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Summary of Insurance

This type of coverage protects directors and officers against claims for losses resulting from failure to do their jobs properly. Claimants can include competitors, suppliers, customers, employees, investors/shareholders of the company, and government agencies.

As a public company, your greatest financial exposure is probably from security holder litigation. In order to reduce the volume and expense of claims brought by security holders against directors and officers, Congress passed the Private Securities Litigation Reform Act of 1995. However:

• Technology companies are increasingly targeted.
• NASDAQ technology companies are far more likely to be sued than companies listed on the New York Stock Exchange or AMEX.

Consequently, it is extremely important for publicly held companies to carry this insurance, particularly those that are active in mergers and acquisitions or whose stock value or industry are subject to extreme volatility.

Private companies face significant exposure to litigation brought by parties other than security holders. In fact, plaintiffs other than security holders brought the bulk of claims filed in 2003. Any company that employs one or more individuals or deals with customers, clients, competitors, the government, or other third parties has a D&O exposure. In addition, private companies planning an IPO or a private offering of debt or equity in the next 36 months should consider purchasing D&O insurance.

Coverage Highlights

• Covers CLAIMS MADE against Directors & Officers within the policy period (vs. occurrence).
• The contract could be an indemnification contract or a duty to defend contract.
• Directors & Officers are covered for acting within their scope and capacity as Directors and Officers of their company or a subsidiary.

Typical exclusions under a D&O contract could include:

• Typical / significant exclusions include:
  • Fraud, Dishonesty, Criminal Acts (if proven)
  • Known or existing liabilities
  • Outside Directorship liability
  • Punitive Damages
  • Liabilities covered under other insurance contracts
  • Securities claims stemming from the 1933 SEC Act (IPO) or 1934 Act
• Unfortunately, exclusions are not only contained within the “exclusions” section of the policy

A private company D&O contract has three main components:

• Coverage Part “A” – (Personal Asset Protection) covers Directors & Officers to the extent the company is unable to reimburse them.
  • Examples of Claims:
    • Shareholder derivative action
    • Insolvency
    • Duty of Loyalty
• Coverage Part “B” – (Balance Sheet Protection) covers the company’s obligation to indemnify the Directors & Officers.
  • Important: This does not cover the legal liability of the company.
• Coverage Part “C” – if not included in the form can be added to most forms to cover the legal liability of the company, subject to limitations (i.e. securities claims under 33 and 34 Acts).