Govt Legal responsibility Insurance coverage - Why Personal Firms Require It
Considering the fact that its inception about fifty several years back, D&O insurance policy has evolved into a family of products responding differently to the needs of publicly traded providers, privately held businesses and not-for-profit entities and their respective board members, officers and trustees.
Directors' & Officers' Liability, Government insurance brokers Sydney CBD Liability or Management Legal responsibility insurance policies are essentially interchangeable terms. However, insuring agreements, definitions, exclusions and coverage options vary materially depending upon the type of policyholder being insured and the insurer underwriting the risk. Govt Legal responsibility coverage, once considered a necessity solely for publicly traded companies, particularly due to their exposure to shareholder litigation, has become recognized as an essential part of a risk transfer program for privately held organizations and not-for-profit organizations.
Optimization of protection is a common goal shared by all types of organizations. In our opinion, the best way to achieve that objective is through engagement of highly experienced insurance plan, legal and financial advisors who work collaboratively with management to continually assess and treat these specialized enterprise risk exposures.
Non-public Company D&O Exposures
In 2005, Chubb Insurance Group, one of the largest underwriters of D&O insurance policy, conducted a survey of the D&O insurance policy purchasing trends of 450 non-public providers. A significant percentage of respondents gave the following reasons for not purchasing D&O insurance policies: • did not see the will need for D&O insurance, • their D&O liability risk was low, • thought D&O risk is covered under other liability policies
The corporations responding as non-purchasers of D&O insurance policies experienced at least one D&O claim in the five several years preceding the survey. Results showed that personal firms with 250 or more employees, were the subject of D&O litigation during the preceding five a long time and 20% of organizations with 25 to 49 employees, experienced a D&O claim.
The survey revealed 43% of D&O litigation was brought by customers, 29% from regulatory agencies, and 11% from non-publicly traded equity securities holders. The average loss reported by the personal providers was $380,000. Organizations with D&O insurance policy experienced an average loss of $129,000. Corporations without D&O insurance policies experienced an average loss of $480,000.
Some Common Examples of Personal Company D&O Claims
• Major shareholder led buy-outs of minority shareholders alleging misrepresentations of the company's fair market value • purchaser of a company or its assets alleging misrepresentation • sale of company assets to entities controlled by the majority shareholder • creditors' committee or bankruptcy trustee claims • personal equity investors and lenders' claims • vendors alleging misrepresentation in connection with an extension of credit • consumer protection and privacy claims
Non-public Company D&O Policy Considerations
Government Liability insurance policies for privately held corporations typically provide a combination or package of coverage that includes, but may not be limited to: Directors' & Officers' Liability, Employment Practices Legal responsibility, ERISA Fiduciary Legal responsibility and Commercial Crime/ Fidelity insurance policies.
D&O policies, whether underwritten on a stand-alone basis or in the form of a combination-type policy form, are underwritten on a "claims-made" basis. This means the claim must be made against the Insured and reported to the insurer during the same effective policy period, or under a specified Extended (claims) Reporting Period following the policy's expiration. This is a completely different coverage trigger from other legal responsibility policies such as Commercial General Legal responsibility that are traditionally underwritten with an "occurrence" trigger, which implicates the insurance policies policy that was in effect at the time of the accident, even if the claim is not reported until several years later.
"Side A" coverage, which protects individual Insureds in the event the Insured entity is unable to indemnify individuals, is a standard agreement contained within many personal company policy forms. These policies are generally structured with a shared policy limit among the various insuring agreements resulting in a more affordable insurance policy product tailored to small and mid-sized enterprises. For an additional premium, separate policy limits may be purchased for one or more of each distinct insuring agreement affording a more customized coverage package.
Also, policies should be evaluated to determine whether they extend coverage for covered "wrongful acts" committed by non-officers or directors, such as employees, independent contractors, leased, and part-time employees.
Imputation of Knowledge & Severability
Coverage can be materially affected if an Insured individual has knowledge of facts or circumstances or was involved in wrongful conduct that gave rise to the claim, prior to the effective date of policy under which the claim was reported. Policies differ as to whether and to what extent, the knowledge or conduct of one "bad actor" may be imputed to "innocent "individual Insureds and / or to the Insured entity.
"Severability", is an important provision in D&O policies that is often overlooked by policyholders until it threatens to void coverage during a serious pending claim. The severability clause can be drafted with varying degrees of flexibility-- from "partial" to "full severability." A "full severability" provision is always most preferable from an Insured's standpoint. Many D&O policies, impute the knowledge of certain policy-specified senior level officer positions to the Insured entity. That imputation of knowledge can operate to void coverage that might have otherwise been available to the Insured entity.
M&A and "Tail Coverage" Considerations
The "claims-made" coverage trigger is critically important in an M&A context where contingent liability risks are inherent. In these contexts, it's important to evaluate the seller's policies' options to purchase a "tail" or "extended reporting period" for each of the target company's policies containing a "claims-made" trigger.
A "tail" coverage option allows for the reporting of claims alleging "wrongful acts" that occurred during the expired policy period, yet were not actually asserted against the Insured until after the policy's expiration, but instead were asserted during the "extended reporting" or "tail" period. An acquiring company's insurance coverage professional should work closely with legal counsel's due diligence team to identify and present alternatives to manage contingent exposures.
