Intuitive Insurance Articles

Navigating D&O: Understanding Additional Endorsements and Exclusions

All Directors and Officers Insurance (D&O) policies contain a number of standard exclusions. These standard exclusions often vary from one insurer to the next, however, insurers may also include additional specific endorsements to a contract which can alter the cover provided by the standard policy.

It’s important for decision makers to carefully review any additional endorsements and resulting coverage alteration to the standard policy.

Below are some of the most common endorsements and exclusions added to D&O policies, some of which may even be standard exclusions on some policies. Executives need to be hyper-aware of the wording along with the nature and subsequent effect of any additional endorsements and exclusions to ensure they are fully aware of the scope of coverage provided by their policy.

1. Major Shareholder Exclusion

At their core, D&O policies are designed to cover claims made by any shareholder. However, insurers can often endorse a policy so that claims made by ‘major shareholders’ are excluded.

The rationale for this, from an insurers perspective, is that whoever is determined to be a ‘major shareholder’ may have  a controlling influence over the company and its board of directors, and as such should not be able to claim on a situation they may have had the opportunity to influence.

In the first instance, it is important to determine whether this exclusion is in place. Next, one should check how extensive the exclusion is. Commonly, there are two variations used for any given policy:

  • Broad Exclusions – excludes claims brought and maintained by a party that, at the time of loss, had control over a specified percentage of the voting shares of the company (usually between 10% and 20%).
  • Dual Trigger Exclusions – excludes claims brought and maintained by a party who, at the time of loss, had control over a specified percentage of the voting shares of the company and who also had representation on the board of directors.

Directors should determine if any current or future shareholders are captured by the exclusion and, if so, understand the implications of this. If there is one of these exclusions present, which the insurer is unwilling to remove, directors should investigate the Deed of Indemnity, as protection in the event of a claim will be reliant on the provisions of this agreement.

2. “Absolute” Exclusions

There are a number of certain exclusions often outlined in D&O policies where separate, often more appropriate coverage is available under an alternate insurance policy.

For example, D&O policies will generally contain exclusions resulting from:

  • Bodily Injury / Property Damage
  • Professional Services Exclusions 

Third party bodily injury or property damage would usually be covered under Public & Products Liability (PPL) policies, and professional services claims under Professional Indemnity policies.

Whilst these exclusions are quite common, some endorsements applied to D&O policies exclude coverage for claims that are remotely, but not directly, related to the actual nature of the exclusion.

Rather than the exclusion applying to claims “…for…” the specific exposure, the typical language applied would be “…based on or directly or indirectly arising out of or relating to any actual or alleged…”.

Such wording could eliminate coverage not only for claims by, for example, persons suffering bodily injury or property damage (a PPL exposure), but also with respect to secondary claims by stakeholders who sustain financial loss resulting from the bodily injury or property damage of others (e.g. shareholders).

These secondary claims are not covered under a PPL policy, thus creating a gap in coverage if this wording is included.

These “absolute” exclusions have become increasingly common and should be avoided wherever possible.

3. Failure to Maintain Insurance Exclusion

This type of exclusion removes coverage for claims that arise due to the failure of or omission by a company or its insurance broker to obtain, implement, or maintain insurance or to comply with the terms of any insurance agreement.

This exclusion is onerous. The decision to purchase (available) insurance policies that completely address the risk profile and provide adequate coverage may not be a commercially viable one.

Pending the situation, a smarter route may be to self-insure a specific risk, which can prove more commercially sound in the long term.

Another red flag when it comes to this kind of exclusion is that they can often also contain “absolute” language as described above. The simple approach when considering whether or not to accept these exclusions is, don’t!

4. Securities Offering Exclusion

Securities Offering Exclusions can be applied on specific raisings, on a broad basis (all offerings), prior to a specific date, or after a specific date.

The most common exclusion added is a Future Securities Offering Exclusion, which removes cover for public offerings after a specific date; most commonly the policy inception.

The concern with a Future Offering Exclusion is it places a burden on management to notify the insurer and apply for cover prior to each planned raising.

If a transaction is overlooked, or cover has not been confirmed prior to a transaction occurring, it could result in inadequate or no protection for the company, its directors or officers.

The preferred approach would be blanket cover for all raisings however, at minimum, the company should obtain automatic cover for the placement or offering of securities up to a specified amount, and cover for raisings above this amount for a period of 60 days to allow time for the insurer to be notified and cover to be negotiated and agreed.

5. Industry Specific Endorsements

In some cases, insurers will apply endorsements that limit or exclude certain exposures, which are specific to an insured’s activities. Examples include Intellectual Property (IP) Exclusion for Life Science Companies or Pollution Exclusion for Oil & Gas Exploration companies.

It is important to be aware of the effects of such exclusions, as they can severely impact the effectiveness of a policy, and in some cases, create an opportunity for any insurer to deny coverage in the event of a claim. For instance, the IP exclusion frequently includes “absolute” language, which, for a company whose purpose is the development and commercialisation of IP, is totally unacceptable.

To combat exclusions, the cover can often be reinstated, or the sub-limit applied increased by providing additional information on the company’s management of the particular exposure, thereby increasing the insurers comfort with the risk.

While this is not a completely comprehensive or absolute list of all possible exclusions and exceptions, these are a few common examples that can cause problems if applied to a policy.

It is of utmost importance to read each individual policy carefully and, if there are any concerns, ensure these are discussed with your insurance provider.

To ensure an adequate D&O program, insurance professionals with significant expertise in placing this kind of insurance should be engaged. If you would like more information, please drop us a comment, email or call Intuitive on (02) 9493 6111. We’d love to hear from you.

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