Michael Cremeans, Sr. Vice President, Britton-Gallagher & Associates, Inc.
Do you really know how a Directors and Officers insurance policy works? If you sit on the board of a technology company, or even invest in one, you may want to investigate the exact type of management liability protection that exists for the company, because the policy-often referred to as D&O-may not respond in the way you might expect.
All policies are not created equal
When considering a D&O policy, ask the following questions:
- Who defends you in a lawsuit? Are defense costs advanced to you?
- Who has access to coverage first?
- How do the limits work? Is the limit of liability an aggregate amount, or provided to each director or officer?
- How does your policy respond to alleged Patent Infringement?
- Does your policy include Employment Practices? Who is covered?
- Is there a "major shareholder" exclusion?
- Do you have a "Hammer Clause"? (Hammer Clause? You might say, "Give me a break, what difference does that make? D&O is D&O." Tell that to someone who gets a denial letter from his insurance carrier because he did not take the time to design an effective policy. "I don't have time to do that," you say?)
The big picture
Let's take a few more minutes to understand what D&O really is. The main components of D& O coverage are:
- Management Liability for the Directors and Officers ("funds" the indemnity agreement
- Employment Practices may be included (i.e., wrongful termination, discrimination etc.)
- Coverage for the entity itself is optional
- Some forms may offer an additional "portfolio" of coverages, including Fiduciary Liability and Crime.
What are the most common areas from which claims arise?
Employee claims, mergers and acquisitions, vendors, customers or competitors, regulators, stockholders or investors.
Claims from government and regulatory agencies can create sizeable defense costs-even if it is found that no wrongdoing has been committed. You have to be careful here, as sometimes these things don't give rise to the definition of claim.
What should you do to protect yourself?1. Many insurance carriers have "loss prevention handbooks."
2. Determine what can most hurt you, and have the policy designed around those exposures.
3. Review corporate bylaws so that they clearly outline the duties and responsibilities of your directors and officers to take advantage of the maximum available protection provided under indemnity statutes.
Why should Employment Practices Liability be considered?
The Family and Medical Leave Act, The Americans with Disabilities Act, amendments to Title VII of the Civil Rights Act of 1964 and other legislation have broadened potential employer liability exponentially.
In addition, the Equal Employment Opportunity Commission (EEOC) recently reported that employees filed 81,293 charges of discrimination nationwide in 2003. Discrimination complaints remain at the second highest level since 1996. The EEOC reported that most charges concerned race discrimination (35.1%) followed by sex discrimination (30.0%).
And how about one more? A recent Michigan case determined evidence of discrimination based on an employee's marital status!
How do I know what limits to buy?
The million-dollar question! On the public company side, the average securities class action suit is now more than $13 million. For privately-held companies, defense costs alone can run more than $500,000. Many factors impact the evaluation of a company when assessing what limits are "enough." Factors include:
- Are you a publicly- or privately-held company?
- What type of industry is your company in?
- Is this a start-up company, or is it a "seasoned" company that already provides a product or service?
- What is the company's current financial picture?
- Is the company in a "high growth" mode?
- Is any merger, acquisition or downsizing planned?
- Will there be activity in private placements or secondary offerings? (Watch out for those major shareholder exclusions!)
- Who comprises the Board of Directors? Is it an even mix of outside vs. inside board members?
- Who provides the major investment in the company-private individuals, venture capitalists?
How do I buy a D&O policy for my company?
The D&O policy for a start-up "LLC" will not be the same as that for a high-growth private company contemplating an initial public offer. There are many different policy forms to choose from and knowing how to differentiate between them to select the right one for you requires specialization. Check with an experienced broker, agent, attorney or professional consultant who has experience in putting together D&O and Employment Practices policies that fit your company's profile and needs.
Michael Cremeans is a Senior Vice President with Britton-Gallagher & Associates, Inc., a privately owned, independent insurance brokerage located in Cleveland, Ohio. The firm specializes in developing insurance and risk management solutions for medical device companies. Britton-Gallagher is the endorsed insurance broker for several technology associations throughout the Midwest.
Britton-Gallagher & Associates, Inc.
440 264 2703
michael_cremeans@britton-gallagher.com
The author wishes to acknowledge special thanks to Steve Zashin of Zashin & Rich Co., L.P.A. for his assistance in preparation of this article. Mr. Zashin is an OSBA Certified Specialist in Labor and Employment Law and has extensive experience representing employers before state and federal administrative agencies. For more information about the EEOC, state civil rights agencies and the National Labor Relations Board, please contact Mr. Zashin at 216 696 4441 or ssz@zrlaw.com.
Copyright 2005 Michael Cremeans, Britton-Gallagher & Associates, Inc. All rights reserved.