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An expert’s guide to buying D&O insurance

By Carly Eveniss
Portfolio Manager, Management Liability

Claims against senior executives are on the rise.  Shareholders, regulators and other stakeholders are increasingly targeting individuals alleging poor decision making, mismanagement or failures to act with due skill care and attention in their managerial capacity. 

Recent high-profile cases drive home the fact that senior management are not just at risk of losing their jobs when their performance is called into question, they could also be personally liable for covering the costs of their legal defence and any resultant penalties and financial liabilities.

Recent research QBE carried out across Europe found that a staggering 1 in 4 senior executives has had a personal liability claim made against them at least once while almost a third admit to concerns about such a claim being made in the future. 

Modern pressures, expanding remits and increased regulation are leaving senior executives more exposed now than ever.  Why then are so few digging into the detail of the specialist Director’s & Officer’s insurance (D&O) cover their employers are buying on their behalf?

I have specialised in this area of insurance for over 15 years and have worked on both the claims and underwriting side of the business; it is a complex and often misunderstood policy coverage, but in its most simplistic form , a D&O policy is designed to offer cover for the financial costs of investigations and legal proceedings for individuals, damages if the individual is found liable, civil fines and penalties, and to some extent coverage may exist for the company they work for itself

Not all cover is created or bought equally and product scope can vary enormously.  At a time when senior executives are increasingly targeted as a legitimate route to legal recourse, there are some key points that are worth considering when assessing the value of a D&O policy which protects you. 

How broad is the cover?

Who is covered under the policy? – Most policies operate by defining covered individuals as ‘insured persons’.  This definition can vary in breadth from solely covering the Board of Directors to some which include all employees.

What is covered? Some D&O policies may also cover such claims as employment practice liability and bodily injury.

The broader the wording and the more people covered the quicker the limit of indemnity can be eroded and as they say, “once it’s gone, it’s gone”.  When considering the breadth of the product you are purchasing, it is worth questioning whether there is more appropriate coverage under a more applicable policy.

Have coverage gaps and overlaps been identified?

For example, following the implementation of the General Data Protection Regulation (GDPR), some D&O policies excluded cyber coverage, yet recent research from QBE shows that cyber breaches/attacks are one of the biggest liability concerns for senior management.  Just as important is considering areas where a policy may overlap with other policies your business may have. This could cause delays if it is not clear which policy a claim will fall under.

How will the policy respond to a claim?

The wording of a policy should be legally tested to suit your role and ensure claims will be handled the way you need. It’s important to make sure the following is clear:

  • How does your policy deal with several claims that have a common nexus or originating cause? Will it count as one claim or multiple claims? Is there legal precedence to support the language used?
  • Does your policy cover D&O’s for claims brought anywhere in the world? What licence does the insurer have to pay claims in territories where you do business?
  • In the event of a claim, do you want to use your own agreed approved defence counsel, or would you prefer to use one approved by the insurer? Would you benefit from having one that already knows you or your business?

How and when does coverage engage?

D&O risks are ‘long-tail’ risks (where underlying matters often involve long and complex legal action which can run to several years), and it is important to know when the coverage would be triggered in the event of a claim. Given the complexity and life-span of most claims it is important to have a clear understanding of the earliest point at which coverage engages. A good example of this is self-reporting.  Do you understand the impact on coverage in the event that you decide that there is a need to self-report before a claim is formally made against you?

Is the policy generic or tailored to the risks you face?

The D&O exposures faced by senior management are often unique depending on the business, and therefore considering a bespoke policy could be a better option. It is equally as important that the insurer understands your business and meeting with your underwriter and those who would be handling any claims can be beneficial.

Can your cover be extended?

It is possible to purchase additional coverage and it is becoming increasingly popular for companies to buy excess “Side A” coverage.  This product only offers cover for D&O’s where there is no indemnification from the company.  This ‘sleep-easy’ style thereby boosts the total amount of insurance available to cover the cost of claims made against individuals in the event that traditional cover is eroded for example by Corporate Reimbursement or cover for the company itself in the event of securities litigation.

What law and jurisdiction is the policy based on?

Policies are written to reflect the laws and jurisdictions they are designed for.  We see examples of policies where we are asked to change the law governing the interpretation of the policy words.  This can have significant unintended consequences especially where drafting is used which reflects specific legal principles.  It is worth considering, whether or not this suits where you are based and the nature of your legal responsibilities?   

How important is my carrier relationship?

Given the duration and complex nature of D&O claims, we believe that longevity of relationship with your key carriers delivers significant benefits.  Where a relationship has been nurtured and developed over time, a greater understanding and effectiveness of disclosure is achieved.  For an insurer to understand how a company approaches litigation enables us to offer support in the most timely and efficient manner.  It should also afford the company and their D&O’s the understanding and comfort that their needs are understood and that underwriters and claims teams alike have the right experience and track record.

The cost of a D&O claim can be staggering, and given recent trends, it isn’t worth risking your own liability if your company doesn’t have the right cover in place for you. Ask the right questions about your employer’s cover; it could make or break you if a claim arises.

For further information on QBE’s D&O offering, click here