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Directors and Officers Liability insurance: The top 5 exclusions and why they matter

If you only have time to understand one part of your Directors and Officers (D&O) liability insurance policy, make it the exclusions section.

Exclusions are items and situations not covered by your insurance policy, and they can turn up to nasty surprises if you're not mindful.

Keep in mind that exclusions aren’t just confined to the "Exclusions" section of your policy — they’re actually in the definitions and endorsements section, but labeled differently.

Since exclusions change and evolve over time, and it's not possible to list them all here. But there are five major D&O exclusions you need to know about:

1. Policy overlap exclusions

Insurers assume that a D&O policy is one piece of your company's overall insurance coverage. Because of this, they base numerous exclusions on the idea that another policy already covers the loss in question.

Two examples are Contractual Liability and Professional Services exclusions. While the purpose of these exclusions is to avoid overlapping between the D&O and Professional Liability / E&O policy, it has been invoked to deny claims. D&O expert Kevin M. LaCroix urges carriers and brokers to push for a limited definition of these exclusions.

2. Insured vs. insured exclusions

To protect the insurer against collusion and corporate infighting, this exclusion precludes claims made by one insured officer against another. You may, however, see exceptions such as derivative claims, bankruptcy claims, employment practice claims, and even claims brought by former D&Os if they haven't operated in that capacity for a certain period of time.

Insured vs. insured claims often happen in bankruptcy and whistleblower situations (so long as the whistleblower is one of the insured people under the D&O policy). Whistleblower protection is one of the more common exceptions to this exclusion.

3. Prior knowledge claims exclusions

These exclusions are designed to help carriers preclude coverage for claims known prior to purchasing coverage. It's common for carriers to exclude coverage on issues previously reported under other policies, and also preclude coverage for claims that were previously known about by the company.

4. Misconduct exclusions

Most D&O policies include this exclusion, and often they preclude coverage for more than one type of conduct. The most common categories are losses related to criminal or deliberately fraudulent conduct and the insured receiving illegal profits, or remuneration to which the insured is not legally entitled.

The wording of these exclusions — specifically what triggers the exclusion — determines coverage. For example, many conduct exclusions include an adjudication provision to trigger the exclusion, meaning that a formal judgment of said conduct must occur. The best negotiated policies contain "final non-appealable adjudication" wording on this exclusion.

5. IPO road show exclusions

Private company D&O policies are typically much broader on the Side C (entity coverage) than ones written for public companies. Because of this, the insurer usually includes exclusions that apply specifically to the entity's coverage.

A common private company exclusion involves IPO, as private company D&O insurers avoid the risk of public trading. Make sure the wording ensures coverage for activities occurring before making a public offering. Claims usually spring up when a private company decides not to move forward with its public offering. The exclusion's wording must include this possibility.

The bottom line on D&O exclusions

Exclusions vary by policy and provider. When shopping for D&O policies, make sure you stack your exclusions side-by-side and work with your broker to define key exclusions in a narrow way.

Knowing your D&Os exclusions gives you more leverage to negotiate better policy terms so if/when a claim happens, you'll get the largest payout possible from the insurance company.

Want a complete walkthrough of D&O insurance, including a claims example? Check out our Ultimate Guide to D&O Insurance.

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