Directors and Officers liability (D&O) insurance is a complex coverage form. There is no “standardized” policy form in the marketplace – every insurer’s form is different from the next, and two policies from the same insurer can differ greatly with the addition of a variety of endorsements. That’s why when you purchase D&O coverage you need to work with a broker who understands the ins and outs of different policies and has a good working knowledge of these policy forms and endorsements.
A question that often comes up in discussing D&O (also known as management liability or executive protection) is what is covered under this policy?
For many other forms of liability protection, it’s relatively simple to know what’s covered and what types of claims trigger coverage. For example, in a general liability policy if the business causes bodily injury or property damage to a third party (meaning another person or entity) it’s likely covered (subject of course to policy exclusions).
But most management liability forms root their coverage trigger in something called a wrongful act. So we’re going to focus on what a wrongful act is and how it works in the D&O policy form.
What is a Wrongful Act for D&O?
In its simplest form, a wrongful act is an action, decision or a lack thereof which another party considers wrongful. Usually that other party has suffered some financial consequence due to the wrongful act and elects to sue the decision maker for their actions.
The typical D&O liability policy definition of a wrongful act, is: any actual or alleged breach of duty, neglect, error or omission, misstatement, or misleading statement. Within this definition any one of those acts could branch off into dozens of situations or circumstances!
So, let’s dig a little further into what a wrongful act is.
- Let’s start with Act – broadly these can be any actions or decisions made by decision makers which a third-party thinks are wrongful and can include a breach of contractual obligations or covenants, infringing on intellectual property, slander, defamation, and libel claims.
- Breach of Duty – there are both legal standards and common-sense standards of what an executives duties are, and when breached can be the subject of a lawsuit. An obvious breach of duty is when an executive does not act in the best interest of the organization or entity they work for or represent on the board.
- Neglect -in its basic sense, neglect is similar to just not caring or not doing your job. When a decision maker fails to satisfy the care owed to employees, customers, vendors, or any other party, they can be accused of neglect.
- Error – Errors can be unintentional mistakes, carelessness, errors made in reporting company results, improper decisions in the day to day operations of a firm, and any other acts which results in errors.
- Omission – Similar to errors, but it is usually the act of omitting information out of private or public documents which decisions are made upon. It can also refer to the failure to take action or to make a decision when one is needed to move the company forward.
- Misstatement – leaders of companies are looked to for solid, correct information. When they speak to any stakeholder of their company that stakeholder believes the information they are hearing, or reading is true and correct. When a business leader makes a misstatement either innocently or not so innocently they can be held responsible for their mistake, even if it’s correct later.
- Misleading Statement – as you can see, all of these acts are somewhat related, and when a business leader commits a misleading statement there is an element of partial truth/untruth to the statement. Often misleading statements involve misrepresentation of factual information or financial information. Again, it can also involve the omission of critical information which prevents a stakeholder from creating a fully informed thought or decision on a subject.
These are just some of the common wrongful acts which a D&O policy will contain in its definitions, but it’s important to keep in mind that all these definitions can be altered by endorsements. Also important, as mentioned earlier is that every policy can have different definitions of wrongful acts, these examples given here are the common points we see in most private company D&O policies.
For help in understanding the management liability risks you face and how to best protect yourself from them, why not contact me so we can start a conversation. Thanks!