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Bridging D&O gaps.

Those who lead corporations and those who sit on boards have come to rely on directors and officers (D&O) policies for personal liability protection. But with the uncertainty that is a by-product of today's economic turmoil, it may be time to ask if traditional D&O insurance is the complete coverage that these high-level executives can count on when things go awry.

A legal prohibition against indemnification, the state of a company's finances, or policy terms and conditions may leave directors and officers exposed when they least expect it. Add to that the possible situation of a non-indemnifiable claim exceeding the D&O policy limits purchased by the insured, and those at the helm of a company have reason to worry.

There is coverage that provides a safety net for any gaps in a D&O policy, however. Whether called broad-form or difference-in-conditions D&O, this added level of protection is worth exploring. It not only helps to protect individuals already in place at a company, but it also is an added tool to attract the most talented directors and officers into the service of the company--whether publicly traded, privately held or non-profit--by offering them enhanced peace of mind.

Gaps in Coverage

Not all D&O insurance is alike; different policies may have different exclusions. But there are instances where some D&O policies may leave gaps in coverage for non-indemnifiable claims:

Exclusions applicable to the traditional D&O insurance program. In many cases, the policy terms and conditions found in the traditional D&O insurance program may be more restrictive than terms found in the broad-form policy. Since a non-indemnifiable claim has such personal meaning to the directors and officers of the insured, such a gap can impose real financial liability on the individuals. The corporation can, however, purchase broad-form or difference-in-condition coverage for individuals that may provide protection when the traditional D&O program does not.


Insurer's inability to pay. While closures and bankruptcies were less common in the past several years, today's economic pressures are pushing many more corporations to the brink of insolvency. Having additional coverage that steps in for individual directors and officers when an insurance carrier may no longer be able to indemnify its insureds is a valuable layer of protection in uncertain times.

Excess claims. Broad-form D&O policies may serve to act as primary coverage when exclusions in the traditional insurance program would leave directors and officers without indemnification. Additionally, these policies also serve as excess coverage when a covered Side A claim exceeds the underlying D&O limits.

Insurer performance. An insurer may reject a claim because the claim, once filed, does not meet the policy terms and conditions, including definitions and exclusions written in that policy. Additionally, rescission of the coverage may occur due to misrepresentations made by some parties when securing coverage. In these cases, having broad-form D&O coverage for individuals can act as a backstop to protect directors and officers.

Dealing with Uncertainty

The compelling reason to purchase broad-form or difference-in-condition D&O coverage is that it is difficult to assess the likelihood of occurrence of the type of problems described above. This is particularly true when the economy is moving in unexpected directions and no one is sure how their company will be impacted.

A typical D&O policy may seem more than adequate on its surface. But since the claim handling process does not determine coverage until a specific claim is filed and begins to make its way through the insurer's handling process, a director or officer cannot be certain how the claim will be resolved.

Broad-form D&O provides an extra layer of assurance because it cannot be rescinded and is specifically designed to take care of the lack of indemnification that occurs when exclusions are invoked. It is designed to cover individuals, as opposed to the corporation itself.

This is a time when many people are questioning if it is prudent to serve on a board, and many executives feel unnerved by rapidly changing economic conditions and increased public scrutiny of their actions. Broad-form D&O is simply an effective way to provide another layer of protection to people making difficult decisions in difficult times.
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Article Details
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Author:Meiners, Cary
Publication:Risk Management
Geographic Code:1USA
Date:Jun 1, 2009
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