A big thank you to everyone who answered the 10 questions posed in the Directors’ and Officers’ (D&O) insurance survey which we, McGill and Partners, ran jointly with NEDonBoard in February and March 2021.
The results from well over 150 responses offered a fascinating insight into the entirely understandable scope for confusion and uncertainty among directors around the workings of this class of insurance in the event of a claim. In particular:
- Just 17% of respondents understand what happens to their D&O cover when they leave the company;
- Less than 30% are aware of the impact of a company merger on their cover; and
- Only 21% understand that the D&O policy might not cover them for all their legal representation costs in the event of an insolvency
These findings support our theory that there tends to be a mystique surrounding D&O insurance which can often result in a disconnect between the product and its end users and which in turn has the potential to create a dangerous expectation gap. The reasons for this mystique include:
- D&O polices tend to be relatively complex. Some of this is historical and to do with the way in which this class of insurance developed. Originally it took the form of two separate policies – the first designed to cover individual directors (to the extent not indemnified by the company) and the second to reimburse the company to the extent it had indemnified its directors. These were then amalgamated into a single class of insurance with two insuring agreements which became known as Side A and Side B. This distinction still exists and creates the potential for uncertainty of outcome.
- No two D&O policies are the same or even directly comparable. The D&O insurance market comprises dozens of different carriers. Whilst the majority offer only excess insurance capacity and therefore tend not to produce their own wordings, there are nevertheless at least ten different base forms to choose from in the London Market. Insurance brokers and other advisers often negotiate enhanced versions of these wordings for the exclusive use of their clients. Many of these forms are further modified and tailored to individual risks. All of this adds to the complexity.
- The general approach of D&O insurers is to provide cover on an affirmative basis i.e. to identify specific categories of risk and set out the basis on which the relevant cover is provided. So, for example, separate extensions commonly exist for matters such as extradition, corporate manslaughter and pollution. Whether this tendency towards complexity always inures to the benefit of the policyholders is open to question.
Our mission is to demystify D&O and reconnect it to its end users. In essence the product is not dissimilar from a professional indemnity cover. Both types of policy offer liability protection to individuals (along with associated legal costs) arising from acts, errors and omissions committed by them in an insured capacity. Both covers are annually renewable, and both respond to claims made against insured persons during the relevant policy period. Yet there is far less scope for misunderstanding as to the nature and workings of a professional indemnity policy.
This article is part of a series of 4 published over the course of 2021, aiming at informing non-executive directors and board members as to the nature and limitations of D&O insurance cover.
Written by Francis Kean, Partner Financial Lines at McGill and Partners.