Directors’ and Officers’ liability (“D&O”) insurance offers key protections to a company’s board members and management by serving as a financial backstop for their indemnification rights as well as their personal assets in the event directors or officers are the subject of claims or investigations based on their service to the company.  D&O insurance also adds value and financial protection directly to the company that purchases it, including by reimbursing the company when it indemnifies a director or officer, and insuring the company directly against its own liability for securities claims or (in the case of private companies) certain other claims.

Given the importance of D&O insurance to a company’s corporate governance and risk management, it is critical that companies carefully approach the procurement and renewal process for their D&O insurance.  Unlike many other types of insurance policies, D&O policies are neither standardized nor regulated, and the procurement and renewal process can be more complex to navigate.  Although, the individual facts and circumstances of each particular company will dictate the coverages that are needed, there are a number of key issues and policy provisions that should be at the forefront for every company engaged in the procurement or renewal process.  We address a few of these considerations here. 

Key definitional terms

Certain key definitions found in D&O policies impact whether and when coverage will be owed, including who is an insured and the types of matters that constitute a “Claim” for which coverage may be owed.

With respect to the term “Insured Person” (or similar terms), definitions vary widely as to who qualifies for coverage.  Despite being called “directors and officers” insurance, D&O policies often insure individuals who are neither directors nor officers of the company.  To determine what policy language is necessary for a particular company, it is imperative to closely evaluate the proposed language and ensure that the definition captures the company’s decision-makers—whether that includes just directors and officers, or other employees or consultants beyond those individuals.

Further, the definition of “Claim” should be checked to ensure it uses broad wording to capture more than just civil lawsuits, including written demands for monetary or non-monetary relief and written demands for arbitration or mediation, as well as criminal proceedings, regulatory investigations, and extradition proceedings. 

Timely notice of a Claim in accordance with the terms of the policy is critical.  The company’s knowledge of when a “Claim” is first made typically triggers the company’s obligation to provide the insurer with timely notice.  It is, thus, ideal if a company can narrow the list of persons whose knowledge of a Claim triggers that notice obligation.  Companies should carefully review their notification obligations under their policies, and implement appropriate risk management processes to provide timely notice.

Exclusionary language

Careful review of a policy’s exclusions is also critical.  Like the key definitions, exclusions are not standardized.  The number and scope of exclusions varies among D&O policies, but most up-to-date policy forms contain certain core exclusions: the conduct (crime/fraud) exclusion; the insured v. insured exclusion (or its modern version, the entity v. insured exclusion); the bodily injury/property damage exclusion; the ERISA exclusion; and the pending or prior proceedings and prior notice exclusion(s).  The language used in these exclusions may have a significant impact on coverage, so it is imperative to carefully review and understand the scope of the exclusions and how they may be triggered.

Conduct exclusions typically bar coverage for (1) deliberate fraudulent or criminal acts committed by an insured, and (2) an insured gaining any personal profit, remuneration, or other financial advantage to which he/she/it was not legally entitled.  The most favorable wording of this exclusion includes an important trigger for the exclusion to apply: the excluded conduct must first be established by a final, non-appealable adjudication in an underlying action or proceeding (other than an action or proceeding to determine coverage under the policy).  This prevents the insurer from applying the exclusion to mere allegations or settlements without admissions, and also prevents the insurer from creating the required final adjudication in a separate proceeding brought by or against the insurer.  This wording also ensures that the Insured Person’s defense coverage is available all the way through the judicial process, including all appeals, until there is a final determination of wrongful conduct.

In addition, the exclusions should be fully severable, such that the facts pertaining to and knowledge possessed by one Insured Person will not be imputed to any other Insured Person, and only the facts pertaining to and knowledge possessed by a past, present, or future CEO or CFO will be imputed to the company (and any subsidiary that qualifies as an Organization).


D&O policies are complex contracts, and policy forms and endorsements may vary substantially from insurer to insurer and between different types of policyholder companies.  This post is intended to provide a high level overview of only a few of the many important considerations involved in the D&O procurement and renewal process.  If you have any questions about your company’s D&O coverage, or would like more information or assistance in negotiating and procuring adequate coverage, please contact one of the authors or a member of Reed Smith’s Insurance Recovery Group.

For more information on D&O insurance coverage, please see parts 1 and 2 of “D&O insurance basics”.