Let’s face it, people make mistakes. And sometimes those mistakes concern decisions and actions that occur while managing a company. The mistake may not only be costly for the company, but it may also be costly for the individual who took the action, directed someone else to act, failed to act when he/she should have acted or a combination of the above. But, directors and officers of companies can protect themselves from the financial consequences of these mistakes by having the company purchase insurance for them.
Directors and officers liability insurance policies (“D & O”) provide liability coverage for past, present, and future directors and officers for actual or alleged wrongful conduct as well as the costs associated with defending such wrongful conduct. Even in those cases where the policy excludes paying for the damages arising from a claim, having the insurance carrier pay for the costs of defense can be the difference between inconvenience and financial ruin. In some cases, managers and other non-executive directors, and employees may be covered under the policy. As with most insurance policies, there are always exclusions as to both the obligation of the carrier to defend and the obligation to pay damages to which the claimant is entitled. For example, many D & O policies do not cover: fraud; intentional acts that result in property damage or bodily harm; illegal remuneration or personal profit; claims made before the policy begins; claims made under a previous policy; and claims covered by other insurance.
In a recent case decided by Judge Robin L. Rosenberg on March 11, 2015, the D & O insurance carrier had paid to defend a case which was decided in a jury trial. The jury returned a verdict for the plaintiff for $644,746.00. When the plaintiff sought to collect the judgment from the insurance carrier, the carrier said it was not liable for the judgment because the jury verdict had found the defendant liable for civil theft, which presumes the conduct of the defendant included criminal intent. The Court ruled in favor of the insurance carrier because the definition of “Loss” under the policy did not include the restoration of ill-gotten gains and several exclusions in the policy did not cover this type of intentional illegal conduct. But, the company had defended the action because certain of the claims could have been covered under the policy and the insurer’s obligation to defend arises from the contents of the insurance policy and the complaint filed by the claimant. Even if the complaint is untrue, the duty to defend arises with few exceptions.
Generally, D & O policies have a total limit of liability that applies to all claims and sometimes includes defense costs. In other words, the limit is the total available to pay under the policy, regardless of the number of claims. In most cases, the insurance carrier is not obligated to pay anything beyond the aggregate limit – once exhausted, whether on defenses costs or the payment of claims, there is no further obligation to pay any additional money. These types of policies are known as wasting policies. In some cases, it is possible for the defense costs to exhaust the entire aggregate limit, leaving nothing left over for settlement of claims or payment of a judgment. Many years ago, I was hired to defend someone whose insurance defense counsel withdrew from his case when the policy ran out of defense costs three weeks before a trial where the plaintiff was seeking $78 million dollars in damages.
So, if you are a partner, officer, director, or manager of a company, be sure the company purchases insurance for your acts. Try to get the limits of the insurance to be high enough to pay for your defense and any damages your actions might cause. Talk to the insurance agent to understand the coverages, and be sure you know how and when to provide notice to your insurance carrier if a claim is made against you.
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