CEOs and managers, also known as directors and officers, have a large number of responsibilities and duties. As a result, their actions can, at any point, lead to lawsuits and sudden claims. Hence, most companies and individuals purchase director and officer (D&O) insurance to protect their directors and officers from liability claims.
The insurance will help cover legal and defence costs in case of lawsuits due to accidental breach of fiduciary duty, misuse of funds, lack of governance or failure to comply.
However, companies and individuals must understand the policy from the cover to insurance exclusions. Insurance exclusions are situations or factors not covered by the specific insurance policy. So, what does D&O insurance not cover?
The article will highlight the main D&O insurance exclusions that many CEOs, managers and companies need to know about.
What are D&O Insurance Exclusions?
Almost no insurance will cover any criminal activities performed at or by a business. The director or manager is liable if caught performing illegal activities, which can lead to imprisonment.
Crime is one of the main D&O insurance exclusions that everyone must understand. Common criminal activities at a business include sexual misconduct, stealing, bribery, money laundering and more.
The director or officer will have to deal with the situation alone and pay all the legal, compensation costs out of their pocket. Each country has different laws, and breaking local laws can be considered a criminal act and will void insurance coverage.
Intentional fraud can also be counted as a criminal act and is taken seriously. However, fraud is much deeper and is happening daily in businesses worldwide. Often, fraud is done to gain more from investors or pay less to the government. Businesses always get carried away and believe they will never get caught.
However, when caught, guilty managers may be unable to depend on D&O insurance. Intentional fraud is another one of D&O insurance exclusions. There are incidents when thefraud is an error, which insurance may cover. Even so, the accused must prove not guilty to claim from the insurance.
The most common intentional frauds are accounting frauds and tax evasion to gain investors, funds or pay less tax.
Manager vs. Manager Claims
There will always be situations where managers may want to take action against other managers in a business. The lawsuits could be due to defamation, harassment or more. Both managers will need lawyers, pay legal fees and possible compensation costs. Would the company D&O insurance cover the case?
D&O insurance will not cover any lawsuits/ claims between managers and directors (internal conflicts). This is because they will both be under the same policy; hence the claim will be one of the D&O insurance exclusions.Therefore, a D&O policy will refuse to pay legal expenses, and the directors and officers will have to bear the legal costs for such claims out of their personal accounts.
On the other hand, if an employee decides to sue a manager and the manager believes they are innocent, D&O insurance may cover the legal fees and protect the manager’s liability. (Depends on the severity of the lawsuit and the specific policy).
Some companies panic purchase D&O insurance, right after they notice one of the directors or managers has messed up. They hope that the insurance will cover all the expenses related to the prior incident. They do not know that previous claims are one of the exclusions that fall under ‘what does D&O insurance not cover’.
Prior claims are any incidents that occurred before the D&O policy period began. It is a common confusion under D&O insurance exclusions. The insurance company will ask the insured if they have any knowledge of any possible claims before purchasing the insurance. If found dishonest, it will be considered insurance fraud.
The incident and lawsuit must have occurred during the policy period to be financially covered. In addition, businesses must be honest with the insurance provider to gain the best coverage.
Penalties and Fines
In many cases, a manager or director’s actions could result in fines or penalties for the company. For example, these fines could occur when a director breaches a contract, doesn’t meet local regulations or breaks government laws. In addition, a company may be fined due to tax violations (underpaying), wage or hour violations, environment violations and many more.
These fines could be anything from thousands to millions of dollars. D&O insurance may cover the legal side of defending the case, but D&O insurance will not cover the related fines and penalty costs. It’s a director and officer liability insurance exclusion that many companies and managers forget.
Insurers can’t cover such damages as the cover would promote poor business behaviour, and directors and officers must face the consequences. Therefore, the related director and officer will be liable to pay for the fine themselves.
Your Business Needs D&O Insurance Today!
Every business that has CEOs, directors, and managers needs D&O insurance. Even small companies with under ten employees may need insurance in case of possible lawsuits against the founder and manager.
D&O insurance will cover an extensive range of liabilities for any director and officer on duty. With D&O insurance, CEOs, CMOs, HR managers and more can focus on their responsibilities rather than fear sudden lawsuits.
However, everyone covered should know about D&O insurance exclusions and ‘what does D&O insurance not cover‘ in their industry. Knowing insurance exclusions now can save you from a surprise in the future.
Additionally, exclusions may slightly differ in every policy, and businesses must understand their specific D&O policy.