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Exclusions are the risks or items not covered by an insurance policy. Directors and officers (D&O) liability insurance protects the personal assets of business owners and managers if they’re sued for not carrying out their roles correctly. But, like all insurance policies, they don’t cover every possible scenario or event.
Typically, D&O insurance policies will protect your company and its directors and officers from fees, losses, and expenses arising from a lawsuit. Whether you have or are considering D&O insurance, it’s vital to know precisely what your policy includes and excludes, to make sure you don’t have gaps in your coverage. This article discusses some common exclusions in D&O policies and how you can get the proper coverage.
Insured vs. Insured D&O Exclusions
An insured vs. insured exclusion means insurers typically won’t cover directors and officers of the same business suing each other. Insurance providers see these kinds of claims as having the potential for fraudulent activity.
There are sometimes exceptions to this exclusion. Examples of potential scenarios where this exclusion may not apply include if the person making the suit has not worked for the company for a certain period of time, or if the company is now bankrupt. The exclusion also may not apply if the suit is brought under the False Claims Act.
Standard Exclusion in D&O Policies
Although D&O insurance will vary from one policy to the next, some exclusions are considered “standard” to most insurers:
- Deliberate fraud or criminal activity. You won’t be covered if someone at your company willfully breaks the law while doing their job.\
- Breach of contract. You accept contractual obligations voluntarily; they’re not imposed by law. Breaking a contract is viewed as intentional action, so it’s excluded.
- Other insurance. D&O insurance specifically protects company leaders in their work capacity only. Claims for other things may fall under different insurance policies, such as Fiduciary Liability Insurance (FLI), for example.
- Wrongful termination or discrimination. These lawsuits will usually come under Employment Practices Liability Insurance (EPLI).
- Penalties and fines. Insurers can’t cover punitive damages as they’re a deterrent to bad behavior, and insurance would remove that restraint.
- Prior acts. Most D&O policies cover claims made during the insurance term, and anything outside of that period won’t be included.
- Defamation, libel, and slander. Having D&O insurance doesn’t protect business leaders or managers from saying things that someone could interpret as harmful or damaging.
- Catastrophic events. Providers won’t usually include the results of large-scale incidents like wars, natural disasters, or acts of terrorism in this type of policy.
Additional types of D&O Exclusions
The reasoning behind some or all of the standard exclusions already described is fairly self-explanatory. Here are some more complex exclusions that you should be prepared to review and understand in your policy agreement:
- Antitrust Exclusion: Competition laws designed to prevent several companies from colluding or price-fixing for their advantage are complex. The way an insurer defines these exclusions is likely very specific. Essentially, any actions intended to hinder competition between your company and another won’t be covered if your policy has this exclusion.
- Conduct Exclusions: In addition to blatant illegal acts like fraud or embezzlement not being covered, certain types of behavior may also prompt an exclusion. You’ll want to check the specific wording of your policy carefully to see what exactly may be classed as bad conduct by your insurer. Suppose a court rules that you are liable because of your behavior. In that case, an insurer will not pay for the losses associated with it.
- Commissions Exclusions: This exclusion comes from the Foreign Corrupt Practices Act, which makes it illegal “to make payments to foreign government officials to assist in obtaining or retaining business.” Although it’s not as common today, it would mean an insurer wouldn’t pay for claims related to these payments.
- Defense Cost Exclusions: Your insurer will only pay to defend you from things they cover as named in your policy. If a claim includes multiple allegations, some that are covered and others that aren’t, they may only pay for a portion of the defense.
- FTMI Exclusions: Some policies may not cover you for any issue where insurance was available, but you didn’t have it. This is called a failure to maintain insurance (FTMI) exclusion. It’s becoming less common now, though, because many choose to self-insure for some issues.
Getting the Right D&O Coverage
Double-check the terms when you buy and renew your D&O insurance. Remember to look at each exclusion carefully to make sure you don’t have unanticipated gaps in your coverage. It’s common for brokers to negotiate with insurers on behalf of their clients to try to achieve coverage that matches the needs of the business.
Working with trustworthy experts who can help you find and tailor the right policy is essential. D&O insurance from Counterpart covers your whole team, not just directors and officers. Plus, we include excess insured person liability, derivative demand, and inquiry costs as standard.
If you’re a business owner, even if your company is small, you’ll benefit from having comprehensive D&O insurance coverage. This is true if you have a board of directors (even if there are only two) or senior employees who oversee the day-to-day running of your company—claims against directors and officers are common.
Understanding the common exclusions for these policies will help protect you and your business. You should carefully discuss your needs with your broker and be diligent about reviewing the policy.
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