Whether you are a director of a large company or a working professional, lawsuits are a constant threat. Negligent or erroneous acts, even a downturn in the stock markets or a bad round of venture capital, can spell big trouble. Commercial general liability insurance protects against most legal hassles, but it won't protect directors and officers or protect against errors and omissions. For these special cases you need specialized policies. This article will shed light on the various lesser known liability insurance policies that are worth considering for your professional coverage needs. (To begin with the basics on liability insurance, see Cover Your Company With Liability Insurance.)
Errors & Omissions (E&O) Liability Insurance
- What It Covers - Errors & Omissions polices offer insurance coverage for lawsuits arising from rendering negligent professional services or failing to perform professional duties.
- Who Needs It - Lawyers, accountants, architects, engineers, IT companies or any company or individual providing a service to a client for a fee should purchase this form of insurance.
- Coverage - Usually, the coverage includes legal, judgment and settlement expenses up to the limit of the policy. Coverage is offered as per the risk exposures of the insured, as some professionals have more potential exposure than others. Coverage typically starts at $1 million and may have a deductible of $1,000 to $25,000 per claim.
- Exclusions - Common exclusions include claims arising from criminal, fraudulent or dishonest acts, bodily injury or property damage, employment-related claims and punitive damages.
Factors influencing insurance cost include location, class of business and claims experience of the individual and the industry.
These policies are offered on a claims-made basis, in which claims must be made and reported during the policy period. E&O policies have a retroactive date wherein the insurer will not cover claims arising out of acts committed prior to the retroactive date. Retroactive coverage is available but comes with higher premiums. (To brush up on the basics of insurance terminology, see Understand Your Insurance Contract.)
Most claims-made policies allow individuals to buy "tail coverage". This extended reporting period covers claims made after you discontinue you professional liability coverage, often because of retirement. The main purpose of tail coverage is to protect the individual from claims that occurred during their active professional practice but were only reported after they retire or quit practicing. If an E&O policy is canceled and the extended reporting period coverage is not bought, then the entire coverage stops.
With this type of policy the insurer has the right to defend the insured and usually controls the defense strategies and costs. In many cases, depending upon the policy terms, the insurer may have a duty to defend the entire claim, even if it includes non-covered allegations against the insured. However, the insurer is not obligated to indemnify the insured for a settlement, verdict or judgment based upon non-covered allegations - just to continue in the overall providing of legal defense.
Directors & Officers (D&O) Liability Insurance
- What it covers - The policy provides protection to directors and officers of large companies against legal judgments and costs arising from unlawful acts, erroneous investment decisions, failure to maintain property, releasing confidential information, hiring and firing decisions, conflicts of interest, gross negligence and errors under many other scenarios.
- Who needs it - Company directors and officers who are accountable to investors, shareholders, creditors, employees and customers.
- Coverage - There are three main types of coverage: Coverage A, B and C (detailed below). The minimum policy limits of liability are $1 million or even $5 million, which is used for defense expenses, expenses of a claim and damages, judgments and settlements expenses. The $1 million limit is per policy and is not shared among individual policies.
- Exclusions - Most D&O policies will exclude coverage for fraud or other criminal acts. A compromise is the "segregate clause" in many D&O policies, which provides coverage for the company and other innocent parties that might be dragged into a lawsuit due to criminal actions of another company director. Other typical exclusions are coverage for claims arising out of prior acts, punitive damages, and bodily injury or property damage. However, punitive damages may be covered as per the jurisdiction of the state in which the policy was issued.
Coverage A - This is a personal/employee coverage that covers past, present, and future directors and officers to help them defend themselves against claims alleging a wrongful act and the personal liabilities they encounter for their acts. A company may not be able to indemnify its D&Os directly because either it is not permitted by law, or by company bylaws.
Coverage B - This is corporate coverage for the company to the extent that it can or may be permitted to indemnify its directors and officers for claims against them; however, the company is not covered for its own liability. Therefore, during a claim the company receives the compensation; in turn the company then reimburses the amounts to directors and officers.
Coverage C - This is entity coverage wherein the company is insured against securities claims. Lawsuits naming directors and officers along with other parties are common. The coverage provides protection to the company for its own liabilities in such a situation. Entity coverage basically renders allocation (the portioning off of blame) unnecessary for securities claims. Additionally, D&O policies may be composed of extensive allocation clauses that force the parties to negotiate an allocation agreement. In case both parties are unable to reach an agreement, the policy may provide a default or force the parties to accept arbitration. (To learn more, check out When A Dispute With Your Broker Calls For Arbitration.)
Factors such as the size and form of the company, location, mergers and acquisitions, industry type and loss experience determine the premium rates in a typical D&O policy. It is important to note that the insurer does not have the duty to defend the directors and officers.
Many insurers allow deductibles if the company is able to indemnify the individuals named in the legal suit. D&O policies are offered on a claims-made basis; in other words, claims must be made and reported during the policy period. Though, the insurer holds the right to oversee the defense and approval of defending strategies, expenditures and settlements.
Many insurers also include Employment Practices Liability coverage in the D&O policy. The coverage may not be as comprehensive as a traditional stand-alone policy and may offer relatively less coverage. (For related reading, see Protect Your Company From Employee Lawsuits.)
Nevertheless, certain types of companies are protected under safe harbor statutes. For example, some states have provisions that protect directors of nonprofit companies from losses. But safe harbor statutes do not reduce the necessity for insurance - the provisions only protect the individual from a final adjudication but not from a suit being filed.
With the rise in lawsuits against directors, officers and other professionals, it has become essential to have proper liability insurance in place. Nowadays, even defending a claim can put a major financial dent in both individual and company resources. Of course, liability insurance can not eliminate legal risks found in the workplace, but it can transfer some risks to the insurer. Buying a liability insurance that befits your professional needs can be the perfect stress buster.
To learn about personal insurance, check out Five Insurance Policies Everyone Should Have.