What is a Wrongful Act in a D&O Policy?

“The one fear I have is getting sued/bankrupt but being personally liable for some reason.” That is how one software founder put it, and we hear the same worry from owners, CFOs and volunteer board members every week. Then an investor, a creditor or a former employee sues you by name, and the corporate shield shows its gaps. D&O insurance is built for exactly that moment, but only if the policy’s definition of a “wrongful act” fits the allegation. The Coyle Group is a commercial insurance agency that handles the complex, high-value risks other agencies don’t know how to structure, where the details in the policy are the difference between a paid claim and a denied one.

What does a wrongful act claim cost if you are not covered?

An uninsured wrongful act claim against a private company leader can cost seven figures. In our published research on how much D&O insurance is enough, the median private company D&O claim settled at $3.1 million and the average at $4.3 million. What most owners miss is that the bill starts long before anyone is found liable.

On top of that, defense costs alone can consume 25% to 33% of a D&O policy limit before a settlement is even discussed. Without D&O, those legal fees then come from the company’s balance sheet or, worse, from your personal savings.

You may assume the company will indemnify you. However, the American Bar Association warns that indemnification rights against the company are typically worthless in a distressed situation. In other words, the moment you need protection most, such as an insolvency, is the moment the company can’t pay for it.

What is a wrongful act in simple terms?

A wrongful act is an action, decision or failure to act by a company leader that someone else says was wrong and that cost them money. IRMI, the insurance reference publisher, defines it as the event triggering coverage under a liability policy. The surprise for most owners is how little the claimant has to prove.

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.

Wrongful act in law vs in insurance

In law, the term is broader. The Insurance Training Center notes that Black’s Law Dictionary describes a wrongful act as conduct that contravenes a legal duty or unjustifiably infringes on others’ rights. In an insurance policy, however, a wrongful act means only what the policy’s definition says, so two policies can treat the same allegation differently.

Why the word “alleged” matters

Not sure how your policy defines a wrongful act? Book a call and we will read the definition with you line by line.

How does a wrongful act trigger D&O insurance?

A wrongful act triggers D&O insurance when someone makes a claim alleging that a director or officer made a bad management decision, and the claim is first made while the policy is in force. D&O then pays covered defense costs, settlements and judgments. What makes this different from almost every other policy is the trigger itself.

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. Our plain-language D&O explainer covers the basics.

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?

How D&O differs from general liability

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. I give clients a five-second test: did something HAPPEN, or was a DECISION challenged? General liability answers what happened to someone; D&O answers a decision someone made. See our comparison of D&O vs general liability insurance.

What are the 7 types of wrongful acts in D&O?

The 7 common wrongful acts in a D&O policy are acts, breaches of duty, neglect, errors, omissions, misstatements and misleading statements. Each describes a different way a leader can be accused of letting the company or its stakeholders down. They overlap more than you might expect, which is exactly why a broad definition protects you.

In practice, these allegations come from shareholders, investors, lenders, employees, competitors and regulators.

So, let’s dig a little further into what a wrongful act is. These terms sit behind most of the common D&O insurance claims we see:

How does the wrongful act definition differ in D&O, E&O and EPLI?

The wrongful act definition changes with the policy: D&O covers management decisions, E&O covers mistakes in professional services, and EPLI covers employment-related acts. The same word sits in all three policies. As a result, an allegation that fits one definition can fall straight through another.

Here is how the trigger typically reads in each, based on sample wordings published by the Insurance Training Center:

That is why I tell clients that “E&O covers what your firm does; D&O covers how your firm is governed.” Our comparisons of E&O and D&O insurance and D&O vs EPLI insurance show where each one stops.

What parts of a D&O policy decide whether a wrongful act gets paid?

Six parts of a D&O policy decide whether a wrongful act claim gets paid: Sides A, B and C, the claims-made trigger, defense costs and the retention. Most owners only look at the limit. Who counts as an insured matters just as much, and I cover it below the table.

First, here is how each piece works in a typical private company D&O form:

Our guide to Sides A, B and C explains each insuring agreement. Some policies also extend to board seats elsewhere through outside directorship liability. D&O is often sold in a management liability package with employment practices liability, fiduciary liability and crime coverage, often with shared limits.

Who counts as an insured

D&O policies define insured persons instead of listing names, usually past, present and future directors, officers and managers.

Why timing decides coverage

Because D&O is written on a claims-made basis, the policy that responds is the one in force when the claim is made. Your retroactive date sets how far back a covered wrongful act can go, which is why full prior acts coverage matters when you switch insurers. If coverage ends, a tail keeps the window open.

When is an act not a wrongful act under D&O?

An act is not a covered wrongful act when the leader was not acting in their role as a director or officer, or when the claim falls inside an exclusion. The definition is broad, but it has edges. For that reason, knowing them ahead of time is far better than learning them from a denial letter.

These are the edges I walk every client through:

Wrongful act vs illegal act

A wrongful act is not the same as an illegal act. As the Insurance Training Center puts it, insurance does not and cannot cover anything that is proven to be illegal, yet a D&O policy can still defend an alleged illegal act until a final judgment says otherwise. Many policies also exclude contract disputes, but as the real-world example further down shows, not all of them do.

Which businesses face wrongful act claims?

Any organization with decision-makers who can be sued personally faces wrongful act claims, including private companies, startups, nonprofits and family businesses. In fact, the bigger question is when your exposure jumps, and that usually happens the day outside money or outside directors arrive.

For example, these are the business types I see most often:

You may hear that most small businesses don’t need D&O. In my experience, the exposure is smaller but rarely zero, and if the risk is simple, a modest limit may be enough. I’ll tell you so.

What are the benefits of insuring against wrongful act claims?

The main benefit is that a lawsuit over a business decision doesn’t become a personal financial crisis. D&O funds your defense, pays covered settlements and keeps company cash for operations. There is also a benefit most owners don’t expect, and it shows up at the board table.

In other words, each benefit is really a risk avoided:

How much does D&O coverage for wrongful acts cost?

D&O coverage for a small private company often costs a few thousand dollars a year for a $1 million limit, and more for larger, regulated or investor-backed firms. Investopedia reports that the median D&O cost among Insureon customers was $1,240 a year. Price, however, matters less than what the policy defines as a wrongful act.

The examples below are illustrative premiums for a $1 million D&O limit that I walk clients through:

Planning a raise or adding directors? Book a call so your D&O is in place before the term sheet asks for it.

What should you watch out for in a wrongful act definition?

The biggest risks hide in the exclusions and conditions around the wrongful act definition, not in the limit. As a result, a policy can look complete on the declarations page and still deny the claim you are most likely to face. Most of these problems aren’t expensive to fix; they come from nobody reading the form.

Our pages on D&O insurance policy exclusions and what D&O insurance does not cover go clause by clause.

Red flags that your D&O program is wrong

I audit programs for a living, and I find a fatal flaw in roughly 9 out of 10 of them. In D&O, especially, these are the warning signs:

Why work with The Coyle Group on D&O insurance?

Business owners work with The Coyle Group on D&O because we read the wrongful act definition before we look at price. I hold the CPCU and ARM designations, Michael Vanderwerker on our team brings 35 years of D&O experience, and 95% of our clients stay with us. The real difference, though, is the process.

The Coyle Process

As a result, you get fewer applications, fewer duplicate requests and one point of contact. Our directors and officers insurance hub and guide on how to choose the right D&O insurance show what we compare.

What about shopping your D&O with several brokers?

Comparing options is smart. Indiscriminate shopping means duplicate applications, the same insurers approached by several brokers, and risks misclassified by generalists. You don’t need five brokers shopping your insurance. You need one capable broker making sure the right insurers compete for your business.

Who this isn’t right for

Of course, we may not be the right fit for everyone. If you’re looking for someone to rubber-stamp what you already have at a lower price, there are brokers who will do that, and we’re not one of them. We also won’t copy a deficient D&O program at the same price and present it as if everything is fine. If you’re a very small organization with a simple risk, a basic packaged policy may serve you well, and I’ll tell you so.

Start with a 15-minute call, not an application

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? If you already have D&O, we run a confidential review of your forms, exclusions and conditions without disrupting your current broker. If you need new D&O coverage, we build the underwriting picture first and identify which insurers fit before any application goes out. Thanks!

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