Why does a public company need D&O insurance?
First, to provide coverage for the individual Ds & Os for both indemnifable and non-indemnifable 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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