Independent Directors Liability Insurance -
Independent directors should purchase an Independent Directors Liability insurance policy as a liability safety net and not rely solely on directors' and officers' liability policies purchased by the organization.
You have been asked to serve on the board of a prominent and prestigious organization. Congratulations!
But did you know corporate directors and officers can be sued individually for acts they perform (or fail to perform) or decisions they make while serving? If someone alleges the corporate leadership harmed the organization or another individual in the course of managing financial affairs or establishing policies, the resulting legal fees and potential judgments or settlements can devastate the organization as well as the individuals. For example, a stockholder of a corporation or a member of an organization may allege financial loss as a result of a director's or officer's breach of the duty of care or loyalty to the organization. Employees, governmental entities, competitors, or creditors may allege negligence or some other breach of duty.
Organizations that depend on independent directors for leadership would have a difficult time convincing individuals to serve in those positions without some method of protecting their personal assets from such claims. Directors' and Officers' (D&O) Liability insurance policies were developed to protect organizations and their directors and officers against these potential losses.
If you serve as an independent director of a corporate entity – whether it is for-profit or non-profit – you are likely covered by a D&O liability insurance policy purchased by the entity for the benefit of the organization as well as the individual officers and directors. Before agreeing to serve – or continuing to serve – as an independent director, request details about the D&O policy the organization has purchased. Ask for a copy of the policy and read it. A careful reading should convince you that the corporate D&O policy does not provide the complete protection needed to protect your assets.
There are several reasons the organization's D&O policy should not be the end of your search for adequate protection. Consider these points carefully.
Limits of liability. The limits of liability on the D&O policy belong to all covered persons and entities combined, and they apply to all claims during the policy period, including defense costs incurred to defend those claims. When the limits have been exhausted by payment of defense costs, settlements or judgments related to one or more claims during the policy period, there is nothing left for any subsequent claims.
Exclusions. The exclusions found in a D&O policy can have a profound effect on the scope of coverage provided by the policy. The typical policy contains the following exclusions:
- Insured versus insured: The policy may exclude claims brought by one director against another director, or by the organization against a director.
- Failure to Maintain Insurance: The policy may exclude the consequences of board decisions regarding insurance. If a property or liability insurance policy proves to be inadequate to cover a loss to the organization, the D&O policy will generally not cover a claim against the organization or its directors that they failed to purchase adequate insurance coverage to protect the organization's assets.
Application warranties and policy conditions. The D&O policy can be rescinded after a claim is reported if the application for the policy contained false or misleading information. A claim may be denied if the claim is not reported to the insurance company in a timely manner.
Cancellation. The D&O policy can be canceled for a number of reasons without the director's knowledge, including cancellation for non-payment, change of control or change of risk.
Independent Directors Liability Insurance
When you purchase an Independent Directors Liability insurance policy (IDL), these concerns are addressed by providing coverage and limits dedicated to only one director – you.
The typical Independent Directors Liability Insurance policy protects you with the following important features.
Dedicated Limits of Liability. The limits of liability on your Independent Directors Liability Insurance policy belong only to you – the independent director named on the policy. If the corporate D&O policy limits are exhausted due to claim expenses, judgments or settlements, your Independent Directors Liability Insurance policy steps in and takes over on your behalf.
Non-Rescindable and Non-Cancellable. The Independent Directors Liability Insurance policy can't be canceled or rescinded except for non-payment of the premium. If the D&O policy is canceled or rescinded, the Independent Directors Liability Insurance policy drops down to protect you.
Fewer Coverage Exclusions. The Independent Directors Liability Insurance policy is unencumbered by the large number of exclusions that are necessarily found in the typical D&O policy. In other words, the Independent Directors Liability Insurance policy does not "follow form" with the corporate D&O policy.
Portable. The Independent Directors Liability Insurance policy can cover your service on more than one board if you elect to do so. In addition, it can cover your past service on boards, should a claim arise after you leave that board.
Shadow Defense Coverage. When a suit is filed against the corporation and/or a number of directors, the defense counsel appointed by the D&O insurance company is responsible for representing the potentially diverse interests of all defendants. When you report the claim under your Independent Directors Liability Insurance policy, and the Independent Directors Liability Insurance insurance company may appoint an attorney to monitor the proceedings to be sure your individual interests are protected.
The points listed above are some of the major benefits of purchasing an Independent Directors Liability Insurance policy. Independent Directors Liability Insurance policies are available from a number of different insurers, but these policies have different terms and conditions and must be reviewed carefully to determine how they suit the needs of a prospective purchaser.
Some organizations agree to procure and pay for Independent Directors Liability Insurance policies for their independent directors, but a policy obtained in this manner may not be the best policy for you.
The producers and support staff at SwingleCollins possess the expertise and knowledge to review Independent Directors Liability Insurance policies available on the market today and help you select the one policy that best suits your particular needs. Contact your SwingleCollins agent for more information.
Swingle, Collins & Associates specializes in individual directorship liability insurance coverage The descriptions of coverages listed on this website are brief and subject to the provisions, limitations, and exclusions that can only be expressed in your policy and related endorsements. For additional information of how Swingle, Collins & Associates can assist in meeting your coverage needs for individual directorship liability insurance please contact your dedicated risk manager to discuss the benefits and services of personal homeowners insurance coverage.
The information contained on this page is provided for informational and educational purposes only. It contains general information on insurance issues and may not reflect the most current developments in insurance coverage and is unlikely to apply in all factual scenarios. The information does not include all the terms, coverages, exclusions, limitations or conditions that may be contained in the actual insurance contract language. The policies themselves must be read for those details. Sample policy forms will be made available upon reasonable request.