Recently, while perusing the Canadian D&O Blogosphere, I came across the website of an Ontario insurance broker, who pointed out that “not all D&O policies provide Entity Coverage” and that that coverage is “critical to your insurance program.” It ends with “if your broker can’t do this… find one that will.”
I appreciate every attempt to understand and communicate the technical minefield of D&O risk and loss control, but this proves that the really important issues cannot be provided on a website. I decided not to provide a public reply on their blog, but since education on the subject of Directors’ and Officers’ liability is insufficient (by insurance brokers, or available to insurance buyers) I decided to send him the response I was going to put on his blog, and post this same response to you.
Dear blogger, I think this blog has the potential to do more harm than good. The D&O policy was always intended to cover the personal liability of directors and officers, because a relatively small loss could be catastrophic to an individual person, but even a much larger loss might not be catastrophic to their corporation.
The insurance brokerage industry has done a very poor job of explaining D&O coverage in general, and many Insured Persons have been put at great risk by purchasing D&O policies that have too many extensions to the corporate entity. Following your example, it may be great to have entity coverage when there is a $10 million total loss on a $25 million policy, but it is catastrophic to the individual Directors and Officers if that $10 million total loss is made against a $5 million policy. In this second example, many brokers will point to ‘coverage enhancements’ (I use this term very carefully) to protect against ‘limit exhaustion’, like ‘Priority of Payments’ or ‘Built-in Additional Excess Side A’, but these could be window-dressing hiding a bigger problem. I know of no Canadian precedent surrounding the actual trigger of Priority of Payments, but many versions of that wording might actually create more financial risk for certain Insured Persons. And regarding Built-in Additional Excess Side A (Side A is the Insuring Agreement that responds when the Corporate Entity is not legally or financially able to indemnify the individual Insured Persons), this small additional limit is shared by many individuals, and is not adequate protection when you consider that it will likely be the only insurance available for the remainder of that particular claim and for every future claim that is in any way related to the same underlying circumstances. The other problem with Built-in Additional Excess Side A is that it doesn’t include protection from failure of the Insurer, or provide Difference in Conditions (DIC – fewer exclusions) features.
There may be many examples of the Corporate Entity being uninsured by the D&O policy, but there are also many examples of D&O policies being fully exhausted on defences costs alone, long before the exposures to individual Directors and Officers have stopped (it has been suggested that that the vivendityclassaction (try it with dot com) defence costs will fully exhaust their $200 million policy limit.)
I am not suggesting that Entity Coverage should not be available in the D&O policy, but all forms of Entity Coverage should be fully explained to the client, and they should know the degree to which they are sharing their limit of liability (perhaps the only limit of liability available to any and all claims that could arise from their tenure as a Director or Officer) and therefore increasing the possibility of ‘limit exhaustion.’ My second warning is that it is very difficult to identify all areas of ‘limit sharing’ in a modern D&O policy. This form of ‘Insurance Risk’ is not isolated to the Insuring Agreements, it can be found within any section of the policy, every endorsement and even in the applications. This analysis has to include definitions, allocation, severability, exclusions and insuring agreements.
Any broker can help you buy a broad D&O policy, but that does not make it a good policy. They first need to understand your industry, your company, and your priorities, long before they present a D&O policy.
If your broker isn’t doing this, find someone who can and will.
If you would like an explanation of this post with specific reference to your company, or if you have questions about D&O risks, insurance coverage, limits adequacy, program structure, risk management or loss control, please call me directly.
Greg Shields, Partner, Mitchell Sandham Insurance Brokers, 416 862-5626, email@example.com
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