Frequently Asked Questions
Here you can read the most frequently asked questions regarding Management Liability.
Management Liability
What is a "hammer" clause?
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 of 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").
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What is the Spousal Extension?
If a D or O is sued in a community property state, plaintiff's bar often sues the spouse as well so as to be able to access community property assets. This provision extends coverage to the spouse as well to address this potential exposure.
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Explain Severability of the Application
The 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.
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Can the D&O Policy be amended to provide Coverage for Named Positions?
The standard D&O contract provides protection only for corporate directors and officers. However there are other, potentially non-officer positions that may be subject to being named in a suit such as General Counsel or Director of Investor Relations. These, and other positions can be named on the policy and coverage provided for these otherwise exposed employees.
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Is It Important that Majority Shareholder Exclusion be deleted from the Policy form?
D&O contracts will frequently have an exclusion for suits brought by someone holding more than a certain percentage of company stock, often 5-10%. This has been viewed as an extension of the "insured vs. insured" exclusion. However, with the "most adequate plaintiff" concept introduced by the Private Securities Litigation Reform Act of 1995, litigation will often be brought or directed by a stakeholder with a significant interest in the company. As a result, any such exclusion is unacceptable in that it could result in a denial of coverage.
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Why should the Definition of Claim be amended to include "written demands/non-monetary damages"?
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.
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Why does a public company need D&O insurance?
First, to provide coverage for the individual Ds & Os for both indemnifiable and non-indemnifiable suits. Another reason is to protect the corporation against Securities Class Action lawsuits. Until recent years, D & O policies did not cover the corporation, but only reimbursed the corporation for their indemnification of the Directors & Officers; however, Entity coverage is now readily available and provides coverage for the company in the event a Director or Officer is not named in the suit.
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Why does a private company need D&O insurance?
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
Also, most carriers offer Entity Employment Practices Liability Insurance coverage as an enhancement to the contract for an additional premium, which generally is less expensive than purchasing a stand-alone policy.
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What protection should be provided for Directors & Officers?
Directors and Officers Liability insurance is designed to provide protection for individuals that have accepted these positions. Insurance is the final component of protection and should be viewed as a supplement. Insurance serves as a funding mechanism of the corporation and as the final line of defense when the state laws and the corporate indemnification do not apply.
- State Laws provide safe harbor
- Corporate by-laws provide indemnification
- Insurance protects against the non-indemnifiable, as well as reimbursing the corporation.
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Is there any way to reduce the risk of litigation?
Carriers have studied the litigation trends and discovered that the plaintiff's bar is targeting certain performance patterns. These patterns have been identified and loss control programs have been developed to help companies modify their behavior.
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Explain the Bilateral Discovery Clause
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.
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Is it important to have the Fraud Exclusion amended to Final Adjudication Wording?
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.
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Is the definition of Wrongful Act sufficient as stated in most policy Contracts?
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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