Directors and Officers liability insurance (“D&O”) is one of the most critical coverages for large publicly traded companies. For such companies, this insurance is an automatic purchase. Also, for large non-profit entities, D&O coverage is common.
However, over the last two decades or so, a variation of D&O insurance, Management Liability (or Executive Risk) has become a coverage that some insurance producers have found a niche in for protecting small and medium-size business from risks that traditional liability insurance will not cover.
As more company owners and managers learn of the benefit of this coverage demand has increased. Many of the companies seeking this coverage are owned by the officers and directors who would be covered along with the company under a management liability policy. For them, a claim against the company is like a claim against themselves. Their personal wealth may depend on the added coverage that a management liability policy provides to protect their company’s assets.
Agency Checklists thought a summary of the increasingly sold management liability coverage for small and medium-size businesses would be useful for its agency readers.
- D&O insurance and management liability insurance are different
D&O insurance historically had its coverages broken up as three “sides” or coverages:
- Side A providing indemnity coverage for the directors and officers of a corporate entity for their personal liability arising out of their actions as officers or directors when the corporate entity does not indemnify them (E.g., after a corporate bankruptcy);
- Side B providing the corporate entity with reimbursement for any funds that it expends under its legal obligations to indemnify its officers or directors. Corporate bylaws generally have, or should have, provisions for such indemnity obligations;
- Side C providing liability coverage for the corporate entity for the acts of its officers and directors. For a public company, this coverage only provides indemnity for liability relating to claims involving the company’s securities (E.g., Alleged stock manipulation).
Where management liability policies and traditional D&O coverages diverge is on the entity coverage. Carriers may provide private companies broader entity coverage packaged as a management liability policy than they would offer a public company. This additional coverage can have real value to a private company of any size when packaged into a policy designated as a management liability policy.
- Management liability policies offer potential coverage not found in other policies
A typical management liability policy combines the traditional Side A and Side B, officer and director coverages with enhanced coverage for the insured entity. In its purest form, this enhanced insurance agreement states:
The insurer will pay on behalf of the insured entity loss from claims first made against the insured entity during the policy period for its wrongful acts.” [pullquote]Any actual or alleged error, misstatement, misleading statement, act, omission, neglect, or breach of duty—Wrongful Acts covered.[/pullquote]
Since there are no standard management liability, or D&O, coverage forms, the insuring agreement may vary from carrier to carrier. However, the basic grant of coverage will focus on indemnifying the insured corporate entity for loss payments made as the result of “wrongful acts” by its officers, directors, or depending on the policy, employees.
- The definition of “Claims” under a management liability policy is broad
The claims that a management liability policy may respond to are more extensive than those of almost any other type of policy. Depending on the form used they may include:
- Any written demand or proceeding for monetary or non-monetary damages, including injunctive relief, made against an insured.
- Any civil or criminal judicial, administrative or regulatory proceedings for such damages or relief; or
- formal civil, criminal, administrative or regulatory investigation of an “insured person” that may lead to such proceedings.
The above listing is not a complete description of what might constitute a claim under a management liability policy. However, the listing does show the scope of potential coverage. Few other policies will provide potential indemnity for matters involving criminal, administrative, regulatory or injunctive relief against insureds.
In some cases, any indemnity may, of course, have limitations based on their facts found — E.G., intentional fraud or wilful criminal acts.
- “Wrongful Acts” under a management liability coverage include just about everything
For a management liability policy coverage for a claim starts with how the term “wrongful acts” is defined. A broad common definition for a covered wrongful act is:
Any actual or alleged error, misstatement, misleading statement, act, omission, neglect, or breach of duty.”[pullquote]Any civil or criminal judicial, administrative or regulatory proceedings for monetary or non-monetary damages, including injunctive relief, made against an insured—Reportable claims[/pullquote]
As written, this definition pretty much covers the legal waterfront to include any cause of action that a plaintiff’s lawyer could conceive of filing against an insured entity. Likewise, this type of definition would include any possible claim by an administrative or judicial agency against an insured.
- Legal costs and defense under management liability policies
Both traditional D&O policies and management liability policies indemnify for legal and claim costs in defending a claim. Some management liability policies also cover the investigative costs arising from potential claims.
In the case of D&O policies, carriers only retain the right but not the duty to defend. The insured may select counsel from a list of approved counsel or may choose its counsel with the carrier only having the right to veto the insured’s choice. In most or may select its Defense costs within limits of liability
For management liability policies, insurers generally assume the duty to defend along with the right to defend any claim. Depending on the policy, the insureds may elect to defend the claim with counsel of their choice if the insurer consents.
Common to both D&O and management liability policies is that claim costs, including legal fees incurred defending a claim, are charged against a policy’s limits of liability. Most professional liability policies have similar provisions but without the same effect. For D&O and management liability policies, legal costs can substantially reduce the indemnity benefits. In selecting limits of liability, one has to remember that these types of claims against both officers, directors, and the corporate employer can run up very substantial legal bills.
- Management liability policies exclude coverages available in other standard policies
Not surprisingly, management liability policies with their broad grant of coverage for any wrongful acts, exclude claims that other insurance policies might ordinarily cover. These exclusions would exclude bodily injury and property damage under commercial general liability and automobile liability policies, workers’ compensation obligations, fiduciary liability, employment practices liability, excess liability, and professional liability.
- Management liability policies frequently include employment practices and fiduciary liability coverage as a separate part
An overwhelming number of the claims against companies and their officers and directors result from employment-related claims. As a result, many management liability policies have as a separate coverage part employment practices liability coverage.
Also, since most companies have some form of 401k or other benefit plans subject to the fiduciary requirement of ERISA, management liability policies may include this coverage as a separate form. See Agency Checklists’ article of August 18, 2015, “How Your Commercial Insureds May Have Uncovered Personal Liability Under ERISA.”
In most cases, including these coverages in the management liability policy makes good sense. Having all these coverages in one policy reduces the risk of conflicting provisions between different coverage form and the attendant risk of an unintended gap in coverage.
- The reporting of potential claims is as important as reporting actual claims for management liability policies
Claims made and reported is the standard for D&O and management liability policy coverages. Many agents are familiar with the insured reporting late or not reporting at all a claim for liability coverage written on an occurrence. In their experience, ninety-nine percent of the time, the carrier involved takes over and defends any lawsuit. With a claims made and reported policy, an insured reporting to its insurer a claim received before the active policy’s inception date is likely to receive a coverage denial. For an occurrence policy, an insurer receiving a late claim report must show the delay caused actual prejudice to the insurer’s claim handling. For claims- made policies, the insurer only has to show that the insured did not report a claim during the policy period when the insured first received notice. Massachusetts law does not require any prejudice to the insurer. Late notice on a claims-made policy is considered a material breach of contract.
Reporting potential claims during the policy period in which an insured first has any idea that circumstances involving an alleged wrongful act could develop into a subsequent claim is essential.
The reason such protective reporting is that a trap for the unwary lies in a definition contained in all D&O and management liability policies for events defined as “Interrelated Wrongful Acts.” This definition, depending on the insurer’s form policy, states that “interrelated wrongful acts” involve:
any Wrongful Act that is logically or causally connected by reason of any common fact, circumstance, situation, transaction, or event.”
This definition can trigger a policy provision providing that more than one claim involving “interrelated wrongful acts” is considered one claim and that a claim will be deemed to have been made on the earliest date the insured learned one of the interrelated wrongful acts had occurred.
What this means in practice is that an insured runs the risk that knowledge it acquires in one policy period of a wrongful act that it considers immaterial or inconsequential may mushroom into a full-blown claim in a subsequent policy period. If the insured did not report this first wrongful act to its carrier, it runs the risk that the carrier will deny coverage asserting the two wrongful acts were interrelated and constituted one claim that the insured did not timely report.
This is a real risk under any claims-made policy. The remedy: Report first and answer any questions later—There is no penalty for overreporting at the end of a claims-made policy period.
Benefits of a management liability policy for small and medium-size businesses
What, in my opinion, management liability policies provide to small and medium-sized companies whose owners are its likely officers and directors is the peace of mind. These managers have a personal investment in their companies that management in large companies may not possess to the same degree. They have worries and concerns about potential risks that a large company does not have.
A management liability policy, when properly explained, by their trusted insurance advisors can do much to assuage their fears. Such a policy cannot cover every risk their company faces but it can substantially reduce the attendant costs and expenses of sudden, unexpected and, otherwise uncovered, claims for alleged wrongful acts by the company, its officers, directors, and depending on the policy, its employees.