Glossary of D&O Industry Terminology
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Advancement of Defense Costs:
Requires the Insurer to advance defense costs for covered Claims after the
applicable retention has been satisfied.
Allocation:
The process by which an Insurer evaluates which portion of a loss is covered.
An Allocation of coverage is made between (1) the corporate entity and
the Directors and Officers, (2) covered and uncovered defendants in a
Claim, and (3) the covered and uncovered allegations of a Claim. An Allocation
process normally occurs both at the beginning of the claims process to
evaluate how much of the defense costs are advanced and again at the end
of the claims process to evaluate how much of a settlement or judgment
is covered.
Arbitration Provision:
This provision establishes an alternate dispute resolution process for situations
in which there is a dispute between the Insurer and the Insured. The outcome
of this process may be binding or non-binding. If the process is binding,
the parties must abide by the decision of the arbitrators, if not, the
parties have the option to take the dispute to trial.
Automatic Acquisition Coverage:
The policy automatically provides coverage for new subsidiaries provided
that the total asset size of the new subsidiary does not exceed a pre-agreed
percentage of the Insured's total asset size. A 60 to 90 day coverage
window is usually available for new subsidiaries which are larger than
this threshold. The new subsidiary must be noticed to the Insurer during
this window, and the Insurer must agree to provide coverage beyond the
window.
Captive Insurance Company Exclusion:
Excludes coverage for claims arising out of the Insured's ownership, operation
or maintenance of a Captive Insurance Company.
Change of Control Provision (Run-Off):
Upon the occurrence of certain transactions (such as the acquisition of
the Insured), the policy ceases providing ongoing acts coverage for the
remainder of the policy period. This automatic run off period normally
lasts until the natural expiration of the policy, but longer policy periods
can be negotiated.
Change of Control Reporting Requirement:
Requires the Insured to report changes in ownership of voting stock or voting
rights which exceed a pre-determined percentage.
Commissions or Payments/Disbursements Exclusion:
Excludes claims arising from political contributions as well as any payments,
gratuities or benefits provided to domestic or foreign government personnel,
or to customers of the Insured.
Concurrent Liability Allocation:
Provides a pre-determined Allocation percentage for Claims in which the
Directors and Officers and the Corporate Entity are held jointly liable.
This provision applies to both securities and non-securities claims.
Corporate (B and C Side) Retention:
States the monetary amount of costs and/or damages the Insured must bear
before coverage is provided under the policy. Applies to Claims against
the Corporate Entity itself as well as indemnifiable Claims against the
Directors and Officers of the Insured. May be split between securities
and non-securities Claims. A separate Corporate Retention applies to each
Claim or group of interrelated Claims. Also called a deductible.
Subsidiary Coverage:
Coverage should apply to companies in which the named Insured owns, directly
or through one or more Subsidiaries, more than 50% of the outstanding
securities.
Cross Claims Coverage:
Typically included as an exemption from the Insured versus Insured exclusion.
This provision provides coverage for cross claims brought by an insured
against another insured for contribution or indemnity as a result of an
underlying Claim which would be covered if brought directly against such
insured.
Demands included within the Definition of Claim:
Broadens the definition to include Demands. Depending on the Insurer, the
extension may be restricted only to Written Demands for monetary value.
Derivative Suit:
A shareholders action brought on behalf of the corporation against the directors
and officers of the corporation for a breach of fiduciary duty.
Discovery Option:
Also referred to as Extended Reporting Period. Recognizes Claims which are
made and reported after the policy's expiration date but are based on
Wrongful Acts which took place on or before the policy's expiration. The
option may be unilateral (can only be exercised by the Insured if the
Insurer cancels or non-renews coverage) or bilateral (can be exercised
by the Insured regardless of who cancels or non renews coverage). Normally
runs for a period of 12 months beyond the expiration date of the policy
and is activated when the Insured pays a pre-agreed additional premium.
Duty to Defend Clause:
States that the Insurer will appoint defense counsel and assume defense
of a covered Claim. This process is more common in R&O and Employment
Practices Policies Liability.
Employment Practices Liability Extension:
Extends coverage to Directors and Officers for Claims alleging employment
discrimination, sexual harassment, wrongful termination and other related
employment torts. Coverage may be extended to cover employees and, in
some instances, the corporate entity.
Entity Coverage:
Traditionally, Claims directly against the corporate entity were not insured
under a D&O policy. This resulted in the Insured and the Insurer conducting
an Allocation process to determine what portion of a Claim was to be covered
under the D&O Policy. Recent court decisions have resulted in Entity
coverage now being available. Depending on the Insured, Entity Coverage
may be available for all Claims, or Securities Claims only.
Entity Coverage (Securities Claims):
Extends coverage to the corporate entity for Claims alleging violations
of the securities laws. A specific definition of Securities Claim will
be included in the extension.
Entity Coverage (All Claims):
Extends coverage to the corporate entity for all covered Claims. This coverage
is normally only available for privately held companies. Please note,
exclusions will apply to this extension.
Equivalent Foreign Positions Extension:
Broadens the definition of Insured Persons to include individuals in foreign
countries who hold equivalent positions to that of Directors and Officers
of domestically domiciled companies.
Failure to Maintain Insurance Exclusion:
Excludes claims arising out of the Insured's failure to effect and maintain
adequate insurance coverages to protect corporate assets.
Financial Reporting Requirement:
Requires the Insured to provide financial data (10Qs, 10Ks, etc.) as they
become available to the Insurer.
Fraud Exclusion:
Excludes Claims arising from fraudulent or dishonest acts of the Insured
Persons.
Greenmail Exclusion:
Excludes claims arising from the Insured's purchase of its own shares at
a premium over their then current market value when such offer is not
extended to all shareholders of the Insured.
Hostile Takeover Exclusion:
Excludes coverage for claims arising out of an actual or attempted hostile
takeover of the Insured.
Hostile Takeover Exclusion (Limited):
Amends the Hostile Takeover Exclusion such that the Exclusion will not apply
when outside legal counsel affirms that the board's actions are a fair
exercise of the Business Judgment Rule and an outside financial advisor
states the offering price is inadequate, prior to the board declining
the offer.
Inadequate Consideration Exclusion:
Precludes coverage for Claims arising from the Insured's payment of an inadequate
price for the purchase of its own securities.
Individual Insuring Agreement:
States how the policy responds to Claims brought against the Insured Persons
when they are not indemnified by the Insured Organization.
Individual Retention (A-Side):
States the monetary amount of costs and/or damages the Insured must bear
before coverage is provided under the policy.
Insured vs. Insured Exclusion:
Excludes coverage for Claims brought against the insureds by or on behalf
of other insureds. Carve backs from this exclusion are routinely obtained
for Derivative Suits, Cross Claims, and Employment Practices Claims.
Initial Public Offering (IPO) Exclusion:
As opposed to a Securities Exclusion, this restriction only excludes claims
arising from an Initial Public Offering of Securities.
Major Shareholder Exclusion:
Excludes claims brought by shareholders who own greater than a certain percentage
of the stock of the Insured.
Management Buyout Exclusion:
Excludes claims arising from the sale of the Parent Corporation or any Subsidiary
(assets or stock) to any director, officer or employee of the Company
Medical Malpractice Exclusion:
Excludes, among other things, claims arising out of errors or omissions
committed in the provision of medical services.
Notice of Cancellation:
States the number of days of notice which the Insurer must give to the Insured
when the Insurer wishes to cancel the policy.
Notice of Circumstance:
Notice of circumstance arise when an Insured is cognizant of any fact, circumstance
or situation which they have reason to suppose might afford valid grounds
for a claim. Reported circumstances that later give rise to a claim will
be considered reported at the time notice of circumstance was given. Notice
requirements vary from policy to policy.
Notice of Claim:
States the period of time and the manner in which an Insured must provide
notice to the Insurer that a Claim has been made.
Notice of Public Offering Provision:
Requires that the Insured provide the Insurer with notice of a public offering
of securities in order for claims arising from the offering to be covered
under the policy.
Outside Directorship Coverage:
Provides coverage for claims brought against the Insured's directors and
officers while serving as a director or officer of an outside entity (any
non-profit organization or scheduled for-profit organization) when the
Insured has requested that they serve in such capacity. The coverage applies
on either a triple or double excess basis. Triple excess means that the
Insurer's policy applies excess of the outside entity's indemnification
provisions, the outside entity's applicable insurance, and the Insured's
indemnification provisions. Double excess means that the Insurer's
policy applies excess of any applicable insurance or indemnification available
to the director or officer from the outside entity.
Panel Counsel Endorsement:
Requires use of a pre-approved list of defense counsel for certain Claims.
Patent Exclusion:
Excludes coverage for Claims arising from a suit filed against the Company
and/or its directors and officers for patent infringement/intellectual
property violations.
Pay on Behalf of Language:
As opposed to Reimbursement Language, this element of the Insuring Agreement(s)
states that the Insurer will directly pay covered costs, judgments and
settlements on behalf of the Insureds unless contradicted elsewhere in
the policy.
Pending & Prior Litigation Exclusion:
Excludes claims arising from litigation prior to or pending as of a specific
date.
Pre-agreed Allocation for Securities Claims:
Establishes a pre-agreed Allocation percentage between the Directors and
Officers and the Corporate Entity for defined Securities Claims. (i.e.
the Insurer agrees to pay a predetermined percentage of a defined Securities
Claim-usually from 65 to 100%) (Also see: Allocation, Concurrent Liability
Allocation, Entity Coverage (Securities Claims) )
Prior Acts Exclusion:
The Prior Acts Exclusion excludes Claims arising from Wrongful Acts occurring
before the Retroactive Date.
Professional Services (Errors and Omissions) Exclusion:
Excludes claims arising from the rendering of professional services for
others for a fee.
Proprietary Rights Exclusions:
Excludes claims arising from disputes over licensing rights.
Punitive Damages Coverage:
Provides coverage for punitive damages where insurable by law. (i.e. coverage
will not apply if such coverage is against public policy in the jurisdiction
of the Claim)
Reimbursement Language:
As opposed to Pay on Behalf of Language, this element of the Insuring Agreement(s)
states that the Insured is responsible for paying their loss and the Insurer
will then reimburse them for covered costs, judgments and settlements.
Related Party Transaction Exclusion:
Excludes coverage for claims arising from transactions with a specified
named party.
Retention Enhancement provision / Waiver of Retention:
Amends the retention for Securities Claims only to apply to defense costs.
Also states that if the Securities Claim is settled or adjudicated with
no liability to any of the insureds, no retention will apply.
Retroactive Date:
Also called the Retro Date. Claims arising out of Wrongful Acts committed
prior to this date are not covered under the policy.
RICO Exclusion:
Excludes claims arising from a violation of the Federal Racketeer Influence
and Corrupt Organization Act.
Securities Exclusion:
As opposed to an Initial Public Offering Exclusion, this restriction excludes
coverage arising out of violations of any securities law, including, but
not limited to: Blue Sky laws and common law.
Settlement Cap Provision ("Hammer Clause"):
Should the Insurer recommend a settlement and the Insured does not consent,
this provision limits the Insurer's liability to the amount which the
Insurer feels the litigation could have been settled plus any defense
costs incurred as of the date the Insurer recommended the settlement.
Severability of the Application / Warranties (Full Severability):
States that knowledge of a misrepresentation in the application possessed
by an Insured shall not be imputed to other Insureds for the purposes
of determining if coverage is available under the policy.
Severability of the Application / Warranties (Partial Severability):
States that only material misrepresentations made by the Insured(s) who
signed the application will be imputed to other Insureds for the purposes
of determining if coverage is available under the policy. If the signer(s)
of the application make a material misrepresentation, coverage may be
voided for all Insureds.
Severability of the Exclusions:
Provides that the Wrongful Act of any Director or Officer shall not be imputed
to another Director or Officer in the determination of the applicability
of a given exclusion. May apply to all policy exclusions or only key exclusions.
Spousal Extension (Marital Estates Extension):
Extends coverage under the policy to the spouses of Insured Persons for
liability which they incur solely as a result of their status as spouses.
Does not cover the spouses for liability which they may incur as a result
of their own actions.
Warranties:
Warranties are legal representations that the Insured is not aware of any
facts or circumstances that would give rise to a claim under a proposed
policy. Warranties are generally signed once with a given carrier when
the Insured first purchases coverage from that carrier. The older a warranty
is, the less likely the carrier could invoke it to deny coverage. Warranties
are usually necessary when limits of liability are increased.