Directors and Officers and Entities Oh My!! Chris Amrhein, AAI Amrhein and Associates, Inc.

Directors and Officers and Entities Oh My!! Chris Amrhein, AAI Amrhein and Associates, Inc. Lorton, VA chris@insuranceisfun.com

Why D&O • Meant to encourage directors and officers to serve • Provide insurance backup to corporate indemnification agreements • Broaden coverage for D&O beyond corporate indemnification

Typical policy provisions • No standard forms • Claims-made triggers • Two separate coverages • Direct liability protection for individuals for claims other than indemnified by corporation (aka “Insuring Clause 1” or “Side A”) • To reimburse corporation for payments obligated to directors/officers under indemnification agreements (“Insuring Clause 2” or “Side B”) • No direct protection for suits against corporation; may be included for securities claims (“insuring Clause 3” or “Side C”)

Typical policy provisions • Limits subject to aggregates; include defense • Retentions/deductibles • Aggregate per cause • Per director and officer involved in claim, subject to aggregate per cause • May include both flat amount, plus a retention percentage per loss

Typical policy provisions • Key Definitions • “Wrongful acts”: “Any actual or alleged error, misstatement, misleading statement, act or omission, or neglect or breach of duty by the directors or officers in the discharge of their duties solely by reason of their being directors or officers of the organization shown in the declarations.” • Covered persons (includes past, present or future) • Loss, damages “a monetary judgement, award or settlement” • Subsidiary (percent of ownership and/or control may be key)

Typical policy provisions • Exclusions (may be modified/removed by carrier options) • BI, PD, PI • “Cross liability”: • by one director/officer against another • by corporation against director/officer • Criminal, dishonest or fraudulent acts • Failure to maintain insurance • Pollution • ERISA • Acts committed prior to coverage period • Acts involving personal profit or advantage to director/officer

Common Agent Misunderstanding • That type of Entity matters • Profit vs. nonprofit • Large vs. small companies • Public vs. private

Common Prospect Misunderstanding • That type and size of Entity matters • A 2010 Chubb survey of 700 small and midsize company executives found: • 75% had not purchased D&O • Many of those thought D&O was provided by their commercial umbrella • 12% had experienced a D&O suit • Average cost of suits was $225,000, with losses of $1 million and $5 million cited

Sources of Claims • Stockholders • Customers • Competitors • Governmental entities • Creditors

Common Gaps and Oversights • Defense • “Indemnify” or “pay on behalf” • Defense within or outside policy limits • “Reasonable and necessary” • “Hammer”clause

Gaps and Oversights II • Policy aggregate may be insufficient when Sides A, B and C are all covered • Large verdict and/or defense costs including entity in effect decreases available limits for Side A • Common solutions: raise limits or purchase standalone Side A coverage

Gaps and Oversights III • Differentiation between “inside” (employed) and “outside” (independent) directors • First accused = first defended = first to tap limits • Solution: “Layer” of three policies: • D&O including Sides A-B-C • D&O, Side A only • “IDL”: Independent Director Liability Policy

Gaps and Oversights IV • Covered Persons: “directors” and “officers” may not include all parties who may be included in suit • “Non-officer” company officials • Employees • Volunteers

Gaps and Oversights V • “Loss” may include money damages only; non-monetary? • “Other insurance” may not properly coordinate with multiple layers • Exclusions may not property coordinate with other coverages

Key Underwriting Considerations • Organization • History • Finances • Type of industry • Competitive position • Public image • Claims experience • Current circumstances that may give rise to claims

Key Underwriting Considerations • Individuals • Length of service • Outside affiliations • Past claims or pending circumstances

Directors and Officers and Entities Oh My!! Chris Amrhein, AAI Amrhein and Associates, Inc.