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
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
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
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
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
& 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
Mark moved to Ottawa in 1993 to join an international
insurance brokerage where he became a Senior Vice President and
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.