Directors and officers (D&O) claims make headlines daily. Misconduct on behalf of an organization, improper oversight and controls, mismanagement of the firm, misrepresentation of financials – the list goes on.
Whether in light of a regulatory or shareholder claim, financial institutions rely on D&O policies to back their business and C-suite members in the event of a lawsuit. But, does your D&O policy include the right coverage?
Exclusions and exclusory policy language can mean the difference between a covered claim and one that leaves directors and officers and the business in financial ruin. Consider the following common exclusions and best practices to procuring D&O insurance for financial institutions:
- Align the Conduct Exclusion with your company by-laws. While a directors and officers policy does not cover criminal acts or illegal profits, should a director or officer be charged with embezzlement, a Conduct Exclusion should be tailored to at least cover defense costs up until the point that such conduct is actually proven, under a “final adjudication” standard. This exclusion should align with the institution’s by-laws and intent to the point you believe an alleged “bad actor” should be cut off from the D&O policy.
- Look to trigger coverage as early as possible with a broad definition of ‘claim.’ The D&O policy responds only when a “claim,” as defined within the policy, occurs. Focus on broadening this to address coverage for both the individuals and the company when possible. Options also exist to trigger coverage for expenses incurred prior to filing a formal claim. For example, a regulator might ask for years’ worth of emails, or consume days of the director or officer’s time with extensive questioning. Expansions for these situations are available in certain circumstances. The right policy language can ensure that at least the costs of the individuals on the management team and board are addressed.
- Consider Side A coverage for individual D&Os. While the financial institution’s traditional D&O policy will shield a director or officer from a claim, the director or officer may also want to see the company procure a dedicated Side A policy for their personal benefit. Because D&O policies are shared coverage for all employees, a major claim accusing multiple employees of failure of oversight or misrepresentation of the financial condition of the firm, could consume the company’s policy limits quickly. Dedicated Side A coverage with broad terms and conditions provides personal asset protection for individual directors and officers, and may respond even when the traditional D&O policy cannot.
- Specify the language of your Professional Services Exclusion. Common to a D&O policy, a Professional Services Exclusion must be properly tailored to dovetail with your Errors and Omissions (E&O) coverage. For example, a broad Professional Services Exclusion - found in most Financial Institutions’ D&O policies - excludes claims arising out of the services provided to your customers, i.e. loans, investment advice, insurance, etc. For example, should a customer claim that you were negligent in servicing their account, a D&O policy would deny the claim. However, your E&O/Professional Liability coverage should pick up where the D&O coverage leaves off. When possible, keep the two policies with the same carrier and broker to avoid finger pointing and ensure coverage.
- Be mindful of the Insured vs. Insured Exclusion. This exclusion - in all traditional D&O policies - precludes cover for D&O claims between two insureds. For example, if a bank becomes insolvent, the FDIC may step in as the receiver and will then be considered an insured. Your D&O broker should be able to negotiate many “carvebacks” (exceptions) to this exclusion so that coverage can still respond in many circumstances.
- Throw away the Regulatory Exclusion. A point of discussion during financial crises, a Regulatory Exclusion can still be found in some policies. It won’t cover directors and officers in the event the FDIC sues the bank’s C-suite for mismanagement causing the bank to be insolvent. While these exclusions may exist in some unique risk situations, they can often be removed. Make sure your policy is up to date.
Partner with the right brokers and carriers
Both brokers and carriers that have more experience with financial institutions will best understand the nuances of industry-specific D&O coverage language and policy exclusions. Allow them to guide your financial institution in the right direction when it comes to procuring your directors and officers policy. Contact your HUB Financial Institution Specialist today.