Securing the Director and Officers Liability Insurance Lifelines: What Every Director Needs to Know—Before Entering Troubled Waters

In brief: Written by Ronit Berkovich and Paul Ferrillo of Weil, Gotshal & Manges for the Report of the NACD Blue Ribbon Commission on Director Liability, this document outlines key points every director should know about their D&O coverage.

This resource can help your board:

• Determine if directors have adequate coverage through a carrier with a business-friendly reputation.

• Understand elements of D&O insurance, such as the insured versus insured clause and its carve-outs, non-rescindable Side A coverage, and the priority of payments clause.

• Stay on top of D&O insurance issues and developments throughout the year.

Most relevant audiences: general counsel, independent directors

Written by Ronit Berkovich and Paul Ferrillo of Weil, Gotshal & Manges for the Report of the NACD Blue Ribbon Commission on Director Liability

We often get called into corporate calamities where “heavy water” is starting to overwhelm the bilge pump of the corporate yacht. Often in those situations good people like directors and officers, who are tasked with figuring out what to do to “save the ship,” must at the very same time try to figure out if they have enough directors and officers (D&O) liability insurance to weather the storm and protect them from the sharks.

Nautical allusions aside, trying to figure out if your D&O insurance is good enough when you are about to enter rough waters is not ideal for many reasons. First, it takes time to do so (and depending upon circumstances, there may be no time to tinker with the D&O coverage). Second, and more importantly, if there is a problem with your coverage, many carriers are reluctant to modify policy wording to enhance coverage when a company is having financial difficulty because the carrier itself is worried about its own potential exposure to directors and officers claims (whether they might be lawsuits or regulatory investigations). 

Finally, despite years of heavy claim activity and many large bankruptcies during periods of financial crisis, we often still see the same problems with policies and towers of insurance. Why is that? We honestly cannot say. Sometimes corporations (and their boards) do not focus enough on D&O insurance issues because they are frankly too busy with other issues. Sometimes D&O insurance decisions are based not on “substance” issues, but on cost issues, which is generally not the right answer for many reasons. Furthermore, much of the literature dealing with D&O insurance tends not to be broadly disseminated to the folks who need the information most (like corporate directors and officers), and instead is left to the devices of risk managers and brokers who do not have much experience dealing with troubled company D&O issues.