Insured—Archived Article
October 2004
Insured Individuals
Persons insured under a D&O policy usually is defined to include all individuals holding the position of “director” or “officer” of the corporation. In some policies, the individuals insured are listed in the definition of insured. In other policies, the individuals are listed in the definition of directors and officers or in a differently-captioned definition. As the examples below illustrate, there can be significant differences in who is insured.
The term “Directors and Officers” shall mean all persons who were, now are or shall be Directors or Officers of the Company.
Old Republic , ORUG-17 (2/86)
Directors, Officers, and Staff shall mean:
1. any persons who were, are now, or shall be the Directors, Officer or Staff of the Association, including Executives, Board Members, Committee Members and Employees, whether compensated or not, but solely while acting within the scope of their duties on behalf of the Association;…
4. any other person while acting on behalf of the Association at the direction of an Officer or the Board of Directors of the Association.
Chicago Insurance Co. POJ-2035 (06/97)
Insured Person means any natural person who has been, now is or shall become a duly elected director or trustee, duly elected or appointed officer, chancellor, provost, dean, personnel director, risk manager, university counsel, administrator, chaplain, guidance counselor, faculty member, student teacher employee, volunteer, or committee member (whether or not salaried) of an Educational Institution.
Chubb Insurance Co., 14-02-0737 (3/97)
Most policy forms do not require that the individual officers, directors or other insured persons be specifically identified, but only that the individuals meet the requirements of the definition. Most individual-insured definitions have wording such as “…any persons who were, are now or shall be Directors or Officers of the Company.” As shown in the above examples, some not-for-profit, educators and association liability D&O policies extend this definition to include not only directors and officers, but also persons who have other titles or positions, such as trustees, committee members, executives or employees.
Even though the individual-insured definition often includes persons who “shall be” directors or officers of the company at some time after policy inception, most policy forms have special reporting requirements for acquisitions and newly formed subsidiaries, which in many cases is conditional, requiring an additional premium or subject to amended terms and conditions.
Most insured definitions also include a deceased insured's estate, heirs, legal representatives or assigns in the event of incompetency or insolvency. This extension of coverage sometimes is found as a general policy condition, as shown in the sample wording below.
ESTATES, HEIRS LEGAL REPRESENTATIVES, ETC.
In the event of the death, incapacity or bankruptcy of any Director or Officer, any claim against his or her estate, heirs, legal representatives or assigns based on actual or alleged Wrongful Acts of such Director or Officer shall be deemed to be a Claim against such Director or Officer for the purposes of this Policy.
Gulf Insurance Co., CIRI 73001 (08/96)
Some policies require that the directors or officers be “duly elected or appointed,” as in the example below.
“Directors and Officers” means all persons who were, now are, or shall be duly elected or appointed directors, trustees, and/or medical directors of the entity, including their estates, heirs, legal representatives or assigns.
CNA, G-123403-A (12/96)
The word duly, when used before any word implying action, generally means that the act was done properly, regularly, according to law or some rule of law. The statement that one was “duly” elected or “duly” appointed means according to legal requirements and implies the existence of every fact essential to regularity of procedure.
Policies that do not use the term duly elected or appointed may provide coverage for a person given an officer's title by someone not specifically empowered by the corporation's governing instruments to make such an appointment. If such an appointment were not subsequently ratified by the board of directors, the appointed person may not in fact be a corporate officer, although members of the public and other employees might think he or she is an officer.
Policies that provide broad definitions of insured may extend coverage to a large number of individuals for whom the corporation may not necessarily desire or be required to provide coverage. Many corporations—including some insurance brokerage firms—give executive titles to individuals who have no official responsibility for the affairs of the corporation. In large organizations this practice could involve hundreds of individuals who use an executive title but technically are not officers of the corporation.
Although having a large number of insureds may not adversely affect the policy premium, it can present the insureds with other concerns. A large population of insureds can expand the insured-versus-insured exclusion to apply to individuals who otherwise may not have been contemplated by the exclusion. Many not-for-profit and association policy forms expand the insured definition to include all employees and even some nonemployees, such as volunteers. When the policy contains an insured-versus-insured exclusion, the policy's coverage could be severely restricted as respects suits by employees against officers and directors.
Another consideration when a D&O policy covers a large number of insureds is that the aggregate policy limits available to each individual insured may be severely diluted. Policy limits deemed adequate for a handful of corporate directors and officers may be inadequate for a larger and more liberally defined population of insureds.
Other Considerations
Consideration should also be given to key employees within the organization who may be neither a director or an officer but whom the corporation may wish or be required to provide indemnification. Some firms may not confer traditional titles upon their executives and it may not be clear whether coverage applies unless arrangements have been made to name specific persons or titles as insureds under the policy.
In a similar vein, some executives of foreign operations and subsidiaries who have duties that are the functional equivalent of a director or officer may have non-traditional titles. Many insurers now offer endorsements to specifically cover this exposure.
In recent years, some insureds have expressed concern over the contingent exposure created by plaintiffs seeking to recover damages from marital or community property. To accommodate this concern, several insurers offer spousal or marital estate endorsements similar to the following:
Subject otherwise to the terms hereof, this Policy shall cover Loss arising from any Claim(s) made against the lawful spouse (whether such status is derived by reason of statutory law, common law or otherwise of any applicable jurisdiction in the world) of a Director or Officer for Claim(s) arising solely out of his or her capacity as the spouse of a Director or Officer, including such Claim(s) that seek damages recoverable from marital community property transferred from the Director or Officer to the spouse; provided, however, that this extension shall not afford coverage for any Claim(s) for any actual or alleged Wrongful Act(s) of the spouse and that this Policy shall apply only to actual or alleged Wrongful Act(s) of a Director or Officer subject to the Policy's terms and conditions.
Fireman's Fund, Directors and Officers Liability & Corporate Reimbursement Insurance, Policy Form No. 5230, Edition 7-92, By Endorsement
It is unclear whether such endorsements provide much actual coverage, but those insurers offering the extension generally do so for little or no additional premium.
Insured Corporation — Corporate Reimbursement
In the corporate-reimbursement section of most D&O policies, who is insured includes the corporation and usually also includes any subsidiaries in existence at the inception of the policy. Although there can be variation in the way the insured is identified under the corporate-reimbursement section, the following examples are representative:
“Company” means the Parent Organization and any Subsidiary.
Admiral Insurance Co., DO 1200 (07/96)
(C) ”COMPANY” shall mean:
(1) the company shown in Item I of the Declarations;
(2) any company that prior to the starting date of the POLICY PERIOD merged into or consolidated with the company shown in Item I of the Declarations and was not the surviving entity;
(3) any SUBSIDIARY of either such company and; and [SIC]
(4) if covered in accordance with subpart (a) of Clause 21 (Acquisition, Creation or Disposition of a Subsidiary) below, any other subsidiary.
CODA 01 (05/96)
The corporation named in the policy declaration page and any of its subsidiaries are normally insureds to the extent they actually provide indemnification to their directors and officers for claims arising from wrongful acts. Direct actions against the corporation by third parties generally are not insured under the corporate reimbursement section or any other part of the policy. An exception sometimes found in association, not-for-profit and some for-profit policies is discussed below.
Insured Corporation — Entity Coverage
Some D&O policy forms provide a third insuring agreement, either as a coverage section or as a policy endorsement, often referred to as “entity” coverage. This type of insuring agreement can provide coverage to the entity for liability the entity may incur directly for wrongful acts committed by its directors, officers and other insured individuals. More information on insuring agreements can be found in the Coverage Format section.
C. Coverage C — Organization Liability Coverage. We will pay the Loss which you or any Covered Subsidiary are legally required to pay because of Wrongful Acts to which this insurance applies. But we will pay such amounts only when:
1. the Claim is first made against you or the Covered Subsidiary during the Policy Period; and
2. we have been given written notice of the Claim as soon as practicable after the Claim is first made.
Fireman's Fund 5240-12-94 (12/94)
Some policies forego the need of a separate insuring agreement altogether by amending the policy definition of insured to include the entity:
A. COVERAGE PROVISION
The Company will pay on behalf of the Insured all damages that the Insured becomes legally obligated to pay because of claims made against the Insured for actual or alleged wrongful acts arising solely out of the discharge of an Insured Individual's duties on behalf of the Entity.
Safeco Insurance Company, KC 00 28/WC 7/93
F. “Insured” means:
1. the Entity; or
2. an Insured Individual
Safeco Insurance Company, KC 00 28/WC 7/93
Entity coverage can provide important protection that the organization otherwise may be unable to purchase. It should be noted, however, that actions brought against the corporation that do not allege some type of wrongful act by the individual insureds may not be covered.
Also in recent years a form of entity coverage has become available to cover for-profit corporations for specific types of claims, such as those alleging violations of securities laws or wrongful employment practices. You may also refer to the Coverage Format section for a further discussion.
The primary drawback to policy forms that incorporate entity coverage is that the limits of liability for the other coverage sections may be reduced by claims paid under the entity-coverage section. Should policy limits be substantially eroded by claim payments under the entity-coverage part, there might be inadequate coverage left under the individual-coverage section. Purchase of entity coverage may not be in the director's or officer's best interest; but if they are fiduciaries for the corporation, it may be prudent to consider such coverage. Practical solutions to this dilemma might be achieved by negotiating separate limits of liability under the entity coverage part or by purchasing higher limits.