Much (perhaps too much) has been said and written about the nature and scope of D&O insurance – not least by me.
The reality nevertheless remains that few directors (unless they have been unlucky enough to experience a claim) are likely to want to know much more than that they are “covered” and the amount of that cover.
For those curious or intrepid enough to want to enquire further, there is no easy process of assimilating the knowledge with which to conduct a useful compare and contrast exercise between the many and surprisingly different policies available on the market.
This is a subject on which I have written on before and to which I will no doubt return. It seems to me that until end users (i.e. directors and officers themselves) take a more active interest in the quality and breadth of cover as well as the size of the limit and cost, it is unlikely that wordings will match their requirements in the real world as closely as they should.
You may be asking by this stage why I have deliberately misspelled the word “WALC” in the title to this piece. One of the problems of D&O insurance is that the wordings have become too long and complicated over the years. Willis’ D&O Dictionary is our attempt to demystify the product.
“I read it in the FT”
You need to have the time and will to try to analyse the breadth of cover available in competing products in the D&O market. Even then, it can often be a challenge to focus on what really matters. This difficulty is perhaps best illustrated by the “I read it in the FT” approach to D&O insurance.
Corporate manslaughter, bribery and extradition are all examples of this phenomenon under which, due to an understandable desire to demonstrate coverage in these key areas, specific endorsements now commonly appear in D&O policies. Paradoxically, endorsements of this kind can simply add to the length, complexity and jargon associated with the product.
As you’ve probably guessed by now WALC is an acronym. It spells
- Wrongful Act
The majority of D&O policies will incorporate these key defined terms in the insuring clauses. Unfortunately, there the similarity often ends. The definitions differ very widely. Because they usually cross link into the additional endorsements or enhancements to cover as well as to the general terms and conditions, they can and often are of key importance in determining threshold coverage issues.
In an attempt to unlock some of this complexity, I set out below a checklist of points which you should be able to easily tick off against these definitions as they appear in your policy.
- Does your wrongful act definition set out a long and seemingly exhaustive list of covered errors and omissions i.e. “… misleading statement, misstatements, warranty of authority etc etc?” If so, is the list truly exhaustive? If not, what are the “gaps”?
- Does the list contain a mix of specific errors or breaches of duty such as those listed above and general ones such as errors and omissions? Could this lead to uncertainty as to the intended scope of the definition?
- Is the cover limited “solely” to your capacity as a director or officer and if so does this suit your likely exposure in the real world?
- How long is your definition of “Loss”? Some extend to over a page. Is that length and complexity necessarily working to your benefit and advantage?
- More specifically, does the language contain additional back door exclusions introduced with the words such as “Loss does not include..”?
- If the definition extends cover to particular items, is there a risk that other, more general exposures of a similar kind which are not expressly referenced might not be covered? A fertile area in which to ask this coverage question is in respect of fines and penalties.
- What “Claim” are they talking about? Often policies do not clearly and consistently distinguish between claims against the Insured and claims made under the policy.
- Does the definition of Claim extend to claims made by anyone including the insureds or is it restricted to “third parties”?
- Does the definition of claim extend to investigations? If so, is it sufficiently clear that no identifiable wrongful act is required at the point when the investigation is commenced? If not, is it sufficiently clear what the triggers for cover with respect to investigations really are?
- How early is the claims trigger? Is a written demand sufficient? Who does it need to be received by? Is that the right language anyway in the context of a regulatory or criminal proceeding?
- Are there any restrictions on what the claim is for? i.e. is it just damages claims that are covered or are all other types of claim included?
For the DARCstar approach to the WALC test click here.