Most policy forms do not require that the individual officers, directors, or other insured persons be specifically identified by name 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 previous 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, volunteers, or employees.

 

When employment practices liability (EPL) coverage is included under the D&O policy form, the definition of insured or insured persons is usually expanded to specifically include employees, as in the following examples:

     “Insured Persons” shall mean Directors and Officers and all past, present and future employees of the Company other than Directors and Officers.

 

      “Insured Person(s)” means any person who has been, now is or shall become a duly elected or appointed director, trustee or officer, or any employee, volunteer or member of the staff, faculty or duly constituted committee of the Organization.

 Some D&O policies that provide EPL coverage also contain a definition of “employee” to clarify those individuals to whom coverage applies. A typical “employee” definition follows:

      Employee means any past, present or future employee of the Insured Organization, whether such employee is in a supervisory, co-worker or subordinate position or otherwise, including any full-time, part-time, seasonal and temporary employee of the Insured Organization solely while acting in her or her capacity as such. An individual who is leased or contracted to the Insured Organization shall also be an Employee, but only if the Insured Organization provides indemnification to such leased or contracted individual in the same manner as is provided to the Insured Organization's 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 following examples:

      Estates, Heirs, Legal Representatives, etc.

  Coverage Extensions

 Some policies may even require that the directors or officers be “duly elected or appointed,” as in the following example:

      ”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.

 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 the person 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.

 Policies Providing EPL Coverage

 In the context of employment-related liability, the organization's managers and supervisors usually have authority and responsibility to hire, fire, conduct reviews, and promote or demote employees. For this reason, if the D&O policy provides employment practices liability (EPL) coverage, it is important that these persons be insureds under the policy for EPL coverage, as who is insured under the EPL coverage part may be different than who is insured under the D&O coverage part. While the corporation may not have indemnity obligations to this class of employee, many state laws will hold the corporation responsible for the actions of supervisors and managers. In addition, employers are liable for any sexual harassment committed by a manager or supervisor under federal law. Because of this, supervisors and managers may be charged with committing a wrongful employment practice as one of the allegations in a D&O or an EPL lawsuit.

 Depending on the specific jurisdiction, the organization may have no duty to indemnify employees for expenses incurred in defending an employment-related suit nor be legally responsible for the wrongful actions of a rogue employee. There may, however, be instances where it is prudent for the employer to undertake or otherwise provide for a defense of an employee. For example, few employees have sufficient assets to pay the legal expenses and large awards usually sought by plaintiffs. Because of this lack of funds, innocent employees often are named in EPL suits solely as a means of leveraging the employer and its insurer into a settlement. Failure to provide a defense may place pressure on the employee to cut a deal with the plaintiff as a means of getting dismissed from the suit in return for giving testimony favorable to the plaintiff.

 Although most D&O insurance policies that provide EPL coverage include employees as insureds under their basic policy forms, automatically including employees as insureds should not be done without first considering some of the possible arguments against such a practice.

 One such argument is that the alleged offending employee may not be innocent of wrongful conduct. Under such a scenario, the employer may wish to distance itself from the employee. However, if the employee is an insured, she is likely entitled to the same coverage benefits as is the employer. In most instances this means that the insurer owes the employee a defense.

 Two additional aspects of employment law—those involving punitive damages and sexual harassment—can also prove troublesome. While the legality of insuring against punitive damages varies by jurisdiction, there appears to be an increasing pressure on insurers to provide such coverage. As a result, an increasing number of insurers now offer coverage for punitive damages where there is no legal restriction against doing so. When punitive damages potentially are covered under the policy, they might be assessed against an individual employee and not against the employer. By including employees as insureds, the employer might be picking up a punitive damage exposure that otherwise would not exist.

 Regarding sexual harassment, if the organization takes prompt corrective measures after becoming aware of harassing behavior by nonsupervisory employees, it may be able to avoid the imposition of liability altogether, while the harasser may be required to pay substantial damages. Here, too, by insuring the employee, the employer has picked up a liability exposure under its insurance policy that may reduce or exhaust the amount of insurance available to cover other claims.

 Another argument is that when employees are included as insureds, there exists a contractual right of the employee to the proceeds and benefits of the insurance policy. Even in the absence of the corporation filing a claim with its insurer, the employee may be able to seek his own coverage, even when doing so might be against the wishes of the corporation.

 It is noteworthy that some policies may exclude part-time and temporary employees. If these employees are codefendants with the employer but are not provided coverage by the policy, the employer may have to pay for their defense to avoid having the entire defensibility of the claim prejudiced by an inadequately defended part-time or temporary employee.

 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 not only employees but also 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.

 It is widely recognized that liability exposures for companies and their directors and officers continue to increase in a variety of areas. This heightened liability exposure now extends to in-house corporate legal counsel, who advise management on critical legal issues and who to a large extent can influence, if not control, conduct of the company and its directors and officers. In the wake of numerous highly publicized corporate debacles, courts, legislators, and regulators are imposing more rigorous standards on in-house legal advisors. The result is more claims against in-house counsel.

 Most directors and officers liability insurance policies afford limited, if any, coverage for non-officer employees. If the coverage exists at all, it is usually only with respect to securities claims or only when the employee is a codefendant with a director or officer. Also, an issue may arise whether the counsel's alleged wrongdoing was committed as an employee or in some other uninsured capacity.

 A company that recognizes this deficiency in its risk management program generally has two potential insurance options. First, the company may be able to purchase an endorsement to its D&O policy that extends coverage under that policy to its in-house counsel. Second, the company can purchase a separate professional liability insurance policy specifically designed for in-house counsel. Such a policy would be subject to its own separate limit of liability and would cover both the in-house counsel for non-indemnifiable claims and the company to the extent it indemnifies the in-house counsel.

 A separate professional liability insurance policy for in-house counsel affords the insureds a number of advantages over a D&O policy that is endorsed to include in-house counsel as insureds. A more detailed examination of exposures and coverage for corporate counsel can be found in the article Corporate Counsel Insurance.

 Other Considerations

 Consideration also should be given to key employees within the organization who may be neither a director nor an officer but for 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.

 Also, a number of domestic as well as foreign corporations use inside or outside “observer” or “advisory” directors. These are persons who are not formally elected as directors but who participate at board meetings as nonvoting attendees. One apparent goal of the organization in adopting this practice is to insulate the observer from the liability exposures of being a director while still benefiting from that person's insights and expertise. Use of such observer or advisory directors raises problematic liability and financial protection issues and should be cautiously evaluated before persons are asked to serve in that capacity.

 Generally, if a person attends board meetings, is an active participant in board discussions, and “looks like a director and acts like a director,” courts will likely treat that person as a director for purposes of imposing liability for director wrongdoing. This is especially true if the corporation publicizes the involvement by the observer, thereby encouraging corporate constituents to rely on the contributions of the observer. On the other hand, someone who attends a board meeting as a pure observer, not speaking or otherwise participating in board decisions, is unlikely to be subjected to director liability.

 Because an observer will usually contend he is not a director for liability purposes, the person may not be treated as a director for indemnification and insurance purposes, meaning that the observer will have no mandatory indemnification or insurance protection absent special arrangements. To avoid that undesirable result, the board should adopt a special resolution mandating indemnification protection for such persons and the D&O insurance policy should be endorsed to include such persons as insureds in their capacity as observer or advisory directors.

 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 simply have nontraditional titles. Many insurers also 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, many insurers incorporate spousal or marital estate coverage within the policy or may offer such coverage by endorsements granting such coverage. The following are examples of typical spousal or marital estate coverage :

      Spousal and Legal Representative Extension

 

      Spousal Liability

 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.

 

 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 are generally 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 subsequently.

 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 certain 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:

 

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

  F.  “Insured“ means:

 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.

 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.

 Care also should be taken to examine the definition of “who is insured” or any other clause or provision describing who is insured under any excess liability D&O liability policy. Although most excess D&O policies state that they follow the terms and conditions, including the definition of “who is insured,” of the primary D&O policy, sometimes these policies will contain a proviso that such definition of “who is insured” is limited to those insureds under the primary policy at the time of policy inception. Because who is insured under the primary policy can be modified at any time after inception, such as by endorsement, any such limitation or proviso should be removed from any excess liability policy.