Typical Exclusions in a D&O Insurance Policy You Should Be Aware Of

If you are planning to buy Directors and Officers liability insurance for the senior officers and directors in your organization, you should know about the exclusions related to the policy. Doing this will help you make a wise decision for your business.

Here are a few general exclusions in a D&O policy:

1. Deliberate Fraudulence and Dishonesty

The purpose of the Directors and Officers liability insurance is to mitigate the risk or challenges that the directors may face. However, it does not cover the intentional acts of fraud committed by the insured. Covering the intentional wrongdoings would mean that the insurance company is somehow encouragingillegal or unethical acts, which they do not. Hence the wordings of most of the D&O policies clearly say that the deliberate actions of fraud committed by the directors are outside the scope of the plan.

2. Prior Knowledge Claims

This exclusion clarifies that the insurer will not cover the claims raised for activities or litigations existing or known before purchasing the D&O policy. It would be best if you keep in mind that only the claims arising out of acts happening during the policy tenure will be covered. As per the retroactive date on which your liability coverage begins, you can file claims for incidents that occur while your liability insurance is still in force. Typically, the retroactive date does not change as you continue to keep the policy active with timely renewal.

3. Criminal Misconduct

Most D&O policies include an exclusion clause for the criminal misconduct of the insured. It means that the directors and senior executives of an organization won’t get the coverage benefits if they are found guilty of illegal acts related to the position they hold in your organization. These also include obtaining remuneration from various stakeholders outside the scope of work. In some cases, allegations against the directors are enough to trigger this exclusion, making them pay for the losses out of their pockets.

4. Extensive Defense Costs

A D&O policy covers all allegations, no matter how trivial or broad they are. However, you cannot be sure that you will get all the claims covered by the policy. The insurance company you have chosen is responsible for covering defense costs as per policy terms. For instance, if you have chosen a plan which offers coverage of ten lakh rupees, it won’t settle the claim that amounts to fifteen lakh rupees. The insurer will exclude the defense cost reimbursement beyond the coverage limits.

5. Internal Litigations

Just like a shareholder of an organization who can file a lawsuit against its directors, one director may sue the other in some cases. The insurance companies exclude scenarios of litigation between directors and officers of the same organization. It means that the directors must pay for the defense costs and other losses out of pocket without getting financial help from the insurer if they sue one another.

The coverage limits of Directors and Officers liability insurance varies from one policy to the other and insurer to insurer. Hence, you should be familiar with the standard D&O exclusions and their possible impact on your organization. You can even hire an insurance broker to get better insights about D&O inclusions and exclusions.