Part 3 of our Directors and Officers (D&O) Glossary is the last of this series where we take a look at the most common terms used in insurance policies to help provide some clarity to your coverage options.
PARTICULAR CIRCUMSTANCES EXCLUSIONS—During the D&O underwriting process, an insurance company may identify specific circumstances or risks it is unwilling to insure. Accordingly, the insurance company may offer coverage to the organization on a restricted basis. These exclusions, which are sometimes referred to as laser exclusions, are often used when an organization has disclosed a serious claim or circumstance that occurred during a past policy period. Particular exclusions are relatively common, but, if possible, an organization should attempt to acquire D&O coverage without them.
POLICY INTERPRETATION—The policy interpretation clause outlines which jurisdiction’s laws govern the policy. For the vast majority of policies, the laws of the country in which the policy was issued control the policy interpretation. The purpose of this clause is to ensure that all parties involved have a clear understanding of how the policy will be interpreted in the event of a dispute that leads to litigation.
RETROSPECTIVE COVERAGE—Retrospective coverage is usually unlimited, and, in most cases, insurance will kick in regardless of how long ago a wrongful act occurred. In some circumstances, however, a limitation may be placed on retrospective coverage. This is known as a retroactive date, which removes coverage for claims that arise as a result of actions committed before a specified time. Retroactive dates will be specific in a policy’s schedule and are often applied by underwriters on a case-by-case basis.
RUN-OFF COVERAGE—Following a change in control, an organization’s D&O policy will automatically convert into run-off. Run-off coverage is when a policy remains in force but only covers claims that materialize from actions that have occurred before the date of a transaction. Policies that automatically convert into run-off can be particularly beneficial, as any claims or circumstances that arise from past actions can be notified under the existing policy until the end of the insurance period.
SELF-INSURED RETENTION—Self-insured retention (SIR), sometimes simply referred to as retention, is an important component of D&O policies. SIR is a dollar amount specified in a liability insurance policy that must be paid by the insured before the policy will respond to a loss. In essence, SIR provisions represent the amount of risk an organization is willing to absorb before a policy kicks in and provides protection. SIR provisions can be complex, and there are a number of considerations organizations and their directors and officers should keep in mind.
SEVERABILITY—Most D&O policies contain an exclusion severability provision. This provision dictates that an exclusion applying to one executive’s behaviour won’t affect the coverage afforded to another. In simple terms, this means that innocent executives will be protected regardless of whether or not other leaders act outside the boundaries of a policy. For example, if a claim is brought against a board of directors for the deliberate and illegal actions of one executive, such as fraud, a policy exclusion may be triggered. With exclusion severability in place, instead of coverage being excluded for the entire board, the exclusion will only apply to the offending executive.
SUBROGATION—In the event that a D&O insurer protects a policyholder from a covered claim, it inherits the right to subrogate against others. This means that an insurer can assume the rights of the insured and recover damages from any parties found responsible for causing the loss. This is done as a means of recovering the amount of the claim paid by the insurance carrier to the insured for the loss.
TERRITORIAL AND JURISDICTIONAL LIMITS—Territorial and jurisdictional limits of a D&O policy are of particular importance for organizations with international operations. Specifically, these limits refer to the jurisdictional region in which the insurer will respond with coverage, should a legal action arise. Similarly, territorial limits refer to the geographical area from which a claim can originate. While many policies provide worldwide territorial coverage, they can also limit the jurisdictional coverage available for regions that are considered highly litigious.
WRONGFUL ACT—This term specifies what types of actions are covered by a policy. D&O policies often define this term broadly to ensure directors and officers are protected from a variety of claims. In most instances, a wrongful act is considered to be any actual or alleged act, error, omission, misstatement, misleading statement, breach of duty, breach of trust, neglect and breach of warranty of authority.