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You were elected to the board of directors? Gee, that’s … um … p3

Fri Nov 14th, 2014 on     Insurance Claims,    

When we left off, we were talking about the different way defense costs are handled under commercial general liability insurance policies and directors and officers insurance policies. Remember, CGL covers personal injury and property damage; D&O covers financial harm resulting from officers’ and directors’ management mistakes.

So, say both the CGL policy and the D&O policy limits are $100,000. The company files a claim against each policy. For each claim, the insurance company spends $25,000 defending the claim, only to have the court decide for the plaintiff, giving him a $100,000 award. For the CGL case, the policy will cover the entire award; the defense costs do not touch the indemnity limit.

For the D&O claim, though, both the award and the defense costs are charged against the indemnity limit. The insurer will cover just $100,000, and the insured company will have to pay the remaining $25,000 out of its own pocket or from another insurance policy.

We also mentioned last time that D&O insurers have the same duty to defend their policyholders, for the most part. The “lesser part” here is for-profit companies. It is possible for an insurance policy to release the insurer from its duty to defend a for-profit company’s directors and officers. In those cases, the insured controls the defense (and the cost of the defense), though the insurance company may reserve the right to approve the defense counsel.

There are other differences, but we will save those for another post. What we want readers to take away is a basic understanding of D&O insurance and a couple of pitfalls that companies, especially small businesses and unsophisticated nonprofits, may overlook when buying the coverage.

If you have questions about your company’s or your own liability, or if you are having trouble getting an insurance company to pay a claim, you may want to consult with an insurance law attorney.

Source: IRMI, “Glossary of Insurance and Risk Management Terms: Directors and officers liability insurance,” accessed Nov. 6, 2014

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