Wrongful Act

February 2008

A common misconception about D&O liability insurance is that the term wrongful act is always broadly defined and that there is little difference between policy forms in the language used for this definition. Although all policies reviewed for The D&O Book contained a definition of wrongful act, the language varied widely. The definition is extremely important because it is a primary component of the policy insuring agreements. As such, the definition is fundamental to the scope of coverage provided by the policy. Unfortunately, over the years changes in policy wording have often narrowed the scope of coverage. Changes in the definition of wrongful act are illustrated in the following examples.

A popular policy form issued in the 1960s was the Lloyd's (London Market) ALS (Sturge Syndicate) form, which contained the following definition of wrongful act:

The term “Wrongful Act” shall mean any breach of duty, neglect, error, misstatement, misleading statement, omission or other act done or wrongfully attempted by the Assureds or any of the foregoing so alleged by any claimant or any matter claimed against them solely by reason of their being such Directors or Officers of the Company.

Lloyd's-Sturge Syndicate Form, ALS (D5) 1st February, 1967 (amended 1st September, 1967)

The above definition includes two key elements: (1) the definition uses the term any when referring to the various wrongful acts and includes any “other act” as well; and (2) the definition includes matters claimed against insureds solely by reason of their status as directors or officers of the corporation. This wording extends coverage beyond the listed wrongful acts to include almost any act or omission, or any matter claimed against the directors or officers solely by reason of their status as such.

An example of a status-type claim would be a director or officer charged with violating federal securities laws dealing with Section 10(b) of the Securities Exchange Act of 1934. This law requires a corporation's directors or officers to disclose material inside information when personally trading in the corporation's own stock. It is often difficult to establish liability in such cases without correlating the executive's status as a director or officer to his knowledge of inside information. Since personal trading in the corporation's stock is outside the individual's capacity as a director or officer, a definition without reference to status might preclude such a claim from being considered.

Today, this type of broad wording often is replaced with language similar to the definition of wrongful act, first introduced in the 1988 London Market policy form shown below.

“Wrongful Act” shall mean any actual or alleged negligent act, error, omission, misstatement, misleading statement, neglect or breach of duty by the Director or Officers, individually or collectively, in the discharge of their duties solely in their capacity as Directors or Officers of the Company.

London Market, L(88)RL

Notice that the reference to any act has been replaced with any negligent act. This change is significant in that the adjective negligent may be interpreted by the insurer to preclude claims for intentional acts. Because many of an executive's duties require intentional acts, the use by some insurers of the word negligent in manner may be quite restrictive. It also could be argued that the language is ambiguous. For example, does use of the term negligent modify all of the listed wrongful acts or does it only apply to the word act? Whether the term negligent is intended by the insurer to be an adjective of the word act only, or whether it is intended to modify all of the listed wrongful acts, the above definition is considerably more restrictive than definitions that do not use the adjective negligent.

The reference to any other matters claimed against the directors and officers because of their status as such also has changed over the years. Notice that in the Sturge Syndicate wording above, the definition of wrongful act refers to a list of events that constitutes wrongful acts, and then goes on to include “any matter claimed against them solely by reason of their being such directors and officers of the company.” Use of the word or in this clause implies that the language that follows is in addition to—and is over and above—the definition as expressed up to that point. The 1988 London Market example above changes the clause by making the various wrongful acts subject to the additional requirement that the wrongful act be “…in the discharge of their duties solely in their capacity as Directors or Officers of the Company…,” while eliminating reference to matters claimed by reason of their being directors or officers of the company. This change in the definition appears to be a restriction in coverage.

In addition to the 1988 London Market example, which incorporates the “negligent” limitation within the definition of wrongful act, the following examples illustrate the variety of language adopted by underwriters over the years in defining this important term. Many insurers continue to provide relatively broad definitions.

Wrongful Act means any error, misstatement, misleading statement, act, omission neglect or breach of duty committed or attempted, or allegedly committed or attempted, by one or more Directors or Officers, individually or collectively, in their respective capacities as such, or any matter claimed against one or more Directors or Officers solely by reason of their status as such.

Gulf Insurance Co., CTRI 73001 (08/86)

“WRONGFUL ACT” shall mean any actual or alleged error, misstatement, misleading statement or act, omission, neglect, or breach of duty by the INSUREDS while acting, individually or collectively, in their capacities as INSUREDS, or any other matter claimed against them by reason of their serving in such capacities.

CODA 01 (05/96)

Wrongful Act means any error, misstatement, misleading statement, act, omission, neglect, or breach of duty committed, attempted, or allegedly committed or attempted, by an Insured Person, individually or otherwise, in his Insured Capacity, or any matter claimed against him solely by reason of his serving in such Insured Capacity.

Chubb, 14-02-1149 (10/94)

Wrongful Act means any error, misstatement, misleading statement, act, omission, neglect, or breach of duty actually or allegedly committed or attempted (1) by any of the Insured Persons, individually or otherwise, in his or her Insured Capacity, or any matter claimed against the Insured Persons solely by reason of their serving in such Insured Capacity, or (2) solely with respect to Insuring Agreement C., if included, by the Company.

Zurich American Insurance Company, U-PDO-102-A CW (05/03)

Notice that the examples of the wrongful act definition above include reference to “any act” and also contain language extending the definition to include matters claimed by reason of the insured's status as a director or officer. These are broad definitions of wrongful act. Less desirable are definitions that are limited to negligent acts and that do not extend coverage for matters claimed because of the individual insureds' status. This more-limited definition is illustrated in the following example.

“WRONGFUL ACT” shall mean any actual or alleged negligent act, error, or omission, including but not limited to misstatements, misleading statements, neglect or breach of duty, by the DIRECTORS or OFFICERS in the discharge of their duties solely in their capacity as DIRECTORS or OFFICERS of the COMPANY, individually or collectively.

Progressive Casualty, 5775 (07-94)

Some definitions of wrongful act may not refer to act or acts at all, and these also may be less desirable and should be carefully reviewed. Use of the word act or the term any acts is synonymous with anything done or established by an individual. In the context of the definition, act or any act implies something in addition to the other specifically listed wrongful acts.

It is recommended that the following guidelines be considered when evaluating wrongful act definitions.

•  Avoid definitions that restrict coverage to negligent acts. (Some insurers may eliminate this adjective from the definition by endorsement when requested.)

•  Avoid definitions that are limited to specified acts and do not extend coverage to other, unspecified acts.

•  Avoid definitions that require that the wrongful act be committed solely in the discharge of the directors' or officers' duties, as this may be less desirable than those definitions that also include matters claimed against them because of their status as directors or officers.

Some policy forms that limit coverage to negligent acts also include exclusions for intentional torts such as libel and slander. Exclusions for intentional wrongdoings may introduce some ambiguity to the coverage. Policies that limit coverage to negligent acts and then specifically exclude certain intentional acts may imply that some unnamed intentional acts are covered.

An example of this type of ambiguity is a D&O policy that limits wrongful acts to negligence, excludes libel and slander (both intentional torts), yet contains no specific exclusions for other similar personal injury offenses. By excluding only libel and slander, the inference could be drawn that other intentional acts, such as false arrest and malicious prosecution, are not precluded from coverage.

A policy form containing a restrictive definition of wrongful act may be sufficient reason to question the overall value of coverage provided under the policy. If an otherwise-desirable policy contains a limited definition that is restrictive or ambiguous, an attempt should be made to broaden or clarify the definition.

Interrelated Wrongful Acts

Many policy forms contain a definition of the term interrelated wrongful act. The existence of this term usually will not modify or alter the definition of wrongful act; rather, it is used to describe situations where multiple individual claims have their basis in a single identifiable event. Two examples are shown below.

“Interrelated Wrongful Acts” means Wrongful Acts that have as a common nexus any fact, circumstance, situation, event, transaction, cause or series of casually connected facts, circumstances, situations, events, transactions or causes.

Arch Insurance Group Inc., 00 ATL0001 00 04 05

“Interrelated wrongful act” means all causally connected “wrongful acts”.

ISO Properties, Inc., MP 00 01 04 03

Use of the defined term Interrelated Wrongful Acts in the context of other policy provisions, as illustrated below, provides that claims based on the same or interrelated wrongful acts will be treated as a single claim in the policy year when the original claim was made.

More than one Claim involving the same Wrongful Act or Interrelated Wrongful Acts shall be deemed to constitute a single Claim and shall be deemed to have been made at the earliest of the following times:

(1)  the time at which the earliest Claim involving the same Wrongful Act or Interrelated Wrongful Acts is first made, or

(2)  the time at which the Claim involving the same Wrongful Act or Interrelated Wrongful Acts shall be deemed to have been made pursuant to Clause VI.B.

London Market, DOCR92

The above clause restricts the available limit of liability to that which existed in the policy year when the claim was first made. Claims based on the same wrongful act or interrelated act would be subject to the policy terms, limits and retentions that existed during the period when the earliest claim was made, regardless of when subsequent claims are made.

Other terms also may be used to express the intent of the defined term Interrelated Wrongful Acts discussed above. This may include terms such as Related Wrongful Act, illustrated in the following example:

“Related Wrongful Act” means Wrongful Acts which are logically or causally connected by reason of any fact, circumstance, situation, transaction, casualty, event or decision.

Travelers Casualty and Surety Company of America, LIA-3001 (07-05)

Wrongful Act and Employment Practices Offenses

Many insurers also offer employment practices liability coverage as a part of or in conjunction with D&O liability coverage.

Early D&O policies that added EPL coverage often were deficient from a coverage standpoint. For example, in nearly all EPL claims the entity (employer) is named as a defendant. Most D&O policies, however, do not automatically cover the entity. Tacking on EPL coverage without correcting this deficiency created a major coverage gap. While many policies that add EPL coverage have corrected such deficiencies, care must be taken to ensure that the EPL coverage meshes with the terms and conditions of the host policy.

Today it is common for the definition of wrongful act to be modified so as to include various identified wrongful employment practices. The following are examples of this approach.

“Employment Practices Violation” means any actual or alleged:

(1)  wrongful dismissal, discharge or termination, either actual or constructive, of employment;

(2)  harassment (including but not limited to sexual harassment);

(3)  discrimination;

(4)  retaliation;

(5)  employment-related misrepresentation;

(6)  employment-related libel, slander, humiliation, defamation or invasion of privacy;

(7)  wrongful failure to employ or promote;

(8)  wrongful deprivation of career opportunity, wrongful demotion or negligent Employee evaluation;

(9)  wrongful discipline;

(10) failure to grant tenure; or

(11) with respect to any of the foregoing items (1) through (10) of this definition: negligent hiring, retention, training or supervision, infliction of emotional distress, failure to provide or enforce adequate or consistent corporate policies and procedures, or violation of an individual's civil rights,

but only if such act, error or omissions relates to an Executive of, an Employee of or an applicant for employment with an Organization or an Outside Entity, whether committed directly, indirectly, intentionally or unintentionally. In addition, with respect to any natural person customer or clients, “Employment Practices Violation” shall mean only actual or alleged discrimination, sexual harassment, whether committed directly, indirectly, intentionally or unintentionally.

AIG, 75011 (2/00)

“Wrongful Employment Practice” means any of the following occurring in the course of or arising out of a claimant's employment or application for employment with the Organization:

1.   violation of any employment discrimination law or disparate treatment of, or the failure or refusal to hire a claimant because he or she is or claims to be a member of a class which is or is alleged to be legally protected;

2.   any adverse employment action against a claimant on account of such claimant's exercise or attempted exercise of rights protected by law, refusal to violate any law, or on account of the claimant having assisted or testified in or cooperated with a proceeding or investigation regarding alleged violations of law;

3.   sexual or other harassment which is made a term or condition of a claimant's employment or advancement, which the submission to or rejection of is used as a basis for decisions affecting the claimant, or which has the purpose or effect of creating an intimidating, hostile or offensive work environment; or

4.   actual or constructive termination of an employment relationship with the Organization in a manner or for a reason which is contrary to applicable law or public policy, or in violation of an implied agreement for continued employment.

Travelers Casualty and Surety Company of America, DOB-1001 (08-02)

As is illustrated in the above defined terms, there can be great variety in how wrongful employment practices are described. Great care must be given to not only the list of enumerated offenses, but how such offenses are described. Also, some endorsements adding EPL coverage only provide limited coverage. Whenever EPL coverage is added by endorsement, the wording of both the endorsement and the policy should be carefully compared to make sure the resulting coverage is as intended.

Future supplements of The D&O Book will describe in more detail what to look for when evaluating coverage for employment practices within the context of a D&O insurance policy.