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Directors and Officers Insurance:
Let the Buyer Beware!

Let's face it, purchasing insurance nowadays is just like purchasing any other commodity. All the coverages are the same so you go with the best price. This may be true with some types of insurance coverages, but it is definitely not the case with directors and officers liability insurance. Directors and officers insurance is completely different in how it is written and what is covered. This page contains the significant differences between directors and officers insurance and other types of insurance contracts. Of course, there are some similarities. Perhaps the best way to describe the purchasing process for directors and officers insurance is to......

Let the Buyer Beware!

There are big differences between Commercial General Liability coverage and Directors and Officers Liability coverage

Insurance companies offer many types of directors and officers policies. The coverage can range from the bare minimum to all of the bells and whistles.

Let’s compare the make-up of a directors and officers policy to the type of policy that is most familiar to the insurance buying public: Commercial General Liability Coverage.

Commercial General Liability coverage is the most common of coverages written. This coverage is usually incorporated as part of a "Package" providing liability and property coverage for a business location. The contracts really do not vary from company to company and the primary determining factor in purchasing coverage comes down to price. The shopping process is most similar to purchasing personal auto and homeowner’s insurance. This type of coverage really is a commodity. Price is usually the sole determining factor when selecting a insurance company.

Directors and Officers coverage is a "special markets" coverage. How the coverage is triggered is different, (claims made vs. occurrence), How the contract is written is different, (non-standardized vs. standardized). & how the coverage is underwritten is different). You cannot purchase a directors and officers policy in the same manner that you would purchase a commercial "package" policy or a personal home and auto policy. Price should NEVER be the sole determining factor when selecting an insurance company

Q. Are there any similarities between the General Liability policy and the Directors and Officers Liability policy?

A. Yes, they are both insurance contracts. All insurance contracts are set up pretty much the same. A breakdown of the structure of an insurance contract is as follows:

1. Declarations

2. Insuring Agreements

3. Exclusions

4. Conditions

Let's look at these four parts of an insurance contract one at a time:

1. Declarations:

The statements that are entered into what are otherwise blank spaces in the printed policy form. Declarations serve to personalize the policy by identifying the named insured and describing each activity to be insured.

2. Insuring Agreement:

Summarizes the Insurance Company’s obligation under the contract. Includes:

What perils are covered

Definitions of terms used in insurance contract.

3. Exclusions:

Obviously, eliminates coverage that the insurance company does not intend to provide.

4. Conditions:

Summarizes the insured's obligations under the contract.

Additionally, the policy will have endorsements modifying one or all the above mentioned parts of the contract.

All insurance contracts are contracts of adhesion. This means that you will be given the benefit of the doubt in a legal dispute with the insurer since you did not have a hand in writing the contract. Remember the words "legal dispute" This means taking the insurance company to court. This is something to avoid. The trick is to purchase a contract that spells out coverage in a relatively clear matter.

There are Three HUGE Differences between General Liability policies and Directors & Officers Liability Policies: toplist

Occurrence vs. Claims Made

Standardized Vs Non-Standardized Contracts

Underwriting Differences.

Occurrence vs. Claims Made top

General Liability policies are almost always written on an Occurrence basis. Directors and officers policy are almost always written on a claims made basis. An explanation and comparison of these types of policies are as follows:

Commercial General Liability Directors and Officers Liability

Occurrence Form Claims Made Form

Coverage triggered when claim occurred versus when Claim filed. If loss occurred in 1997, then that policy that was in effect in 1997 will respond. IF claim occurs in 1997 and claim is made against the insured in 1999 then policy in effect as of 1999 will respond. The policy in effect in 1997 will NOT respond.

Occurrence policy never disappears. Policy will respond to claim as long as circumstances leading to claim occurred while policy was in effect. Claims made policy disappears after it expires. It is like it never existed at all. A TAIL can be purchased for an additional premium.

Example using the Occurrence policy form:

Medical clinic has a policy with XYZ insurance company with a $500,000.00 limit and a $1,000.00 deductible for the period from 1/1/97 to 1/1/98. On 10/1/97, an employee is fired. On 1/1/98, the insured renews with ABC Insurance Company with a $2,000.00 deductible and a $1,000,000.00 limit of liability On 3/1/98, the employee fired on 10/1/97 files a claim against the non profit organization for wrongful termination. The policy with XYZ Insurance Company will respond to this claim. The insured will have a $1,000.00 deductible and up to $500,000.00 in coverage to respond to this claim since the occurrence is the time the employee was fired.

Example using Claims Made policy form:

Medical clinic has a policy with XYZ insurance company with a $500,000.00 limit and a $1,000.00 deductible for the period from 1/1/97 to 1/1/98. On 10/1/97, an employee is fired. On 1/1/98, the insured renewal with ABC Insurance Company with a $2,000.00 deductible and a $1,000,000.00 limit of liability. On 3/1/98, the employee fired on 10/1/97 files a claim against the non-profit organization for wrongful termination. The policy with ABC Insurance Company will respond to this claim because the claim was made against the insured after the 1/1/98 renewal date. This is in spite of the fact that the circumstances leading to the claim occurred during the prior policy period on 10/1/97. The insured will have a $2,000.00 deductible and up to $1,000,000.00 in coverage to respond to this claim.

Why is Directors and Officers coverage written on a claims made basis?

Tort Law

Regulatory Changes

Legal action concerning wrongful acts of a non-profit organization are relatively recent. The erosion of protection statutes for non-profit organizations along with recent regulatory changes has resulted in a sharp increase in courtroom activity in just the past few years. This sudden increase in legal activity results in rapidly changing rules for legal responsibility on the part of the directors and officers and the non-profit organization.

Tort Law

The changing nature of tort liability with respect to wrongful acts along with the recent explosion in employment practices liability claims demand a flexible contract that can respond to changing definitions. Since coverage under a claims made policy is not permanent, the insurer can provide coverage for a rapidly evolving exposure at a competitive premium. If the insurance company is "locked" into one definition for an unlimited period of time when that definition is being changed and expanded by the courts, then they could never offer coverage at a price that is affordable.

Regulatory Changes

There are Continual regulatory "surprises" affecting the coverage provided by Directors and Officers Liability. Perfect example: ADA. Coverage for ADA claims come off of the directors and officers policy. There are very few regulatory "surprises" affecting General Liability coverages. Most regulatory actions have already occurred. Any regulatory changes now have little impact relative to the big picture.

These regulatory changes are, like any law, poorly written. The courts have to hammer out the meaning of the law or regulation. The insurer must have a policy that is flexible to respond to the changing definitions.

Important things to remember about Claims Made policies.

Retroactive Date: (AKA Pending or Prior Date)

You have to determine that prior acts are covered by the contract and if this prior acts coverage is limited by a retroactive date. The retroactive date will be part of the declarations. No claims will be covered if the loss OCCURRED prior to this retroactive date.

Extended reporting period: (AKA "Tail")

If you let the claims made policy expire, you have the right to purchase an extended reporting period, or tail. On the claims made policy, this Tail gives you coverage for claims reported after the expiration date as long as the claims occurred prior to the expiration date.

EXAMPLE:

Your organization has a claims made liability policy that expires on 10/1/99 and you do NOT purchase the "Tail" and let the coverage lapse. On 9/1/99 an employee is terminated. On 4/1/00, this employee makes a claim against the organization for wrongful termination. Guess what? You do have not coverage since you did not elect to purchase the Tail. The directors and officers may be held personally liability for this employment practices liability claim against the organization

Standardized vs. Non-Standardized Contracts top
General Liability policies are standardized, meaning most insurance companies use the exact same forms with the exact same legal language.

Directors and Officers contracts are not standardized. You have to be more careful and read the contract carefully when selecting a D&O insurer. Some of the reasons why general liability contracts are standardized and directors and officers are not standardized are as follows:

Interpretation by the Courts

Age of Liability Class

Marketplace

Standardized General Liability Policy.

Non-Standardized Directors and Officers Liability Policy.

Interpretation by the courts.

Insurance contracts are made up of words and phrases. Insurance Companies are reluctant to veer from words and phrases that have been tested and modified in the "blast furnace of tort law." Remember, words in a legal contract are not defined by a dictionary, they are defined by the courts within the context of the contract. Remember, "it depends on what your definition of ‘is’ is"?

Most language in a typical Commercial General Liability policy has been tempered in this tort law blast furnace. The changes are still ongoing, but the impact is marginal relative to the overall exposure. Companies are not going to veer away from the readily accepted language in a typical insurance contract. This is why you will never see "plain Language" insurance policies.

There is some standardization from contract to contract in Directors and Officers Liability coverages, but it has to do with language that applies in any insurance contract. The other aspects of the policy are still being hammered out in that "Blast Furnace" of tort law. Generally the courts "broaden" the definition of the words in the contract perhaps beyond the coverage intended by the insurer. This is ongoing. Insurance Companies respond by using more narrow definitions in the contract.

Age of Liability Class.

The words and their conceptual meaning are pretty clear since they have been interpreted in the tort system for a long period of time.

Words and their contextual meaning are still unclear since legal actions related to directors and officers and employment practices liability are relatively new in the tort system and are rapidly evolving.

Marketplace

Many insurance carriers – Many insureds with similar exposures.

These insurance carriers have banded together and formed the Insurance Services Office, (ISO), The ISO is a non-profit organization that functions as a clearing house for information to be shared amongst member insurance companies. One of the services provided by ISO is standardized insurance contracts.

Few insurance carriers – Fewer insureds

Number of carriers still relatively few. Numbers are growing. Insurance carriers have not yet banded together to pool their loss information and develop a standardized contract.

Someday, directors and officers liability contracts will be standardized. Until that time, you must carefully compare each contract when you receive quotations. The insurance companies should ALWAYS send a copy of the contract with any quotations they issue.

Underwriting Differences top

You cannot purchase a directors and officers policy like other insurance coverages. The following three differences make it much more difficult to shop for the best directors and officers coverage for your organization. Care has to be taken on making sure the claims made provisions are not restrictive, you have to compare each contract with the other, and you have to submit a ton of material when applying for coverage.

The three big differences between a directors and officers policy and other insurance contracts are as follows:

How the policies are rated.

What kind of information is required by the insurance company.

How the policy is issued.

Commercial General Liability

Directors and Officers Liability

How policies are rated

A GL policy, you can get out a book, plug in some numbers, and voila! You have the rate!

Unlike General Liability policies, D&O is underwritten on a case by case basis. No class rating. Premium is less dependent upon the application to be completed and more upon the information provided

Information required by the insurance company

Usually a simple, unsigned application with minimal information like: area of premises, annual sales, construction of building.

Directors and officers insurance requires a completed, sign application, Copy of financial records, copy of By-laws, Copy of Brochure, List of Directors and Officers, newsletters, etc. etc.

Differences in how the policies are issued

Coverage can be immediately bound over the phone. No special exclusions attached to the policy unless signed off by the insured.

Coverage cannot be bound until all information required is reviewed. Exclusions particular to your Organization can be attached without you signing off.

You must always read the proposal and conditions when receiving quotes for directors and officers insurance. Each company can and does provide widely different coverages. Always demand a copy of the policy contract with the quotation.

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Commercial General Liability	Directors and Officers Liability
Occurrence Form	Claims Made Form
Coverage triggered when claim occurred versus when Claim filed. If loss occurred in 1997, then that policy that was in effect in 1997 will respond.	IF claim occurs in 1997 and claim is made against the insured in 1999 then policy in effect as of 1999 will respond. The policy in effect in 1997 will NOT respond.
Occurrence policy never disappears. Policy will respond to claim as long as circumstances leading to claim occurred while policy was in effect.	Claims made policy disappears after it expires. It is like it never existed at all. A TAIL can be purchased for an additional premium.

Standardized General Liability Policy.	Non-Standardized Directors and Officers Liability Policy.
*Interpretation by the courts.* Insurance contracts are made up of words and phrases. Insurance Companies are reluctant to veer from words and phrases that have been tested and modified in the "blast furnace of tort law." Remember, words in a legal contract are not defined by a dictionary, they are defined by the courts within the context of the contract. Remember, "it depends on what your definition of ‘is’ is"?
Most language in a typical Commercial General Liability policy has been tempered in this tort law blast furnace. The changes are still ongoing, but the impact is marginal relative to the overall exposure. Companies are not going to veer away from the readily accepted language in a typical insurance contract. This is why you will never see "plain Language" insurance policies.	There is some standardization from contract to contract in Directors and Officers Liability coverages, but it has to do with language that applies in any insurance contract. The other aspects of the policy are still being hammered out in that "Blast Furnace" of tort law. Generally the courts "broaden" the definition of the words in the contract perhaps beyond the coverage intended by the insurer. This is ongoing. Insurance Companies respond by using more narrow definitions in the contract.
*Age of Liability Class.*
The words and their conceptual meaning are pretty clear since they have been interpreted in the tort system for a long period of time.	Words and their contextual meaning are still unclear since legal actions related to directors and officers and employment practices liability are relatively new in the tort system and are rapidly evolving.
*Marketplace*
Many insurance carriers – Many insureds with similar exposures. These insurance carriers have banded together and formed the Insurance Services Office, (ISO), The ISO is a non-profit organization that functions as a clearing house for information to be shared amongst member insurance companies. One of the services provided by ISO is standardized insurance contracts.	Few insurance carriers – Fewer insureds Number of carriers still relatively few. Numbers are growing. Insurance carriers have not yet banded together to pool their loss information and develop a standardized contract.

Commercial General Liability	Directors and Officers Liability
*How policies are rated*
A GL policy, you can get out a book, plug in some numbers, and voila! You have the rate!	Unlike General Liability policies, D&O is underwritten on a case by case basis. No class rating. Premium is less dependent upon the application to be completed and more upon the information provided
*Information required by the insurance company*
Usually a simple, unsigned application with minimal information like: area of premises, annual sales, construction of building.	Directors and officers insurance requires a completed, sign application, Copy of financial records, copy of By-laws, Copy of Brochure, List of Directors and Officers, newsletters, etc. etc.
*Differences in how the policies are issued*
Coverage can be immediately bound over the phone. No special exclusions attached to the policy unless signed off by the insured.	Coverage cannot be bound until all information required is reviewed. Exclusions particular to your Organization can be attached without you signing off.