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Q. Why does a private company need D&O insurance?
A.
While the reasons are the same for private companies as for public
companies, some additional reasons that private companies do purchase
insurance include:
- Outside directors require coverage
- The company has a large number of minority stockholders
- The company knows of dissident stockholders
- Entity Employment Practices Liability Insurance (an additional premium, which generally is less expensive than purchasing a stand-alone policy).
Q. What is a "hammer" clause?
A. In fact, there's actually no such thing entitled "hammer" clause in a policy; it's industry jargon. It refers to the somewhat dramatic image and the insurer holding a hammer to use on the insured, as a metaphor to describe the insurer's right to settle a claim when the insurer believes it is the best course of action to take. At times, insured and insurer will not agree on whether to settle a case. So in most policies, the insurer retains the right to make that decision, if the insured wishes to carry on with the matter, then it must do so without insurance in most cases. There are many differences in how a "hammer" clause is applied- ranging from absolute ("hard" hammer clause") to compromising ("soft hammer clause").
Q. What is the Spousal Extension?
A. When a D or O is sued in a community property state, plaintiff's bar often also names the spouse as well so as to be able to access community property assets. This provision extends coverage to the spouse.
Q. Explain Severability of the Application
A. The “long form” D&O application asks a warranty question, seeking to uncover any known circumstances that may lead to a claim under the policy. If the signer is aware of any such circumstances and does not disclose them, he/she can void coverage for all Ds and Os in the process, even those unaware of the circumstance. Severability results in voided coverage for the signer only, and not for any "unknowing" Ds and Os.
Q. Can the D&O Policy be amended to provide Coverage for Named Positions?
A. The standard D&O contract provides protection only for corporate directors and officers. However there are other, potentially positions that could be named in a suit such as Director of Investor Relations or Office Manager. These, and other positions can be named on the policy and coverage provided for these otherwise exposed employees.
Q. Is It Important that Majority Shareholder Exclusion be deleted from the policy form?
A. D&O contracts will frequently have exclusion for suits brought by someone holding more than a certain percentage of company stock, often 5-10%.
Q. Why should the Definition of Claim be amended to include "written demands/non-monetary damages"?
A. The standard D&O contract responds only to suits for monetary damages.
However, there are other "written demands," and resulting legal expenses
before any actual suit is filed. Additionally, some suits (i.e. intellectual
property) seek only injunctive relief and not monetary damages. The amended
claim wording referenced above allows the policy to respond for defense
costs which would otherwise be uninsured.
Q. Explain the Bilateral Discovery Clause
A. This allows the insured to activate the Extended Reporting Period (ERP)
regardless of who cancels or non-renews the contract. In the absence of this
provision, only cancellation or non-renewal by the insurer entitles the
insured to activate this potentially valuable option.
Q. Is it important to have the Fraud Exclusion amended to Final Adjudication
Wording?
A. The D&O contract contains an exclusion for claims resulting from fraudulent
or dishonest acts on the part of the Ds and Os. However, many contracts
exclude coverage if there is an allegation of fraud and since the typical
securities suit will allege fraud, no coverage would exist. "In fact/final
adjudication" wording requires that fraud be found "in fact" and through a
final adjudication by a court of law. Defense coverage will still be
provided to the defendants until such a finding takes place.
Q. Is the definition of Wrongful Act sufficient as stated in most policies?
A. The typical D&O contract provides coverage for the Ds and Os for allegations
of wrongdoing while acting solely in their capacity as Ds or Os of the Named
Insured. For example, if the corporation forms a joint venture (JV) and the
Ds or Os are involved in the management of the JV and are sued as a result
of this combined activity, coverage could be denied since they were not
acting solely in their capacity as respects the corporate entity. Deletion
of the word "solely" removes this potential.
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