capacity with the Named Insured. This differs from Educators Legal in that D&O Liability extends to non-educational acts. (This is known as Part A of a D&O policy.

Employment Practices Legal Liability – Known as EPLI coverage. This policy form reimburses the Named Insured for wrongful dismissal, discharge or termination of employment, whether actual or constructive; employment related misrepresentation; violation of employment laws, sexual or workplace harassment of any kind; discrimination; wrongful failure to employ or promote; wrongful discipline; negligent evaluation; failure to provide adequate workplace or employment policies or procedures, etc. This is known as Part B of a D&O policy.

Directors and officers can be sued by the entity itself or by other current or former directors and officers, employees, shareholders, investors, lenders, vendors, customers, competitors, various government officials such as state attorney generals, the IRS, and state and federal labor departments, consumer groups, and many other third parties.

Since D&O policies typically include intentional acts exclusion, the policy should include a severability clause so that coverage is afforded to an innocent insured who did not participate in such acts (think Enron). It is usually a good idea to include the organization as an insured in addition to the directors and officers...this can typically be done by endorsement and often at no additional charge.

Here is an example of the source of most D&O claims:

Public Private Non-Profit Average
Shareholders        57%      31%       n/a         51%
Employees           23%      48%       96%         30%
Customers             5%       8%        2%          6%
Competitors           6%      10%        1%          7%
Government           3%      n/a        n/a          2%
Other 3rd Parties    5%       3%        1%          4%

Source:  Towers Perrin Tillinghast 2004 D&O Liability Survey

Types of Actions

There are generally two types of actions for D&O lawsuits:

Derivative suits by shareholders or members suing for poor performance, incompetent management, mistakes, bad judgment, etc.

Non-Derivative suits from all other parties, particularly employees.

Type of Claims

The following are brief, representative examples of claims typically addressed by the professional liability policies outlined above:

•  Providing inaccurate financial information to a lending institution
•  Providing inaccurate information to a surety bonding company
•  Exercising poor due diligence in a business acquisition
•  Receiving deposits for future services and failing to deliver those services
   (retirement community)
•  Wrongful termination of an employee
•  Discrimination against a customer
•  Sexual Harassment of an employee
•  ADA violations