Directors and Officers (D&O) liability insurance protects corporate executives' personal assets from claims related to their official decisions. Understanding the definition of a Wrongful Act is crucial as it is a primary trigger of coverage under the policy. This article explores the significance of this definition, traces its historical development, provides guidance on comparing definitions, highlights the impact of policy exclusions, discusses the wrongful act definition under optional Side-A coverage, and reviews relevant legal cases.

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Importance of the "Wrongful Act" Definition

The term Wrongful Act in D&O insurance defines the actions or omissions that act to trigger coverage. According to Black’s Law Dictionary, a Wrongful Act is an action that contravenes a legal duty or unjustifiably infringes upon others’ rights. In D&O policies, Wrongful Act typically encompasses errors, omissions, misstatements, or breaches of duty by directors and officers that can result in economic loss or legal claims, but that do not involve intentional illegal conduct. The definition’s clarity and breadth determine whether a claim is covered, making it essential for policyholders to understand its nuances. A poorly defined or overly restrictive Wrongful Act definition can leave executives exposed to significant personal liability. While a broad definition of Wrongful Act usually enhances protection, the premium may increase accordingly.

The importance of this definition lies in its role as a gatekeeper. If a lawsuit alleges acts that fall outside the policy’s definition of wrongful act, the insured may face out-of-pocket defense costs and damages. For example, a director accused of mismanaging company resources may be covered if the policy defines Wrongful Act to include errors in management decisions, but not if it is limited to breaches of fiduciary duty. Policyholders must scrutinize this definition to ensure it aligns with their risk profile and seek professional advice to navigate its complexities.