Disclaimer: Presented here is a brief overview of some of the different types of Directors & Officers Commercial Insurance policies.  It includes a simple discussion on the subject and does not constitute insurance advice. This is not intended to be a description of coverage, and does not include all details of the coverage nor the terms, conditions, qualifications, limitations and exclusions applicable. Policies should be reviewed in their entirety and related to your specific operations. Many insurers permit changes (Changes to insurance policies are usually called "endorsements" or "riders") in their limitations or exclusions to match your specific requirements.  As insurance advice must be tailored to the specific circumstances of each situation, nothing provided herein should be used as a substitute for the advice of a competent insurance broker.  IN NO EVENT WILL RHODES & WILLIAMS LIMITED BE LIABLE FOR ANY DAMAGES WHATSOEVER, INCLUDING SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES, ARISING OUT OF OR IN CONNECTION WITH THE USE OR PERFORMANCE OF THE INFORMATION PRESENTED IN THIS DOCUMENT.

Directors and Officers Insurance - Which Policy Is Right for Your Business

There are many articles on Directors and Officers Liability dealing with why you need coverage, or what types of exposures are covered by a policy.

As the CFO of your organization, you understand that an effective method of protecting your companies balance sheet from large, unanticipated liabilities (relating to actions taken by your Directors and Officers) is by transferring that risk to an insurance company via a Directors and Officers Liability Policy (D&O).  For that reason, this article will focus on the "second phase" of the risk management process -  Deciding what type of D&O policy works best for your organization?

Policies can be written on one of two forms:
a)    A Duty to Defend Form or
b)    A Reimbursement Form

A question for the CFO  to ask his board is, "Do we want to manage our own defence if an action is taken against us,  or do we want the insurance company to control the defence?" The answer will give your broker the information needed to seek the appropriate type of policy, but that answer is not as simple as one might think.  Here are some things for you and the board to think about.

a) Duty to Defend Form - In this type of policy, the insurer shall have the right and duty to select defence counsel and defend any claim covered by the policy.   The insured shall co-operate with the insurer, assist in making settlements, and in defence of claims.

If the insurers duty to defend shall cease with respect to a claim, the insurer shall notify the insured so they can arrange to take control of the defence.  The insured agrees to repay the reasonable expenses incurred by the insurer in taking any such steps during the transfer.  


b) Reimbursement Form - Many believe that if they choose this policy form, they and their corporation will have free reign to defend any claims or actions against them, and will be reimbursed for the cost subject to retention and the policy limit. This may not be entirely accurate.

The Insurer has no right or duty to defend. The insurer shall have the right and be given the opportunity to effectively associate and shall be consulted in advance by the insured regarding selection of appropriate defence council, defence strategies including decisions regarding the filing and content of substantive motions, and settlement negotiations.

In a perfect world, a reimbursement policy would do just that…. reimburse an insured up to the policy limit for the defence and settlement of claims. However, it is important to understand the duties of each party in these circumstances and to be aware of how it may play-out when an action is taken against your organization.

So which policy is best for you ?

Do you have in- house legal counsel?  In-house legal councils often have their own preferred firms that they like to deal with depending on the type of claim (i.e. employment practices claim, securities claim, D&O wrongful act suit).  A Reimbursement form may be your best option in this situation.

What amount of defence costs can the corporation sustain before reimbursement from an insurer is required? For example if the corporation can absorb the $25,000 to $50,000 retention, and has an available $250,000 to $500,000 cash available to pay legal and other defence costs, then a reimbursement form may be the  right one (note of caution: if you choose this form be prepared to defend your choice of legal counsel and more importantly their hourly rates. Insurance companies have their own acceptable hourly rates that they will be prepared to reimburse).

If you want to avoid a short term hit to the balance sheet, and do not have in-house legal counsel, or a desire to defend actions, then a Duty to Defend form may be preferable.

D&O policies are a valuable method of reducing the financial impact on your companies balance sheet in the wake of a claim or allegation against a Director, Officer or even the company itself.  However, clients must also be fully aware of the complexities of the policy they have purchased, otherwise a CFO could have some uncomfortable discussions with their board.

These are decisions that are not made alone - talk to your trusted commercial insurance broker, to analyze your specific situation.

Rhodes & Williams Insurance Brokers is one of the largest independent insurance brokerage firms in Eastern Ontario. With offices in both Ottawa and Toronto, our insurance brokers have provided superior customer service and the right insurance coverage solutions since 1935.  We specialize in custom-designed commercial insurance for a wide variety of industries including High-Tech Insurance (TECHCOVER®), Construction, Retirement and Senior-Living, Not-for-Profit, Packaged Insurance Policy Solutions, and Specialty Solutions.


Mark began his insurance career in Toronto after completing his Bachelors of Economics at Laurentian University in Sudbury.
Mark moved to Ottawa in 1993 to join  an international insurance brokerage where he became a Senior Vice President and Sales Manager.
Mark joined Rhodes & Williams Ltd in 2008 as a Senior Account Executive. He is the Commercial Sales Manager and is heavily involved in the Technology Practice Group.

Mark Pusiak
April2011