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How does a directors and officers insurance policy work?

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Who is covered under directors & officers insurance?

Typically, all directors and officers of a company and its subsidiaries are covered under a D&O insurance policy, whether current, future and past. The definition of Insured Person will also typically extend to employees whilst acting in a managerial capacity.

Directors and officers insurance cover is typically afforded to any lawful spouse, estate, heirs, if named as co-defendant in circumstances where allegations are made against a person who is deceased, insolvent, or bankrupt.

How do directors and officers insurance policy limits apply?

The D&O policy limit of liability is shared amongst the directors and officers who will receive the same treatment in the event of a claim. Your policy limits will operate either on an:

Aggregate basis, which means the amount insured under the policy is a maximum for the entire policy period, no matter how many claims are made; or

Any one claim basis, which means the amount insured under the policy applies to each and every claim (or importantly a series of claims arising from any single event).

Some insurers will offer reinstatements of limits on an aggregate basis, which means if the limit of liability has been eroded by a claim, the limit of liability will then be reinstated and made available for unrelated directors and officers insurance claims.

How does a directors and officers insurance policy work?

A company may indemnify its directors in respect of legal proceedings under a written agreement (however, most don't). If there is an agreement in place, there will be circumstances which the company will be unable (i.e. insolvency) or permitted (i.e. restricted by law) to meet its obligations.

Directors and officers insurance policies have therefore been designed to respond to the different circumstances, offering to either pay on behalf of:

>  the director (called Side A); or
>  reimburse the company after it has indemnified the director (called Side B).
It is worth noting that most directors and officers insurance policies will not maintain a deductible for Side A, however, will maintain a deductible for Side B.

If you would like a better understanding of liability principles, such as duty to defend or indemnification, please visit business liability insurance.

What is an D&O extended reporting period?

An extended reporting period, also known as run-off cover, allows claims to be reported to the insurer after the policy has expired. Ensuring you are protected under a directors and officers insurance policy from wrongful acts that may have already been committed but haven't received any claims made against you.

The directors and offciers insurance policy will typically define the length of the extended reporting period available and periods typically up to six years can be requested, usually calculated as a percentage of the premium paid for the policy.

It is worth noting the extended reporting period does not have its own limit of liability, but instead is an extension of the directors and officers insurance limit of liability in place immediately prior to the election.

What is a D&O change in control provision?

What happens under the directors and officers insurance policy if the company merges or is acquired?

Typically, D&O policies include a change in control provision. If the company is merged or acquired, the policy will stay in force for the remainder of the policy period, but only for claims based for wrongful acts before the change of control goes into effect.

Directors and officers policies will typically include an option to purchase an extended reporting period and this should be considered because a change in control increases the potential for future legal disputes.

How to obtain assistance with our D&O insurance policy?

Directors and officers insurance policies are complicated and it's best to work with a specialist D&O insurance broker to ensure you appreciate how cover is afforded under the policy.

If you're unsure whether you should purchase directors and offciers insurance, we've produced a useful guide: Why company directors don’t need D&O insurance?

Get indemnitybusiness insurance is available to both small businesses and large enterprises. Please contact our team to discuss your requirements.


How does a D&O insurance policy work? Posted by Get Indemnity

This guide is for information purposes and based on sources we believe are reliable, the general risk management and insurance information is not intended to be taken as advice with respect to any individual circumstance and cannot be relied upon as such.