How Well Do You Know Your D&O?

By Richard Updegraff | October 02, 2006
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Directors and officers (D&O) insurance is a form of liability protection available to people who agree to serve as directors, officers or even employees of business entities. The purpose of the insurance is to guard the individuals who agree to serve in those capacities from liability and costs of defense that may arise from claims made by people who feel aggrieved by the actions of the directors and officers of the business. This article describes important considerations for boards as they evaluate different D&O insurance policies.

D&O insurance helps protect the personal net worth of those individuals who are involved in the management of the company. This insurance also protects the company from certain claims made against the directors and officers, for whom the company has agreed to indemnify.

Most D&O policies are claims-made contracts. "Claims-made" means that coverage is provided for claims asserted during the period of the policy; they are based on acts that occurred following the "prior acts" date of the policy. The claims-made feature of D&O coverage makes it important for start-up entities to obtain D&O coverage as one of their first priorities.

There are many differences between D&O policies. One difference relates to an indemnity policy versus a reimbursement policy. Under an indemnity policy, the carrier is obligated to pay loss and to advance defense costs. Under a reimbursement policy, the carrier is obligated to reimburse the insured as the claim proceeds. The indemnity policy is much more favorable to the insured.
One of the most widely divergent insuring clauses relates to claims based on the offer and sale of securities of the company. The following are some insurance policies that provide coverage for all securities offerings. These policies are few in number and are the most expensive. There is another type of policy that provides coverage for securities offerings that are exempt under the Securities Act of 1933. If the company is presently considering only securities offerings that are exempt under the 1933 act, this latter type of policy would be acceptable. However, if the company intends to participate in the sale of securities that are not exempt under the 1933 act, then the policy needs to provide appropriate coverage to protect against claims related to registered offerings. Some policies obligate the carrier to give a quote for coverage of other securities claims; other policies are strictly limited to those exempt under the 1933 act.

Of course, the lowest level of coverage of all in this area are those policies that simply exclude coverage for any type of securities claims. Companies that are presently starting up and in the process of raising capital should avoid those policies even though the premiums will be quite low as compared with the other policies mentioned.

Other variations include:
-Coverage for punitive damage claims
-Exclusions if there has been a "final adjudication" of deliberate misrepresentation
-Limitations on refusal to accept settlements

Because each carrier writes its own D&O coverage with no uniformity between policies, it is vital that you consult your attorney to determine that you are receiving the coverage that is adequate to protect those individuals who serve as directors and officers of your new company. D&O protection is not something that should be overlooked simply because of the belief that nothing will ever go wrong.

Richard Updegraff does general practice including, but not limited to, insurance law at BrownWinick, a Des Moines, Iowa-based law firm serving the renewable fuels industry. Reach him at or (515) 242-2413.