What Does D&O Insurance Not Cover in Directors and Officers Liability

D&O insurance is designed to protect directors and officers from personal liability, but it's not a catch-all solution.

Some common areas where D&O insurance may not provide coverage include intentional misconduct, such as embezzlement or insider trading.

While D&O insurance can help with employment practices liability, it may not cover claims related to sexual harassment or other forms of workplace misconduct.

Intentional breaches of fiduciary duty, like self-dealing or misusing company funds, are also typically not covered by D&O insurance.

D&O insurance policies typically won't cover certain things, which are outlined in the policy's terms and conditions.

Insuring agreements state what the policy intends to cover, but it's essential to understand what's excluded. Depending on the policy terms and conditions, D&O insurance policies generally won't cover the following:

These exclusions can have a significant impact on what's covered under the policy, so it's crucial to review them carefully.

D&O insurance can help protect directors and officers from potential financial losses, including wrongful personal injury lawsuits, damage to company property, and income lost due to wrongful decisions by management.

As a director or officer of a company, you are responsible for the company's assets and liabilities, including anything that may come up during your tenure, such as legal fees and damages caused by acts of nature.

Some D&O policies exclude coverage for risks already covered by other policies, such as cyber risk and professional risk. This means you'll need to review your other business insurance policies to see what's already covered.

A Directors & Officers insurance policy won't cover personal injuries you may incur while performing your duty as a director or officer of the company.

If you're a member of the Audit Committee and the independent auditor obtains a civil judgment against you in violation of their ethical duties to shareholders, you won't be protected by D&O insurance.

Some risks that aren't covered in a Directors & Officers insurance policy include:

Any form of intentional criminal activity is not covered by D&O insurance, including fraud, forgery, insider trading, or other illegal behavior. This can leave company executives personally liable for legal and settlement costs in such cases.

Derivative shareholder action carve-backs are also typically excluded from D&O policies, but companies can often negotiate a carve-back to provide coverage for investigative and legal costs incurred in evaluating the claim.

Defamation claims, including slander and libel, are not covered by D&O insurance as they are considered intentional wrongful acts.

Some exclusions may seem straightforward, but others can be more complex.

Certain types of insurance policies are excluded from coverage, such as flood insurance policies that exclude damage from earthquakes.

If you live in a high-risk flood zone, you may still be able to purchase a policy that covers earthquake damage, but it will likely be more expensive.

In some cases, insurance companies may exclude coverage for damage caused by maintenance or repairs that were not done properly.

A good example of this is a policy that excludes coverage for damage caused by a burst pipe due to a faulty installation.

Insurance policies often exclude coverage for intentional acts, such as vandalism or arson.

For instance, a policy may exclude coverage for damage caused by a fire that was intentionally set by the homeowner.

Business fraud is a serious issue that can have severe consequences for companies, directors, and officers. Directors and officers insurance is designed to protect against financial losses, but it's essential to know what's not covered.

Bribery, insider trading, and falsifying documents are all examples of fraudulent activity that can lead to significant financial losses. These types of actions can be devastating to a company's reputation and bottom line.

Directors and officers insurance does not cover fraud, leaving companies vulnerable to financial losses caused by fraudulent activity. This is something to remember when assessing the right coverage for your business.

D&O policies exclude coverage for losses related to criminal or deliberately fraudulent activities. This means that if your business is involved in intentional criminal activity, such as fraud or insider trading, the insurance policy won't cover you.

Allegations alone are not enough to trigger the exclusion, however. The insurance company will generally provide defense costs until a final court judgment or adjudication confirms the action was indeed criminal or fraudulent.

The best policies include "final non-appealable adjudication" wording on this exclusion, which means coverage for defense costs of D&O misconduct claims will kick in once a final judgment is made. This can provide peace of mind for business owners and executives.

Director and officer insurance typically doesn't cover income lost due to unemployment, sick days, or leave without pay.

Accidents that occur away from work are also not usually covered by directors and officers insurance.

Antitrust exclusion is a crucial aspect of Directors and Officers (D&O) policies. It prohibits coverage for losses arising from activities that impede competition.

Most D&O policies have these exclusions to regulate corporate conduct and promote fair competition. This is why it's essential to review your policy carefully.

Private companies face complex antitrust exposures from regulators and private plaintiffs. These exposures can have a broader impact on your business.

You can negotiate a limited coverage amount for certain aspects of these exclusions. This can help mitigate some of the risks associated with antitrust exclusion.

It's also possible to completely remove these exclusions from your policy. However, this may require some negotiation with your insurance provider.

Derivative shareholder action carve-back is a specific exclusion in D&O policies that can be negotiated with insurers. This exclusion typically covers shareholder derivative actions, where shareholders sue directors or officers on behalf of the company.

Board members have a fiduciary duty to act in the best interests of the company and its shareholders. If they breach this duty and corporate management fails to take corrective action, shareholders can file a shareholder derivative action.

Many D&O policies exclude coverage for these actions, but companies can often negotiate a carve-back to the exclusion. This carve-back provides coverage for investigative and legal costs incurred in evaluating the claim.

Some insurers exclude coverage for claims brought by shareholders who own a significant portion of the company's stock, typically around 10% or more. This exclusion prevents conflicts of interest in high-stakes litigation.

Prior knowledge claims can be a major concern for companies looking for D&O coverage. Insurers will often ask if you're aware of any circumstances that might lead to a future claim, and if so, you'll need to provide more details.

If you intentionally omit this information during the application process, it can lead to a rescission of the policy. This means the insurer can retroactively cancel the coverage due to misrepresentation in the initial application.

You can negotiate with your insurance provider to eliminate a rescission clause, so it's essential to be upfront and honest during the application process. This will help prevent any issues down the line.

To get D&O coverage for all current and previous business activities, you should secure "full prior acts" coverage, which addresses all management decisions since the company was formed. This will ensure you're protected for all past actions.

Restrictions on prior actions should be limited to reported claims only, so you can still get coverage for innocent individuals who had no knowledge of the events.

Defamation is a type of claim that's not covered by D&O insurance. Company executives are personally liable for legal and settlement costs if they're sued for defamation, slander, or libel.

D&O insurance typically excludes coverage for intentional misconduct, which includes defamation. This means executives must handle defamation lawsuits through other means.

Defamation lawsuits can be costly and time-consuming, leaving executives with significant financial burdens.

As a director or officer of a non-profit organization, you're responsible for the company's assets and liabilities, including any legal fees and damages caused by acts of nature.

D&O insurance can help protect non-profit directors and officers from potential financial losses, including wrongful personal injury lawsuits and damage to company property.

Non-profit directors and officers are at risk of financial losses if something goes wrong, and D&O insurance can help mitigate this risk.

As a director or officer of a non-profit, you're responsible for the company's operations, and D&O insurance can help protect you from potential financial losses.

D&O insurance can help protect non-profit directors and officers from income lost due to wrongful decisions by management.

Insurers often exclude lawsuits between directors and officers at the same company to avoid collusion and corporate infighting.

This exclusion means directors and officers will pay their legal fees out-of-pocket if they sue each other.

There are exceptions to this exclusion, though, and it's essential to review your policy to ensure these exceptions are included.

The most common exceptions apply to actions brought by bankruptcy trustees, whistleblower suits under the False Claims Act, and claims brought by former directors and officers who haven't participated on the board for a certain period of time.

It's crucial to discuss these exceptions with your broker to ensure your policy explicitly lists them.

A major shareholder exclusion is a common provision in D&O policies that prevents conflicts of interest.

This exclusion typically applies to shareholders who own 10% or more of the company's stock, and can arise from internal disputes or strategic disagreements.

Claims brought by these major shareholders are excluded from coverage to avoid high-stakes litigation between the company and its major stakeholders.

Insurers include this exclusion to prevent major shareholders from using their insider knowledge and influence for personal gain.

Major shareholder exclusions can be a contentious issue, especially in closely-held companies where major shareholders have significant control.

These exclusions are not very common, but it's essential to read the fine print of your policy to make sure you're aware of them. If your policy includes a creditor's exclusion, you won't have coverage for claims brought by creditors, such as disputes over unpaid debts or bankruptcy proceedings.

The failure to maintain insurance (FTMI) exclusion is another uncommon exclusion to be aware of. This exclusion comes into play when a company neglects to maintain necessary insurance coverage, which means any claim that arises against executives will not be covered if the company failed to maintain D&O insurance.

Here are some examples of uncommon exclusions to watch out for: