Understanding what D&O insurance doesn’t cover

Directors & officers (D&O) insurance is crucial to a company’s risk management strategy. It provides coverage for lawsuits brought against a company’s directors, officers and managers for alleged wrongful acts committed in their role. While D&O insurance can provide extensive coverage, there are aspects that aren’t covered. Let’s discuss what D&O insurance doesn’t cover and what other insurance policies companies may need to consider.

What D&O insurance doesn’t cover 

Here are some common things that you might think a D&O policy would cover, but doesn’t.

1. Criminal acts
   Did you know insurance typically doesn’t cover claims arising from criminal acts committed by a director or officer? Depending on the wording, there may be coverage if a final adjudication finds the director or officer not guilty of the criminal act. 
2. Intentional acts
   Claims arising from intentional acts by a director or officer are excluded. 
3. Bodily injury and property damage
   It typically doesn’t cover bodily injury or property damage claims. Companies should look to other types of liability insurance, such as general liability insurance, to provide coverage for these claims. 
4. Employment practices liability
   While some D&O policies may include a limited amount of employment practices liability coverage, it’s often excluded. Companies need to purchase a separate employment practices liability insurance policy to provide coverage for claims related to employment practices.
   This includes claims such as discrimination, harassment, and wrongful termination. Employment practices policies can be tied to the D&O policy limits or have separate limits. 
5. Cyber liability
   Claims related to cyber incidents, such as data breaches or cyber-attacks aren’t usually covered either. Companies should strongly consider purchasing a separate cyber liability insurance policy to provide proper coverage and protection for these risks.
   
   

Why are these areas not covered 

D&O insurance is designed to protect Directors, Officers, and managers from unintentional acts, that they’re held liable for. There are several reasons that the above are excluded, including: 

Legal and Regulatory Issues
The legal and regulatory landscape differs among jurisdictions and can undergo frequent changes. For instance, certain regions might enforce stricter laws concerning insider trading or antitrust violations, and this can directly affect the insurance coverage offered in those areas.

At times, an insurer is unable to provide legal protection (indemnify) to the insured for certain claims, like punitive damages. This limitation arises due to the extensive variations in laws and regulations across different regions, which can significantly affect the coverage of the insurance policy, depending on the jurisdiction where the claim is filed.

Risks better covered under another policy
Another reason certain areas are not covered by D&O insurance is that the risk is better covered under a different policy. Let’s consider Employment Practices Liability as an example. While some coverage may be available under a D&O (Directors and Officers) policy, it’s more suitable to address the risk posed by employment-related lawsuits through specific EPL (Employment Practices Liability) coverage. Similarly, D&O policies do not include cyber coverage, so a separate cyber policy is necessary to address these risks.

Insurability
Certain acts are just uninsurable, including intentional criminal acts. Depending on the D&O policy, there may be no coverage as soon as the allegation of a criminal act is made. The costs may be reimbursed if the Director is found innocent upon final adjudication (highest court). Some policies work in reverse and will provide defence until the final adjudication of guilt.

Claims not covered 

Let’s take a look at some high profile D&O claims that weren’t covered.

1. Enron
   The Enron scandal of 2001 was one of the most infamous cases of corporate fraud in history. The company’s top executives were found guilty of various financial crimes, including accounting fraud, insider trading, and securities fraud. The resulting lawsuits and settlements cost the company billions, most of which would not have been covered by a D&O policy. 
2. Wells Fargo
   In 2016, Wells Fargo was found to have opened millions of unauthorized bank and credit card accounts in the names of its customers. The scandal led to the resignation of the company’s CEO and other top executives, resulting in numerous lawsuits and investigations. If the CEO intentionally engaged in this wrongdoing, then the D&O policy would likely not cover the costs. 
3. NHLPA
   In 1996, the National Hockey League Players’ Association (NHLPA) was embroiled in a financial scandal after it was revealed that former executive director had embezzled funds from the organization. It was also discovered that they had arranged for several NHL players to receive zero-interest loans from the NHLPA pension fund. This misappropriation of funds could have been covered by a D&O policy if not for the intentional criminal act.

To better protect against claims like these that are not covered by D&O insurance, companies must establish more robust internal controls, specifically those that hold senior-level executives accountable. Investing in a strong risk management strategy, including but not reliant on D&O insurance, will help mitigate the financial and legal consequences of uncovered claims. Ready to chat about your organization’s D&O coverage? Connect with us to get started or click below for your Directors and Officers quote.  

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