What Does D&O Insurance Not Cover?
Written by Simon Taylor - Chartered Insurance Broker
21st September 2024
D&O insurance exclusions explained
Directors and officers (D&O) insurance will cover the personal liability of directors and officers of a company for claims made against them whilst undertaking their duties on behalf of the company.
Understanding D&O insurance exclusions is important for companies and their leadership to manage risk effectively and know where additional business insurance or risk mitigation strategies might be necessary.
The cover can provide valuable financial protection for a wide range management disputes. However, it is important that you appreciate how your D&O policy works and whether your cover should be tailored to your specific requirements.
Common D&O exclusions
D&O insurance policy wordings are designed to provide cover for a wide range of wrongful acts that would trigger, therefore insurers will use exclusions to restrict what will not be covered under the policy. Below we take a look at some of the common restrictions:
Fraud and Criminal Acts:
Fraudulent, dishonest or criminal conduct, in addition to gaining an illegal profit, is not insurable. Typically, an insurer will require a final adjudication from a court of law, or an admission of guilt. Generally, the insurer will defend the individual on the basis they are innocent until proven guilty. It's worth noting that innocent directors and officers under a D&O policy will typically remain fully covered if they are co-defendants, even if the acts of their colleagues were fraudulent or dishonest.
Prior Claims and Known Circumstance:
Any D&O claims that arise from wrongful acts that were known or ongoing before the policy began are generally excluded. This is often addressed through a Pending and Prior Date (P&P) exclusion. During the application process insurers will request whether you are aware of any circumstances that might lead to a future claim under the proposed insurance. If the answer is “yes,” you will be required to provide details of the circumstance.
Professional Services Exclusion:
D&O insurance will not cover liabilities that are specifically related to professional services or advice. This type of risk is generally covered under professional indemnity insurance. The exclusion will typically exclude coverage for any claims “based upon, arising from, in consequence of, or in any way directly or indirectly related to the rendering or failure to render professional services. Although this should not extend to the discharge of your managerial duties.
Bodily Injury or Property Damage Exclusion:
Claims related to bodily injury or physical damage to property are typically not covered under D&O insurance, as these are generally handled by public liability or other specific types of insurance policies. Although this should not extend to the discharge of your managerial duties.
Major shareholder exclusion:
It is commonly accepted that if one individual or legal entity owns 25% or more of the business, the insurer will include a major shareholder exclusion. Effectively, they would be unable to bring about a claim because they exercise significant control. However, more recently this exclusion has been absent in most D&O policy wordings. See explanation as to why the major shareholder exclusion has been removed.
Uninsurable fine and penalties
Fines or penalties made by a regulatory body maybe uninsurable. The intent maybe to penalise the company or directors and if they could be insured against, they don’t have the intended impact. No insurer will be able to break the law to indemnify under the policy if the fine or penalty is uninsurable by law.
Employment Practices Liability:
D&O policies will typically provide cover to the individual directors, officers, for employment claims, however, allegations made against the company will be excluded. Therefore, it is typically recommended that cover is also included for employment practices liability insurance (EPLI). That provides comprehensive cover for claims related to wrongful termination, harassment, discrimination, and other employment-related issues.
Cyber Exclusion:
D&O insurers are commonly applying cyber related exclusions. To ensure that companies purchase adequate cyber insurance and do not rely on their D&O insurance for failing to adequately protect the business from a cyber-attack or data breach.
Insolvency Exclusion:
Some D&O policies will contain an exclusion that restricts claims in the event the company becomes insolvent. The largest exposure to D&O insurers under a policy is the failure or insolvency of the company, given a wide number of parties with interests may then seek to claim compensation against the individual directors. This exclusion will typically be applied to startups without adequate funding, or companies that are financially distressed.
Tailored D&O exclusions
Please note there may be alternative insurance underwriters that may provide less restrictive D&O exclusions, or we may be able to specifically negotiate a clause by narrowing the language of the exclusion. Alternatively, there may be scope to carve-back defence costs under the specific exclusion.
Tailored D&O exclusions may provide the board of directors’ greater comfort that in the event of a claim, the insurer will not deny a claim. D&O insurance is a complex product, and the exclusions can significantly affect the coverage. It’s recommended you discuss the availability of coverage with your insurance broker.
Simon Taylor is a respected senior industry professional and a Chartered Insurance Broker with over 20 years’ of experience in the commercial insurance sector as an underwriter, broker and director.