Personal
profit:
No D&O liability policy
covers claims against directors and officers resulting from their gaining
personal profit or advantage to which they are not legally entitled, as,
for example, through their use of inside information.
Excess
remuneration:
If a director or officer
becomes liable to return to the corporation salaries or bonuses received
illegally without the stockholders’ prior approval, the insurance will
not respond.
Short-swing
profits:
If a director or officer
profits by the purchase or sale of securities of the corporation within
the meaning of Section 16(b) of the Securities Exchange Act of 1934 or
similar provisions of any state statutory law, the policy will not protect
the executive against resulting claims. The section of the law referred
to above addresses profits an executive might make through the purchase
and sale (or sale and purchase) of corporate securities within a period
of less than six months.
Dishonesty:
If a claim alleging dishonesty
is brought against an executive, the typical D&O liability policy will
protect the insured unless it is established — by “judgment or other final
adjudication” — that the executive engaged in deliberate dishonesty with
“actual dishonest purpose and intent.” Loss to the principal through executives’
dishonesty is customarily insured through fidelity bonding.
Failure
to procure or maintain insurance:
The insurance does not cover
liability resulting from the failure to effect or maintain adequate insurance
for the corporation. If, for example, the directors fail to authorize the
purchase of products liability insurance and the corporation subsequently
becomes liable for an uninsured, unfunded products liability loss, the
insurance will not cover resulting claims against the directors. Some insurers
will delete this exclusion after examining the corporation’s insurance
program. Deletion may or may not entail an additional premium.
Indemnity under previous
policy: Most policies exclude any coverage for claims covered under a previous
policy (as through the discovery period described earlier). Some policies
provide for excess coverage over such previous insurance.
Indemnity
by corporation:
If a claim against an executive
is paid in accordance with the corporation’s agreement to indemnify directors
and officers, the executives would be enriched, rather than compensated,
by a duplicate payment from the insurance company. Therefore, claims for
which directors and officers receive corporate indemnity are excluded.
(If the corporation carries corporate reimbursement coverage, it will itself
probably be compensated in large part by the insurance company.)
ERISA:
The Employee Retirement
Income Security Act (or Pension Reform Act) of 1974 so broadened the potential
liabilities of fiduciaries of employee benefit plans that some insurers
have chosen to eliminate coverage from their D&O liability policies
for liability based on ERISA. Instead, the exposure is covered through
separate employee benefit liability insurance.
Bodily
injury or property damage:
Some policies emphasize
the intended effect of D&O liability insurance not to overlap other
forms of insurance covering liability for bodily injury and property damage.
Pollution:
Some policies exclude bodily
injury and property damage resulting from pollution or contamination. Pollution
claims represent an huge potential exposure for directors and officers.
The director or officer can be held liable on a personal basis (if he or
she had actual control over the handling of pollutants), or due to a “prevention
test” basis through which the director or officer is held liable because
he or she had the power to prevent the pollution and did not do so.
Nuclear
hazards:
Generally, all insurers
attach the broad form nuclear energy liability exclusion endorsement to
their D&O liability policies.
Suits
by the insured corporation:
Because D&O insurance
is a form of “liability” insurance, most claims triggering coverage are
third party lawsuits or shareholder derivative claims. However, in unusual
suits brought in 1985 and 1986 by corporations against their own executives,
the insurers were required to cover the liability of these executives.
Since insurers viewed these lawsuits as an attempt to use D&O insurance
to recover operating losses, many forms now include an exclusion to clarify
that no coverage is available for claims brought by the insured corporation
itself.