The Conduct Exclusion in D&O and E&O Policies.
Today we’re going to look at the conduct or misconduct exclusion found in every D&O Director and Officers Liability and E&O – Errors and Omissions Liability Insurance policies.
To start with, I’ve said many times that no two D&O or E&O policies are alike. Both are what we consider non-standard forms of insurance, meaning that no insurance industry bureau or authority publishes a policy form that every insurer adopts as a general liability policy.
Instead, each insurer has its own policy forms and, in fact, may have likely several different forms tailored for different industries. A private company D&O form used for a midmarket manufacturing firm will be different from a hedge fund or other alt-asset fund manager policy form.
Another point is that all policy forms are negotiable using various exclusions, carve backs, endorsements, and amendments. Having a skilled broker by your side to procure coverage tailored to your situation is really important.
That’s a long-winded way of saying you don’t buy a D&O or E&O policy off the self – careful examination of the policy is required to determine that you’re getting the broadest terms and conditions possible.
Now, on conduct exclusions.
Just about every D&O and E&O policy will include exclusionary language around conduct or misconduct acts and claims. Underwriters do not want to provide coverage for losses that stem from acts that may be criminal, fraudulent, or dishonest. In addition, coverage should not be provided to insured persons for taking illegal profits, gains, or remuneration.
But, most underwriters also recognize that just the allegation of misconduct should not bar coverage entirely. There is a balancing act between providing defense for allegations made against insured persons and preventing the use of insurance to fund intentionally wrongful conduct. This balancing act is where the proverbial rubber meets the road in the form of conduct exclusions.
In negotiating a new policy or renewing an existing policy, you are looking to tailor your conduct exclusion (among many others) as narrowly as possible.
The best policy wording when it comes to conducting is triggered only when there is a final non-appealable adjudication. In other words, the policy provides the insured person’s defense coverage all the way through the judicial process, including all appeals until a finding of a criminal or fraudulent act was committed or not committed. This is often phrased as “final adjudication wording” in a D&O proposal.
Getting to the point of final adjudication can cost millions of dollars in defense expenses, so negotiating this exclusion is critical. Get it wrong, and those costs are coming out of a director’s or officer’s pocket.
Have other questions, issues, or concerns over D&O or E&O, or any other form of business insurance? Click the button below which will bring you to my calendar to find a convenient time to chat. I work with a variety of firms across the US and love helping business owners with their insurance and risk challenges. Let’s chat!