Executive Liability Insurance – Why Private Companies Need It

Since its inception about fifty years ago, D&O insurance has evolved into a family of products responding differently to the needs of publicly traded companies, privately held businesses and not-for-profit entities and their respective board members, officers and trustees.

Directors’ & Officers’ Liability, Executive Liability or Management Liability insurance are essentially interchangeable terms. However, insuring agreements, definitions, exclusions and coverage options vary materially depending upon the type of policyholder being insured and the insurer underwriting the risk. Executive Liability insurance, once considered a necessity solely for publicly traded companies, particularly due to their exposure to shareholder litigation, has become recognized as an essential part of a risk transfer program for privately held companies and not-for-profit organizations.

Optimization of protection is a common goal shared by all types of organizations. In our opinion, the best way to achieve that objective is through engagement of highly experienced insurance, legal and financial advisors who work collaboratively with management to continually assess and treat these specialized enterprise risk exposures.

Private Company D&O Exposures

In 2005, Chubb Insurance Group, one of the largest underwriters of D&O insurance, conducted a survey of the D&O insurance purchasing trends of 450 private companies. A significant percentage of respondents gave the following reasons for not purchasing D&O insurance:
• did not see the need for D&O insurance,
• their D&O liability risk was low,
• thought D&O risk is covered under other liability policies

The companies responding as non-purchasers of D&O insurance experienced at least one D&O claim in the five years preceding the survey. Results showed that private companies with 250 or more employees, were the subject of D&O litigation during the preceding five years and 20% of companies with 25 to 49 employees, experienced a D&O claim.

The survey revealed 43% of D&O litigation was brought by customers, 29% from regulatory agencies, and 11% from non-publicly traded equity securities holders. The average loss reported by the private companies was $380,000. Companies with D&O insurance experienced an average loss of $129,000. Companies without D&O insurance experienced an average loss of $480,000.

Some Common Examples of Private Company D&O Claims

• Major shareholder led buy-outs of minority shareholders alleging misrepresentations of the company’s fair market value
• purchaser of a company or its assets alleging misrepresentation
• sale of company assets to entities controlled by the majority shareholder
• creditors’ committee or bankruptcy trustee claims
• private equity investors and lenders’ claims
• vendors alleging misrepresentation in connection with an extension of credit
• consumer protection and privacy claims

Private Company D&O Policy Considerations

Executive Liability insurance policies for privately held companies typically provide a combination or package of coverage that includes, but may not be limited to: Directors’ & Officers’ Liability, Employment Practices Liability, ERISA Fiduciary Liability and Commercial Crime/ Fidelity insurance.

D&O policies, whether underwritten on a stand-alone basis or in the form of a combination-type policy form, are underwritten on a “claims-made” basis. This means the claim must be made against the Insured and reported to the insurer during the same effective policy period, or under a specified Extended (claims) Reporting Period following the policy’s expiration. This is a completely different coverage trigger from other liability policies such as Commercial General Liability that are traditionally underwritten with an “occurrence” trigger, which implicates the insurance policy that was in effect at the time of the accident, even if the claim is not reported until years later.

“Side A” coverage, which protects individual Insureds in the event the Insured entity is unable to indemnify individuals, is a standard agreement contained within many private company policy forms. These policies are generally structured with a shared policy limit among the various insuring agreements resulting in a more affordable insurance product tailored to small and mid-sized enterprises. For an additional premium, separate policy limits may be purchased for one or more of each distinct insuring agreement affording a more customized insurance package.

Also, policies should be evaluated to determine whether they extend coverage for covered “wrongful acts” committed by non-officers or directors, such as employees, independent contractors, leased, and part-time employees.

Imputation of Knowledge & Severability

Coverage can be materially affected if an Insured individual has knowledge of facts or circumstances or was involved in wrongful conduct that gave rise to the claim, prior to the effective date of policy under which the claim was reported. Policies differ as to whether and to what extent, the knowledge or conduct of one “bad actor” may be imputed to “innocent “individual Insureds and / or to the Insured entity.

“Severability”, is an important provision in D&O policies that is often overlooked by policyholders until it threatens to void coverage during a serious pending claim. The severability clause can be drafted with varying degrees of flexibility– from “partial” to “full severability.” A “full severability” provision is always most preferable from an Insured’s standpoint. Many D&O policies, impute the knowledge of certain policy-specified senior level officer positions to the Insured entity. That imputation of knowledge can operate to void coverage that might have otherwise been available to the Insured entity.

M&A and “Tail Coverage” Considerations

The “claims-made” coverage trigger is critically important in an M&A context where contingent liability risks are inherent. In these contexts, it’s important to evaluate the seller’s policies’ options to purchase a “tail” or “extended reporting period” for each of the target company’s policies containing a “claims-made” trigger.

A “tail” coverage option allows for the reporting of claims alleging “wrongful acts” that occurred during the expired policy period, yet were not actually asserted against the Insured until after the policy’s expiration, but instead were asserted during the “extended reporting” or “tail” period. An acquiring company’s insurance professional should work closely with legal counsel’s due diligence team to identify and present alternatives to manage contingent exposures.

What a Director or Officer Doesn’t Know Will Hurt Them

Directors’ & Officers’ Liability insurance policies were originally created solely to protect the personal assets of the individuals serving on public company boards and executive officers. In 1992, one of the most prominent D&O insurers led a major transformational change in D&O underwriting by expanding coverage to include certain claims against the insured entity. Entity coverage for publicly traded companies is typically restricted to securities claims, while privately held companies and not-for-profit organizations benefit from more comprehensive entity coverage because they lack the public securities risk exposure of publicly traded companies.

The “Claims- Made” Coverage Trigger

D&O policies are universally underwritten on a ‘claims-made’ basis. This translates to an unequivocal contractual requirement that the policyholder report claims made against an Insured to the insurer during the effective policy period. The only exception is in the case where an optional reporting ‘tail’ is purchased which affords the Insured the ability to report claims during a specified “extended reporting period,” as long as the wrongful act occurred during the effective period of the immediately preceding policy.

Defense

D&O policies issued to public companies generally contain no explicit duty to defend and some require the Insured to select from a pre-approved panel of pre-qualified defense counsel. In contrast, many private company D&O policies do contain a provision placing the defense obligation squarely upon the insurer, and still other policies contain options allowing the defense to be tendered by the Insured to the insurer within a specific period of time. Some D&O policies contain defense cost provisions that require an allocation or sharing of the defense costs between the Insured and Insurer, based upon a determination of covered versus non-covered allegations.

Settlement Hammer

D&O policies typically contain a “settlement hammer” provision. This clause operates to limit an insurer’s obligation to indemnify in the event the Insured refuses to consent to a settlement that is acceptable to the insurer. Some policies may express the amount the insurer will pay for covered loss under this circumstance as a percentage of the ultimate covered settlement or judgment. Other D&O policies may limit their economic exposure to the amount for which the case could have historically settled, but for the Insured’s refusal.

Regulatory Proceedings and Investigations

Most D&O insurance policies afford qualified protection against “regulatory and governmental” investigations, “administrative or regulatory proceedings,” and criminal proceedings. Policies often require the proceedings to be directed against a natural person Insured, to be commenced and maintained in a manner specified in the policy, such as a ‘formal’ order of investigation, and only for policy-defined defense expenses incurred after the issuance of a formal order or an indictment.

D&O policies’ definitions and other corresponding provisions and exclusions vary, and should be carefully evaluated to determine whether they encompass informal investigations from the time a subpoena is received, or from the time an Insured person is identified in writing as a person against whom charges may be filed.

Learning the A,B,C’s and D’s of D&O Coverage

The three main Insuring Agreements found in public company D&O policies, are typically referenced as “Side A, B, and C coverage”. They are sometime supplemented with an optional Coverage D.

“Side A “Coverage – Individual Insured Coverage

“Side A Coverage,” also known as the “Non-Indemnifiable Loss Insuring Agreement,” provides coverage to individual officers and directors against claims for their policy-defined wrongful acts in their official capacities, under fairly rare circumstances in which the Insured entity either cannot or will not provided indemnification.

The policy’s “Side A” coverage for non-indemnifiable claims against directors and officers, almost universally provides that no retention is required to be paid by individual Insureds. A separate “Side A” limit may be available in addition to the traditional D&O policy’s aggregate limit of liability. “Side A” excess D&O policies have become more commonplace in the past several years, and certain “Side A” excess policies may also offer “difference in conditions” (‘DIC’) coverage that generally provides a feature of ‘dropping down’ to respond to claims either not paid by the primary or underlying D&O policy insurer, or in the event indemnification is unavailable from the Insured entity, the underlying limits are eroded by covered claims against the entity, or the underlying D&O insurers deny coverage to the directors. Some Side A policies are underwritten as non-rescindable by the insurer. Purchasers of this coverage should also consider, if available, an option for reinstatement of policy limits for the outside directors, in the event of premature policy limit exhaustion.

“Side B” Coverage – Corporate Reimbursement Coverage
This insuring agreement reimburses the Insured entity for covered loss under claim circumstances where the corporation is indemnifying its directors and officers. This provision does not afford any coverage to the Insured entity for its own potential liability, and is subject to a self-insured retention (“SIR”) that must be paid by the Insured entity before an Insurer will make any payments. It’s important to note that many Insureds do not realize they are contractually obligated to obtain the insurer’s prior consent to incur costs and expenses, and only those costs and expenses approved in advance by the insurer will be deemed to have satisfied the Insured entity’s SIR obligation. It’s important for policyholders to understand they run a serious risk of losing some or all of their otherwise available coverage, if they incur legal expenses prior to reporting the claim, or if they enter into negotiations or reach a settlement agreement in principle without the insurer’s prior knowledge and consent.

“Side C” Coverage – Entity Coverage

This insuring agreement affords coverage to the publicly traded Insured entity only for it own liability and is typically restricted to coverage for securities-related claims. “Securities Claims” is a policy-defined term, encompassing only claims arising from the Insured entity’s own securities. Privately held companies and organizations are afforded substantively different coverage under this insuring agreement.

“Side D” Coverage – Outside Entity Insured Person Coverage

This insuring clause is available as an option on most D&O policies. It provides coverage to designated “Insured Persons”, for their liability as a result of their membership on an “Outside Entity” board. This coverage applies on a “double excess” basis, meaning it is triggered after the exhaustion of any indemnification provided by the Outside Entity to the Outside Entity director, as well as any insurance coverage available from the Outside Entity. Traditional D&O policies typically extend automatic coverage to insured Individuals who are designated by the policyholder to participate as a board member of a not-for-profit organization.

Some Additional Considerations
In addition to the topics highlighted earlier, D&O insurance purchasers should gain familiarity with how their policies may respond under bankruptcy situations, potential coverage issues arising from a Special Committee’s investigative activity, potential issues involving priority of payments among Insureds, hidden D&O insurance program design flaws that can render excess D&O policies unresponsive to catastrophic claims, and the changing requirements of international D&O coverage to remain compliant with local country regulations. These topics will be covered in a future article.

This article provides general information and is neither intended to provide any legal advice nor to provide any advice with regard to the specific interpretation or operation of any insurance policy. Any insurance policy’s applicability is highly fact specific. Qualified legal counsel should be consulted regarding laws that may apply with respect to policy coverage interpretation in the state in which the policy will be interpreted.

What is Builders Liability Insurance and Why You Need It?

Builders and contractors working on construction sites follow safety norms and standards to avoid workplace accidents, injuries, and damages. Yet accidents may occur in spite of all precautions. Builders Liability Insurance provides coverage to builders and contractors as well as from third party claims resulting due to various types of risks in the form of accidents, thefts, damages, and injuries. Builders Liability Insurance covers a spectrum of construction related insurance packages like Public Liability Insurance, Employers Liability Insurance, Contractors All Risk Insurance etc.

Builders Liability Insurance Covers:

It is beneficial for various trades across construction industry.

Public Liability Insurance

Public liability insurance provides protection from any third party claims made against the businesses. It covers claims when employees, sub-contractors, directors, owners are held accountable for any injury or damage caused to the third party or their properties. It also covers legal costs that have to be incurred for defending the claims. It also covers claims made for defective products. The amount of premium will vary based on different factors like type of business, previous claims, projected turnover, and number of employees. This type of Insurance is useful for tradesman, builders, and contractors.

Employers Liability Insurance

Employers liability insurance provides coverage to employers when any of the employee or workers suffers physical injury or death while on work and it is proved that the injury or death occurred due to employer’s negligence. It covers the employers against all the claims made by injured employee or relatives of deceased employee for compensation. It also covers the associated legal costs. This insurance is suitable for companies having employees or workers. It is mostly issued along with public liability insurance.

Contractors All Risks Insurance

Contractors all risks insurance covers loss or damage to contract works, own plant, hired-in plant, and employee’s tools. The contract works section of this insurance is the main part which provides coverage for only the property on which the work is going on. This insurance will cover loss or damage to contract works or materials when any of the work going on is damaged. It will also cover loss or damage caused to the plant of owner including his machinery, tools, and equipments. Contractors all risk insurance also provides cover for theft, loss, or damage to machinery, equipments, tools which are hired in plants from outside like hire yards. Some insurers also extend this insurance to cover loss or damage to owner or employee’s hand held or power tools. This insurance is useful for contractors, builders, and other trades in the construction industry.

Personal Insurance

Personal Insurance or Personal Accident Insurance is suitable for owners, Directors, sole Traders who in case get injured in an accident and can not work for a certain period of time. In such case they also can not sue their own company. It provides for a 24 hour cover which is not limited to work related accidents. This insurance provides an income during the entire course of period for which insured is unable to work. Personal accident insurance provides three distinct benefits in the form of monthly tax free income, hospital cash, and lump sum (capital benefits). A monthly tax free income means the insured gets a tax free benefit after one month and continues to receive it for entire recovery period. While, hospital cash means the insured gets some amount as expenses towards his stay in hospital. A lump sum means the insured gets certain amount depending on nature of injury. The personal accident insurance relieves the insured from financial worries when he has to rest and recover. This insurance is popular in construction industry.

Machinery Insurance

Machinery Insurance provides protection against any type of loss or damage to most of machineries and equipments used in the construction industry like cranes, earth moving equipments etc. This insurance is especially useful for construction industry where a lot of machinery is used and is exposed to rough field conditions on routine basis.

As there are chances of accidents, thefts, injuries, and damages during construction work, the Builders Liability Insurance provides a much needed protection from claims which can be detrimental to construction businesses. It is also useful to cover third party claims for damages caused to other’s property.