D&O Insurance: Glossary of Terms
D&O policies often include technical terminology and although there is no substitute for quality advice from a specialist D&O broker, we’ve included a glossary of general terms insurers often use below.
Directors and Officers Insurance policies, as the name suggests, cover both the Directors and key Officers of the company. The definition differs across insurers but generally includes a person who participates in decision making that affects the whole, or a substantial part, of the business of the Company. We would include the CFO, COO, CEO and Company Secretary as Officers.
2. Wrongful Act
While the term indicates a positive act, the definition of a wrongful act also contemplates an omission or failure to act. D&O insurance policies usually include in the definition; a misstatement, misleading statement, a breach of duty or trust and mistakes/errors made by the Board or officers.
3. Side AB
Side A is the first insuring agreement of a D&O policy. It insures executives from claims where the organisation has not indemnified them (either because it is not in a position to or where it is legally prohibited from doing so). Side B, also known as corporate reimbursement cover, is the second insuring agreement of a D&O policy and reimburses an organisation for the expenses incurred in defending its directors and officers.
4. Side C
Some D&O policies include a third insuring agreement, Side C, also known as entity securities coverage. Side C insurance responds to claims made against a company as a result of the offer, sale or purchase of its securities. See here for the structure of a typical D&O policy.
Also known as a deductible, this is the payment that the insured pays first before the insurer’s payments commence. Generally speaking, Side A attracts no retention, Side B has a moderate retention (on the basis that companies generally have the resources to pay the retention) and Side C carries a larger retention.
6. Securities Threshold
Commonly included as an endorsement by insurers. This is the maximum capital raising threshold for which cover is automatically extended under the policy. The insured should notify the insurer of any raisings above this threshold and they would be entitled to charge an additional premium to underwrite the raising.
Generally, continuity of coverage allows a claim notification to be accepted late provided the policyholder has held uninterrupted D&O insurance cover for a period of time. This is often a convincing reason to remain with your incumbent insurer. In some circumstances your broker can negotiate with an incoming insurer to match this.
8. Extended Reporting Period
This is a time period after expiry of the policy, where the insured can notify claims to the insurer as if they were lodged within the policy period. This usually attracts an additional premium.
Also referred to as an inquiry and includes administrative or regulatory proceedings (official or otherwise) depending on the policy wording. This doesn’t include an ordinary or internal routine matter.
10. Change in Control
A change of control can be any of the following:
- an alteration to an organisation’s ownership, through a transaction for example an acquisition,
- merger or
- change in the composition of the board of directors or
- change in shareholding of the company.
Insurance policies usually provide that in the event of a change in control the policy will be placed into run off (unless this provision is overridden).
11. Run Off
Following a change in control, an organisation’s D&O policy will convert into run-off. The policy will then only respond to claims arising from wrongful acts prior to the date of the change in control.
See our blog post on Run-Off available here
12. Major Shareholder
Commonly seen as an endorsement/exclusion on D&O policies the major shareholder exclusion intends to exclude coverage for any claims by a claimant who owns over a certain percentage of a company, typically 10-15%.
The reason for this endorsement is to avoid any infighting between shareholders and management. More specifically, it isn’t the intention of the D&O policy to act as protection for shareholders as against each other.
13. Retroactive Date
In some circumstances insurers may place a limitation on retrospective cover by including a retroactive date in the policy schedule. A retroactive date removes coverage for claims, arising as a result of actions committed before the specified date.
If the retroactive date is the same as the inception date there is no cover for acts prior to the inception date of the policy.
D&O policies provide for the notification of “a claim, or circumstance that may lead to a claim”. While it may be clear what constitutes a claim eg a statement of claim, letter of demand or similar, a circumstance which may lead to a claim is harder to identify.
How do the directors know whether something will become a claim? It’s important to discuss this with your specialist broker to ensure that notifications are made promptly so the insurer is in a position to react if a claim eventuates.
Have any questions?
Talk to one of our D&O Experts today!
KBI is a boutique insurance brokerage with a focus on Directors’ & Officers’ insurance. Our team has placed Directors’ and Officers’ Liability Insurance for over 300 public companies in Australia, Asia, North America and Europe, including the ASX, TSX/TSX-V, SGX, LSE, Nasdaq, NYSE and LSE/AIM. Our team consists of senior brokers, lawyers and past ASX listing advisors. We add value to the process by helping our clients make an informed decision during the purchasing and claims process. We also continue to provide updates to our clients, so they are properly informed on the ever-changing landscape of Directors & Officers insurance.
By Dawn James
Dawn James is an Account Manager at KBI with a focus on Directors and Officers insurance.