In part 2 of our Directors and Officers (D&O) Glossary, we take a look at the most common terms used in insurance policies to help provide some clarity to your coverage options.
DUTY OF OBEDIENCE—Per their duty of obedience, directors and officers are obligated to follow the statutes and terms of their organization’s agreements. Directors and officers may be held liable if they authorize an act that is beyond the powers established by their company’s charter.
ENDORSEMENT—An endorsement is a separately negotiated clause in the insurance contract that is not considered part of the standard insurance policy. Endorsements are added to modify or amend an insurance policy. Many insurers have standard required endorsements that must go on every account and are not considered negotiable.
HAMMER CLAUSE—If an insurer believes that a settlement is in the best interests of both parties, and the insured does not approve the recommended course of action, the insurer may invoke a protective clause referred to as a hammer clause. Insurers use a hammer clause to limit liability to the amount that the claim could have been settled for and any defence costs incurred. If a claim ends up costing more than the recommended settlement value, the insurer will not pay additional costs.
INSURED PERSON—For D&O and most forms of insurance, an insured person refers to the individuals or entities covered by a specific policy. To qualify as an insured person, directors, officers and organizations must fall under a broad, predefined description. These definitions often include all directors, officers and corporate entities of the named insured (the parent organization).
INSURED VS. INSURED EXCLUSION—D&O policies preclude coverage for claims brought by one insured director or officer against another director or officer also covered under the same policy. The purpose of this exclusion is to eliminate coverage for internal disputes among directors and officers and claims involving collusion.
INSURING AGREEMENTS—The insuring agreements, sometimes referred to as insuring clauses, of a D&O policy specify the scope of coverage afforded by a policy. Insuring agreements are presented in broad terms and subsequently modified by exclusions, definitions, conditions and endorsements noted in a policy. D&O policies will include separate insuring agreements for any Side A, Side B and Side C entity coverage the organization obtains. Each insuring agreement outlines the promise of the insurer to protect the policyholder (the insured) in accordance with the terms and conditions of the policy.
INSURING AGREEMENTS: SIDE A—Side A is the first insuring agreement of a D&O policy and it insures individual directors and officers against losses that the organization is not legally or financially able to indemnify. This coverage protects the personal assets of directors and officers in the event a company does not pay defence costs or fund indemnification.
INSURING AGREEMENTS: SIDE A EXCESS DIFFERENCE-IN-CONDITIONS (DIC)—Unlike standard Side A agreements, Side A DIC sits on top of a traditional D&O policy, effectively providing a broader coverage with separate limits for directors and officers. This fills the following gaps:
- Side A DIC coverage provides excess insurance that kicks in once a company’s traditional D&O policy is exhausted.
- Side A DIC coverage provides protection when an underlying insurer fails or refuses to pay, attempts to rescind coverage or becomes insolvent.
- Side A DIC coverage is not typically subject to the exclusions found in traditional D&O policies, specifically the “insured versus insured” and “pollution” exclusions. This can create policies that are more dynamic.
INSURING AGREEMENTS: SIDE B—Side B, also known as corporate reimbursement coverage, is the second insuring agreement of a D&O policy. Side B reimburses organizations for expenses they incur when defending directors and officers in accordance with their indemnification obligations.
INSURING AGREEMENTS: SIDE C—Often, organizations are named in lawsuits alongside their directors and officers, leaving the entity exposed to serious legal action. Side C coverage, sometimes referred to as entity coverage, is the third insuring agreement of a D&O policy. This side insures organizations for claims made directly against the organization by providing entity asset protections and coverage for defence costs.
LIMIT OF LIABILITY—Put simply, the limit of liability sets the maximum amount that an insurance company is prepared to spend defending and settling claims on behalf of a business and its management. A limit of liability is available for the payment of legal defence costs, settlements and court awarded judgments throughout a policy period.
LOSS—Loss specifies the claim costs covered by a policy. Specifically, loss in D&O policies refers to expenses—investigation costs, legal fees and settlements—faced by defendants involved in litigation. Losses can also include court awarded judgments, like damages, civil fines and penalties.
For a list of more common D&O terms, be sure to check out part 1 and part 3 of our series!
Download a FREE copy of our Guide to Directors and Officers Insurance for more information on how D&O insurance a must for organizations of all sizes.
