CHAPTER 35
Commercial and D&O Insurance for Large Corporations: Best Practices in Protecting the Assets and Liabilities of Directors and Officers and Their Organizations

 

STEPHEN J. MALLORY, ICD.D, FCIP, CRM, BA

Risk and Insurance Industry Executive, Experienced Board Member, Instructor of Risk Management

 

INTRODUCTION

This chapter addresses the process of overseeing adequate insurance protection for a large organization and for its directors and officers. It is written primarily for directors and executives of sizeable organizations who spend in the hundreds of thousands and/or millions annually on insurance, although the principles are applicable to any sized organization. Management can use this chapter to ensure that proper processes are in place to protect the organization with adequate insurance. Boards can use this chapter as a benchmarking guide when certain insurance scenarios arise that require oversight, and is ideally suited for a risk committee's usage as they undertake oversight of all risk-related matters. For large organizations that are sophisticated insurance buyers, the quality of coverage (versus price as a driver) is a necessity. Also important for large organizations is the need to buy high limits of insurance to protect against catastrophic losses (like train accidents, product liability, or directors and officers liability) that could bankrupt the company and its directors. Mistakes made in not securing quality of coverage, or in not buying enough limits, can have a material impact on the organization and its leaders.

Recognizing that detailed knowledge of insurance falls outside of the scope or expertise of most directors, yet like the requirement that directors have a basic level of competence in financial literacy, each section of this chapter provides directors with two tools to assist in understanding the insurance process: a checklist for management to use as a base, reporting back on notable differences; and questions to be asked by the board (see Appendix 35.D: Director's Questions, 20 in total).

The 2013 train accident in Lac Megantic, Quebec, Canada, resulted in 47 deaths and much property damage, and was an infamous example of a board ignoring oversight of many aspects of risk management, including one key element—the adequacy of the commercial insurance carried. Public sources1 reveal that Montreal, Maine and Atlantic Railway (MM&A), which hauled tanker cars in Eastern Canada and in the United States, carried $25 million in commercial insurance, and yet the total costs for this incident will likely exceed $460 million. Hence, the organization failed not only to protect itself and its directors, but it also failed to protect other stakeholders, including the public communities who lived near the tracks that carried MM&A's cargo—dangerous and explosive bitumen oil. Simple benchmarking would have revealed that peer oil-tanker railways were carrying much higher amounts of insurance.

Stakeholders such as boards, shareholders, the public, customers, suppliers, regulators, and rating agencies expect corporate decision makers to be financially accountable for their actions. However, oversight of the adequacy of commercial and directors and officers (D&O) insurance—key financial instruments used to protect organizations and their stakeholders—has not typically been elevated to the board level. Moreover, within management, the administration of corporate insurance coverage has typically not been a priority at senior management levels. However, recent high-profile natural disasters, weather changes, and emerging risks such as cyber threats, corporate fraud, and terrorism, have resulted in catastrophic losses, highlighting the need to more properly arrange and oversee insurance protection. As losses have mounted, D&O insurers have become concerned with the lack of oversight of corporate insurance and the potential liability to directors, leading to a “failure to maintain insurance” exclusion that appears on many D&O policies. It is a big responsibility to insure the assets, liabilities, and directors of a large organization. Hence, delegating this role to junior people with no oversight of their actions is akin to allowing a bond trader to operate without monitoring, yet oversight of insurance is only now just becoming a board practice, typically part of the risk committee's mandate. Inadequate insurance can result in bankruptcy, a severe drain on financial resources, and/or directors and officers being held personally responsible for losses. There are many examples of the consequences of inadequate insurance, but a recent Ontario case, Northstar Aerospace, is resonating with directors. In 2013, the courts found certain directors and officers of the company to be personally responsible for Can$4.75 million for pollution from the bankrupt company, and environmental remediation costs were excluded from the directors' and officers' insurance policy.2

In short, a lack of adequate insurance protection for the corporation and its directors and officers is typically the result of two scenarios: (1) a deficient process for determining what needs to be insured and in what amounts and/or arranging such insurance; and (2) lack of oversight by the board. So, what process can board members and senior executives follow to ensure protection with adequate commercial insurance for themselves and for their organizations?

Exhibit 35.1 is a glossary of terms relating to commercial insurance that will be used throughout this chapter and/or in regular oversight of insurance coverages.

Exhibit 35.1 Glossary of Commonly Used Commercial Insurance Terms

Term Definition
Automobile Vehicles owned and/or operated by the insured, including non-owned automobiles.
Broker Services Agreement A document that specifies the services to be provided by the broker.
Business Interruption Loss of income due to an interruption of business by insured perils, at own premises, and can include loss from off-premises occurrences, such as damage to power service, and at suppliers’ or customer’s premises. This can include extra expenses to keep operating.
Credit Risk Loss of receivables from a customer.
Cyber Liability—Third Party Third-party property damage and/or financial loss and/or business interruption caused by a service or product of the insured.
Cyber Liability—First Party Property damage and/or financial loss and/or business interruption of the insured caused by a cyber breach.
Directors and Officers (D&O) Protection that typically covers for indemnified and non-indemnified wrongful acts of directors and officers and their organizations.
Employee Dishonesty Theft by employees.
Employers’ Liability Liability to the insured that is not covered by Workers’ Compensation.
Employment Practices (EPL) Liability of director or officer or entity for wrongful employment practices.
Enterprise Risk Management (ERM) The process for identification, assessment, controlling, monitoring, and reporting of risks.
Entity Liability Entity liability for wrongful acts, typically insured with D&O insurance.
Equipment Breakdown Breakdown of machinery and equipment, and business interruption therefrom, such as production machines, HVAC, electrical, and mechanical.
Errors and Omissions Third-party liability for financial loss caused by failure of a service or product of the insured.
Fiduciary Liability Liability of directors or officers or entity for wrongful acts in the management of benefits.
General Liability Third-party bodily injury and/or property damage caused by a service or product.
Hammer Clause A D&O policy provision that forces the insured to accept an offer by the insurer to settle, even if such offer is inadequate.
Insured (The) The organization or person covered by insurance.
Lead Risk Director A board member or risk committee chair with experience in protecting an organization via enterprise risk management and insurance.
Management Liability Liability for wrongful acts while acting in their capacity as a director or officer of the insured.
Marketing A term used in the commercial insurance industry to denote the process of shopping with various insurers to find the best alternative.
Off-Balance-Sheet Risk Financing Insurance to remove possible liabilities from the balance sheet, typically to facilitate an M&A transaction.
Legal Costs D&O policies cover legal costs as well as other amounts to be paid by directors or officers for wrongful acts.
Plaintiff Legal Firms A plaintiff's attorney is a lawyer who represents individuals who have been harmed physically or financially.
Political Risk Expropriation and other risks caused by sovereign entities.
Pollution—First Party Pollution damage to property of the insured, and/or interruption of business of the insured.
Pollution—Third Party Third-party, pollution-related bodily injury and/or property damage and/or financial loss and/or business interruption caused by a service or product of the insured.
Product Recall Expenses to company and/or its customer from product recall.
Property Loss Buildings, equipment, stock, all other assets that are owned or leased, or are the responsibility of the insured, as a result of perils such as fire, windstorm, earthquake, flood, terrorism, and others as may or may not be provided.
Reps and Warranties Insurance Covering the obligations such as holdbacks, environmental, legal, or other risks of buyer or seller in an M&A transaction.
Side A, Side B, and Side C Sides A, B, and C are insuring agreements/sections in a D&O policy that spell out the insurer's obligations. Side A covers claims for which there is no indemnity available or allowed from the company; Side B is to reimburse a corporation for indemnity it has provided to a director or officer; Side C is coverage for suits naming the corporation (sometimes only if an insured person is also named in the suit).
Summary of Insurance A document for review that summarizes the key elements of insurance coverage, such as limits, deductibles, and key exclusions.
Tax Opinion Insurance Insuring an adverse tax outcome.
Workers' Compensation (WC) Coverage for injuries to employees while working (offered by insurers in the United States, and by governments in Canada).
Wrongful Acts A term used in a D&O policy to denote an action by a director or officer that has given rise to a claim.

THE KEY ORGANIZATIONAL RISKS (INSURED AND NOT INSURED)

Before determining the adequacy of insurance, an organization is first advised to identify its key business risks, as mandated in virtually all board charters. This can be done via a structured enterprise risk management (ERM) process as outlined throughout this book. Key is that the organization knows which risks most impact its strategic objectives, and that a plan be in place to treat such key risks. This requires aligning the risks to the objectives, such as in the example in Exhibit 35.2.

In Exhibit 35.2, Smith Corp. has identified five key organizational objectives, and adjacent to each has aligned and ordered the key risks that could impact the achievement of such goals. Further, Smith Corp. has highlighted in italics and with an * the key risks that are insured; and in italics, bold, and with ** those risks that are insurable but which are not insured. For those material risks not currently insured, but which are insurable, management should determine whether such risks should be insured and at what cost, presenting such findings and recommendations, if material, to the board. This exercise is particularly important relating to new and emerging risks as might be revealed through the annual ERM exercise, as new risks are often not covered by existing insurance programs, for instance, cyber risks that require specialized insurance. Self-insurance on sizeable risks is usually a material matter and should be approved at the board level. For example, management of an airline company may choose to self-insure terrorism to save money, but this decision may have a material and adverse impact on the financial results.

Schematic illustration of Aligning Insurable and Noninsurable Risks with Organizational Objectives.

Exhibit 35.2 Aligning Insurable and Noninsurable Risks with Organizational Objectives

Source: © Copyright Directors Global, 2021

DIRECTORS AND OFFICERS INSURANCE

Directors are not insurance experts, yet they expect others to arrange high-quality directors and officers insurance (D&O) for them. Few directors ever scrutinize the process undertaken to obtain such insurance, nor the final product, and unfortunately there are a number of inherent flaws in the typical D&O insurance procurement process. The worldwide D&O insurance marketplace offers literally hundreds of options, with no two insurers offering the same product, and hence coverage ranges from restrictive to broad. It requires real broker expertise to select the required options from the many choices, yet specialist brokers are often not used to arrange this complicated coverage. Further, rarely do such broker teams have any board experience nor do they fully understand the challenges or duties of directors. If management places a focus on expense control, it is possible that less expensive insurance has been selected at the expense of higher-quality coverage.

So, what is the process for oversight by directors and executives to ensure that quality D&O coverage has been placed and arranged by the most competent practitioners?

The processes and various steps for ensuring the quality of an organization's D&O insurance mirror the same fundamentals (including checklists and board questions) articulated elsewhere in the other sections and appendices of this chapter. Like with all insurance coverages, organizations need to first identify their risks before determining the insurance to be arranged. It is strongly advised that readers of this section on D&O insurance also read the remainder of this chapter and its appendices, to gain a thorough understanding of the insurance procurement process (which also applies to D&O insurance). This section focuses on: “General Considerations in Protecting Directors and Officers” (via insurance and other means); and “Overseeing D&O Policy Terms and Conditions.” A detailed checklist of some of the sections and components that should be in place in broad D&O policies is included as Appendix 35.A.

General Considerations in Protecting Directors and Officers

The following insurance and non-insurance related items should be reviewed when arranging to protect directors and officers.

  1. Three keys to protecting directors: Insurance, indemnities, and conduct. D&O insurance by itself does not adequately protect directors. Organizations of all types (private, public, nonprofit, government, NGO, etc.) and their directors and officers must protect themselves through a combination of: proper conduct; indemnification and indemnification agreements; and D&O insurance.
  2. Some emerging risks facing directors: COVID-19 and future pandemics; climate change risk; cyber risks; pollution; administrative monetary penalties; pension funds underwater; class actions; foreign corrupt practices legislation; recently introduced changes in government acts, laws, and statutes. Coverage under D&O insurance is restrictive and/or may be nonexistent for these exposure areas, and the availability of separate and more specific coverage should be investigated.
  3. Three areas of legal liability for directors and officers: Fiduciary liability—directors must act honestly and in good faith with a view to the best interests of the corporation; duty of care—directors must exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances; and statutory liabilities—directors must understand the various laws and statutes that govern the activities of the organization, such as: environmental legislation; corporate and securities legislation; obligations to government for taxes and source deductions; obligations to employees. Areas one and two are common law in Canada.
  4. Indemnification: Corporate by-laws generally mandate a corporation to indemnify a director or officer against all costs, charges, and expenses, provided: he/she acted honestly and in good faith; and there are reasonable grounds for believing his/her conduct was lawful. However, indemnification may not be provided if the organization is: bankrupt or unable to provide funds; unwilling to indemnify; and not allowed by law.
  5. Personal indemnification agreements: Increasingly used by directors and officers to supplement corporate indemnification. Directors within government organizations, like Crown or government run corporations, face the prospect that political changes may dictate the availability of indemnification. Likewise, board disagreements at public companies may make indemnification or advancement of defense costs difficult to obtain. Hence, obtaining indemnity agreements solidifies the corporation's commitment. Of importance is the advancement of defense costs that are often delayed in the absence of an indemnification agreement yet pose a threat to the finances of a director needing legal protection.
  6. Some typical claims examples:
    • Past, current, or prospective employees—for improper or excessive executive compensation; wrongful dismissal; discrimination; humiliation; sexual harassment; salary, wage, or compensation disputes.
    • Competitors, suppliers, and other contractors—anti-trust, copyright, patent infringement, contract disputes.
    • Government and regulatory agencies—environmental, safety, regulatory breach, statutory.
    • Shareholders and other investors—inadequate disclosures, challenge to takeover, merger and acquisition/financial performance.
    • Other—dishonesty, fraud, loss or bankruptcy, general negligence, or breach of fiduciary duty.

Overseeing D&O Policy Terms and Conditions

The following coverage sections are standard and should be included within D&O policies.

  • Side A: D&O liability—direct coverage for individuals where no indemnification is available from the corporation, example-bankruptcy.
  • Side B: Corporate indemnity coverage—reimburses or pays on behalf of the organization the amounts paid to indemnify directors and officers.
  • Side C: Entity coverage—for actions to protect the entity, with or without directors and officers named in the action.
  • Employment practices liability—for claims arising out of employment-related issues such as wrongful dismissal, discrimination, humiliation, and sexual harassment, and can be extended to cover claims against the organization.
  • Fiduciary liability—mismanagement of pension and employee benefit plans.
  • Some other extensions available with some limited coverage: cyber liability; pollution liability; spousal liability; outside directors liability; other.

Finally, in Appendix 35.A is a detailed coverage checklist that addresses many of the key extensions in a broad D&O policy that are available from the D&O marketplace at the time of writing of this chapter; however, it is not an exhaustive list since niche coverages may be available outside of the list. As noted, there are hundreds of variations of D&O insurance and no two policies are the same, so it is unlikely that all listed coverage extensions can be obtained from the same insurer. However, management will find it valuable in using this checklist, to report back to directors on what is not insured and what the cost would be to secure such additional coverage. This model may be used to compare the “Ideal Scenario” per the second column, with the existing coverage in the third, compared to competitive offerings in the next columns.

SUMMARIZING INSURANCE DETAILS AND CLAIMS FOR BOARD OVERSIGHT PURPOSES

While it is not a board's responsibility to have expertise in insurance coverages, it is important to have a general knowledge of what management has chosen to insure. A good overview can be provided by management via a summary of an insurance document that lists the insurance coverages carried, such as limits, deductibles, and key exclusions, and this should be reviewed annually. A member of the board, ideally a lead risk director or a member of the risk committee who has experience with protecting an organization via insurance, should undertake this review so as to oversee management's activities in this area.

A second key area to be summarized for the board is the level of claims activity of the organization, and that of other organizations similar to it. A listing of material insurance claims should be summarized periodically for the board.

ROLES AND RESPONSIBILITIES

It is increasingly common for buyers of insurance to contract with their broker or outside insurance provider to ensure the provision of agreed services and to ensure accountability. It is less common for the buyer to formally hold itself accountable for responsibilities it must undertake in managing the insurance, yet this is important. The key is that a process of oversight and management exists to ensure that the roles and responsibilities of both parties are being followed. If one link in the chain is weak, such as late reporting of a claim by the insurance buyer, material losses may occur.

Management Responsibilities

The starting point is to establish that a responsible, experienced, and senior officer is responsible for and understands the process. This person is sometimes the chief risk officer (CRO), or more often the CFO, or a senior finance individual who reports regularly on key matters to the CEO or a member of the C-suite. In turn, there should be reporting to the board on material decisions made by management on insurance that could impact the organization in a positive or adverse manner. For example, a decision by management to “self-insure” a risk (like pollution or cyber risks) to save money may provide short-term positive results to the bottom line (and to management bonuses), but may expose the organization to adverse risks, which might impact whether long-term strategic objectives can be met. Exhibit 35.3 is a checklist of management responsibilities in managing the insurance portfolio.

Broker/Outside Provider Responsibilities

Of equal importance to the responsibilities of management are those to be carried out by insurance providers (referenced hereinafter as brokers). When an experienced CFO or CRO manages insurance, best-practice services of the broker may be well known. However, as is the case when very busy or less experienced internal people are managing the insurance portfolio, an overreliance on the brokers may exist. In such cases, relationships can become cozy with outside providers, and no check and balance exists to ensure that the buyer is availed of all coverages and services that are routinely available and should be carried. To address accountability, it is increasingly common that the broker agrees to a contract that specifies the services to be provided, noting that for large commercial insurance engagements, the broker should be providing many risk-management services (often as agreed from a menu of services) in addition to insurance services. These ancillary services may include taking on some of the responsibilities of the buyer.

Outlined in Appendix 35.B is a sample broker services contract specifying agreed services to be rendered to the buyer.

Exhibit 35.3 Management Responsibilities in Managing the Insurance Portfolio

Risk Identification, Assessment, Selecting Insurance Coverages, and Reporting to Broker/Underwriter
  1. Survey all divisions and operations to understand their risk exposures.
  2. Identify the risks of any known exposure, through knowledge and assessment of risk exposures.
  3. Identify emerging risks, assess impact, determine treatment.
  4. Complete applications, surveys, and information requests in timely manner.
  5. Choose limits and coverages that protect the organization against catastrophic loss, and non-catastrophic loss that might materially impact the financial results of the organization.
  6. Benchmark limits compared to peers, the industry, and based on possible loss scenarios.
  7. Be apprised of general or industry specific losses that might be reasonably expected to occur, and that highlight the need for insurance.
Incident Response, Claims Management, Claims Reporting
  1. Report any situation immediately that has or might give rise to a claim. Educate key staff on claims reporting.
  2. Report claims either to broker or, if after hours, directly to insurer, or to adjuster if after hours phone numbers are provided.
  3. Immediately take all reasonable steps to protect persons/property from further loss.
Documents, Policies, and Endorsements—Review, Understand, Organize, and Safeguard
  1. Review documents delivered or posted online by broker, including binders, summaries of insurance, certificates, and policy documents.
  2. Notify broker of anything in documents that is not in accordance with directions or specifications.
  3. Understand the terms, conditions, and key exclusions of each insurance contract, and the need for each.
  4. Keep liability policies and sensitive insurance documents in perpetual safe storage in case such documents are needed for legal reasons in the future.
  5. Organize insurance documents so they are easily retrieved in case they are needed.
Communications
  1. Report regularly to CEO, Executive Team, and Board on any material, risk-related situation that requires monitoring or that requires oversight. Distribute Summaries of Insurance and updates on material claims.
  2. Explain key policy terms, conditions, and exclusions, along with key responsibilities, to other internal and external stakeholders and divisions, via presentations, seminars, and documentation. Employ the broker to assist as necessary.
  3. Reply in a timely manner to requests from brokers and underwriters.
  4. Report to the board on material matters, including decisions not to purchase insurance and on matters whereby the organization self-insures significant risks.
Risk Control and Loss Prevention
  1. Identify and recommend measures to control and mitigate situations that might give rise to a claim, or which might jeopardize persons, property, or company financials.
  2. Comply with insurer's recommendations, if any, on preventing losses.
Premium, Premium Allocation, and Amounts Payable
  1. Allocate premiums to each division fairly, ensuring consideration of factors such as losses of that division and differing exposures.
  2. Ensure that invoices are paid immediately upon receipt, or within the requirements advised by broker.
  3. Allocate insurance taxes, if any.
Stay Apprised of the Latest Insurance Products and Developments
  1. Stay updated on developments with new insurance products and ways to manage risk.

THE INSURANCE MARKETING PROCESS

As outlined above, it is the responsibility of management to periodically explore alternative insurance options. In the insurance industry, the term marketing denotes the process whereby multiple insurers are approached to shop for insurance, using coverage specifications like in a request for proposal, and the best option is selected. The objective of the marketing process is to recalibrate coverages so as to ensure that the right protection has been placed with the right insurer(s). To do this, it is necessary to develop an accurate, creative, and professional representation of the risks, aggressively persuading all suitable insurers to quote the best possible terms, ending up with an attractive arrangement for buyer and insurer. If not done properly, the board may be under the false impression that the organization has diligently explored all options, that is, that insurance coverages protecting the organization are state of the art. Why is marketing necessary? Organizational risk exposures change rapidly—through growth; new products and offerings; economic, demographic, technology, and weather conditions; and through mergers and acquisitions. For example, witness the sudden onslaught of cyber claims, requiring that old insurance programs be updated to cover this new risk. Another factor requiring that insurance be regularly marketed is that the worldwide commercial insurance marketplace is hyper-competitive, and an example of this phenomenon is the D&O insurance marketplace, wherein literally hundreds of insurers offer coverage, all with notably different terms and conditions—no two offerings are identical. A buyer of D&O insurance that has not marketed the coverages within the last few years has likely missed out on important new innovations developed and available, such as the relatively recent D&O insurance offering whereby one board member can now sue another (the “Insured versus Insured” exclusion is now typically removed in newer policies, subject to conditions).

Each marketing exercise should be strategically planned and should be carried out in accordance with the requirements of the specific organization.

Appendix 35.C is a checklist that outlines some fundamentals to a typical insurance marketing process and is best suited to buyers of large commercial insurance placements.

CONCLUSION

In this chapter and its appendices are important tools and checklists to assist directors and executives in their oversight of the maintenance of commercial and D&O insurance implemented by management. Contained in Appendix 35.D of this chapter are 20 questions that directors can ask relating to different facets of the insurance procurement process. As the business world becomes more complicated and fraught with new and emerging risks, commercial insurance plays an increasingly important role in protecting the assets and liabilities of business leaders and their corporations. A lack of adequate insurance protection is typically the result of a deficient process for scrutinizing what needs to be insured and in what amounts, and is often a result of a lack of oversight by the board and senior management. As risk committees and risk subcommittees become more commonplace on boards, and as enterprise risk management becomes entrenched as a process to identify and treat the key risks of the organization, so too must commercial and D&O insurance be considered a primary risk response/risk mitigation tool. Failure to oversee adequate insurance can have catastrophic consequences.

APPENDIX 35.A: CHECKLIST OF KEY D&O INSURANCE POLICY EXTENSIONS

The following extensions of coverage are available in the D&O insurance marketplace, but availability will depend on factors such as claims, size, geography, insurance jurisdiction, and industry. Additional extensions not shown here may be available. Use this checklist to audit the existing D&O program, and seek advice from a qualified D&O insurance specialist when comparing existing and prospective coverage with this checklist. First, determine coverage in the “Our Insurer” column, then determine if such coverage (or better coverage) is available from other insurers. Always use the policy language to interpret actual coverage, and do not rely on the following definitions alone, as each policy is different and coverage will apply in different ways with different insurers. Abbreviations should be explained by a D&O specialist.

Coverage Condition Ideal Scenario Our Insurer Other A Other B
  1. Acquisition Threshold: Automatic coverage to apply based on assets.
 No acquisition threshold, not limited to asset only deals
  1. Allocation of Defense of Costs: % for covered and uncovered claims.
 80% or even 100% for insured persons or insured loss.
  1. Best's rating/Security: To ensure the stability of the insurer.
 Best's A or better.
  1. Bill 45 Carve Out
 To cover defense expenses, criminal proceedings, amended by Bill C 45.
  1. Bodily Injury, Property Damage Exclusion
 Uses word “For” and omits words “Based upon, arising out of, attributable to,” with exception benefiting Directors, Officers, and Entity. Include defense costs coverage with respect to Occupational Health and Safety Act.
  1. Breach of Contract Exclusion
 Uses word “For” and omits words “Based upon, arising out of, attributable to,” with exception benefitting Directors, Officers, and Entity.
  1. Claim or Loss Definition to include coverage for:
 Fines and Penalties, see section below.

Civil proceedings.

Corruption—civil penalties assessed against an Insured Person pursuant to the Corruption of Foreign Public Officials Act of Canada or any equivalent federal, provincial, territorial, state, or other governmental law.

Extradition—an official request for Extradition of any insured person or the execution of a warrant for the arrest of an insured person where such execution is an element of Extradition.

Injunctive, administrative, regulatory investigations, inquiries, criminal, arbitration, mediation, or dispute resolution proceedings including Insolvency Claims.

Nonmonetary damages

Statutory, i.e., wages, taxes.
  1. Conduct Exclusion
 Applicable only at time of final non-appealable adjudication.
  1. Costs–Derivative Demands
 Included.
  1. Cyber
 Included coverage; more specific coverage should be purchased outside the D&O policy.
  1. Conformity to Statute
 The terms of this policy that are in conflict with the terms of any applicable laws construing this policy, including the Quebec Civil Code, are hereby amended to conform to such laws.
  1. Deductibles/Retentions
    • A—D&O's, non-indemnified
    • B—Corporate Indemnification
    • C—Entity Coverage
    • D—Employment Practices
    • F—Fiduciary
  • A—Nil
  • B—Variable
  • C—Variable
  • D—Variable
  • F—Variable
  1. Defense Cost Advancement
 Yes, at least until final non-appealable adjudication.
  1. Defense Costs in addition to the Limit
 Included (often available for Private Companies).
  1. Discovery Notice
 Title and name of individual in organization who is to receive notice.
  1. Discovery Provisions
  • 1 year—75% of full annual premium
  • 2 years—125%
  • 3—150%
  • 4—175%
  • 5—190%
  • 6—200%
  • Unlimited—220%
  1. Duty to defend (Insurer)
 Yes.
  1. E&O Exclusion
 Named operation, not all.
  1. Employment Practices Liability (Clause D)—Entity
 “Entity” EPL coverage can be included, usually for additional premium. D&Os usually are included for no additional premium.
  1. Entity Coverage (Clause C.) Suits not naming directors and officers.
 Included.
  1. Fiduciary Liability (Clause F)
 Included.
  1. Fines and Penalties—policy may insure some fines and penalties levied against an insured person, where insurable by law with “most favorable jurisdiction” language.
  1. Criminal Fines and Penalties—likely uninsurable.
  2. Quasi-criminal Fines and Penalties (e.g., regulatory offense, or corporate punishment)—likely uninsurable.
  3. Administrative Monetary Penalties (e.g., by a regulator intended to ensure compliance rather than punish)—likely insurable.
  1. Hammer Clause
 Hammer deleted.
  1. Insured versus Insured (I vs. I) Exclusion, limited to “Entity vs. Insured” (E vs. I), but allows:
 Amended—just excluded is “Entity” versus “Insured.”
Coverage Condition Ideal Scenario Our Insurer Other A Other B
E vs. I—a. Derivative actions. Included.
E vs. I—b. Employment practices including wrongful termination. Included.
E vs. I—c. Claims for indemnity. Included.
E vs. I—d. Trustee in bankruptcy claims. Included.
E vs. I—e. From past directors not served in 4 years. Included.
E vs. I—f. Defense costs. Included.
E vs. I—g. Whistleblower claims. Included.
I vs. I—h. Cross-claim or third-party claim for contribution or indemnity, which is part of, and results directly from, a claim that is covered by this policy. Included.
  1. Insured Persons: The D&O and ODL Insured Person definition amended to include:
    1. Appointed persons.
    2. All employees as co-defendants.
    3. Spousal liability.
    4. Estates' heirs, assigns.
    5. Nonprofit directors.
    6. Past directors.
    7. Future directors.
 Aim to include “de facto” persons, and to cover off-partnerships, joint ventures, trustees, board of managers, management committee members, advisory boards, in-house general counsel, risk managers, and those in similar positions in foreign jurisdictions.
  1. Intellectual Property Exclusion
 Uses word “For” and omits words “Based upon, arising out of, attributable to,” with exception benefiting Directors, Officers, and Entity.
  1. Inquiry Coverage
 To include Investigation Demands, Derivative Actions.
  1. IPOs and Securities claims
 Private Companies—IPO's coverage to be included.

Public Companies—Securities claims to be included on a Public company's D&O form.
  1. Lawyers (in-house) Professional Liability
 Included.
  1. Limits ($000')/Annual Premiums
    A—D&Os, non-indemnified
    B—Corporate Indemnification
    C—Entity Coverage
    D—Employment Practices (EPL)
    F—Fiduciary
 Separate aggregates for each section.
  • A—Variable
  • B—Variable
  • C—Variable
  • D—Variable
  • F—Variable
  1. LPs/GPs—Special Provisions
 To be covered and listed.
  1. Non-cancellation by Insurer: Endorsement (except for nonpayment).
 Insurer not allowed to cancel (except for nonpayment). Chairman, CEO, or CFO of the Parent Organization shall have the authority to terminate the policy or customize as required.
  1. Non-rescindable Coverage for Side A, Non-indemnified Loss, i.e., Insurer can rescind coverage.
 Insurer not permitted to rescind coverage for Side A.
  1. Notice (see Discovery Notice)
 As above.
  1. Notice of Non-renewal: Days
 Insurer to notify 60 days before renewal if no intent to renew.
  1. Order of Payments—Should the aggregate claim exceed the Limit of Liability, then at written request, policy payouts are prioritized.
 First Insuring Agreement A, then B, and C if covered. Customize who decides, i.e., Chairman, CEO, or CFO.
Coverage Condition Ideal Scenario Our Insurer Other A Other B
  1. (ODL) Outside Directorship Liability, Blanket—For employees serving on outside boards.
 Nonprofit automatic, listed for-profit.
  1. Parent Name—Include LP and GP
 To be requested.
  1. Pending Prior Litigation
 Inception of first continuous D&O coverage, current insurer.
  1. Policy Term Beyond One Year
 Some insurers will consider multi-year policies.
  1. Pollution
 Seek a stand-alone dedicated Side A limit. Standard is an entity exclusion. D&O policies contain limited pollution coverage, including a possible remediation exclusion. More specific insurance should be purchased outside the D&O coverage.
  1. Presumptive Indemnity Exclusion
 Exclusion to be removed.
  1. Principal/Major Shareholder Exclusion
 Exclusion to be removed or limited to entities or persons holding greater than 25%.
  1. Punitive Damages
 Covered if insurable in the “Most Favored Jurisdiction,” and to include moral, punitive, exemplary, or multiplied damages.
  1. Retro Date/Continuity Date
 Use the date of inception of first D&O policy purchased by the organization.
  1. Reinstatement
 The insurer shall reinstate the Limit of Liability under the Policy to the extent of subrogated recovery.
  1. Severability
 There should be full severability for Side A and ideally for all sections. Failure of one Insured to cooperate should not impair coverage for others.
  1. “Side A Excess Coverage” and “Difference in Conditions” for Non-indemnifiable Claims
 Consider a separate, stand-alone policy with a different insurer, with a “Difference in Conditions” provision, including for pollution.
  1. Subsidiary Definition
 Named entity has “Management Control,” or owns >50%; or 50% in partnership or JV.
  1. Territory: Worldwide suits
 Worldwide suits.
  1. Wrongful Termination Coverage Extension—Employment Practices Liability
 Wrongful Termination claims coverage providing additional compensation owing to an employee that is above the termination offer, provided that the termination offer was reasonable and made in good faith, and was made in reliance upon legal advice from independent legal counsel prior to the wrongful termination.
Other
Other
Other

APPENDIX 35.B: BROKER RESPONSIBILITIES, SAMPLE BROKER SERVICE AGREEMENT

Broker Service Agreement

Term: This agreement is applicable for the policy term.
Between:
Client:
Broker:
Purpose: The purpose of this document is to set expectations, monitor and rate the service delivery (the “Broker Responsibilities”) in the past 12 (twelve) months according to performance.
Broker Responsibilities:
Identification and knowledge of risk exposures
  1. Actively assist the client in collection of underwriting data, i.e., applications, information for underwriters, etc.
  2. Work with the client to assess the client's risks.
  3. Visit to insured locations and facilities (see #49, Visits, below).
  4. Identify limits of insurance and coverages to be carried based on: benchmarking comparable clients; losses that relate to the client's business; knowledge of the client's exposures.
Loss Control
  1. Oversee compliance with underwriter's requests regarding loss control improvements.
  2. Ensure adequate information exists to represent the state of loss control to underwriters.
  3. Provide option for alternate and supplemental loss prevention consultation.
Insurance Placement, Risk Transfer, Risk Financing, and Insurance Consulting
  1. Prepare and review insurance policy documents and prepare summaries of insurance.
  2. Obtain policies in a timely fashion (60 days from renewal).
  3. Deductible/Retention studies—Analyze claims, especially for high frequency slip-and-fall or similar claims experiences, to determine the optimum retention level, compared to credits and additional premiums charged by liability insurers.
  4. Provide technical support on insurance policy interpretations.
  5. Work with the client to design and develop the client's insurance program.
  6. Recommend and arrange proper insurance for client.
  7. Recommend enhancements and supplemental coverages.
  8. Negotiate with insurers or wholesale brokers to secure competitively priced coverages.
  9. Renew insurance with insurer or wholesale broker.
  10. Secure midterm amendments and changes to the program.
  11. Market insurance every three years (or other time as agreed) to test other available insurers and/or wholesale brokers, and/or other providers.
  12. Premium financing—provide options to finance premiums via month pay mechanism.
Administration
  1. Respond immediately to phone calls and requests (same day).
  2. Issue account service plan and timelines, with annual objectives and focus areas.
  3. Help facilitate cost allocation within client's divisions, properties, and operations.
  4. Train/inform local staff as necessary in insurance procedures.
  5. Hold annual meeting locally to discuss insurance and risk management issues.

Billings and Taxes

  1. Provide the client with detailed invoices, except in the case of direct billing by insurers, and review payment options. Advise on local premium tax matters.

Contracts and Certificates Risk Management

  1. Prepare and manage certificates of insurance, respond within 24 hours to local business units.
  2. Review key contracts (like snow removal; contractors; IT; HVAC, Special Events, etc.) advise on technical insurance language and amend insurance coverage, as required.
  3. Set up a supplier insurance protocol, establishing a certificates of insurance procedure with guidelines for contractors coming onto premises.

Claims Management and Incident Response

  1. Provide loss reports (quarterly, or as required).
  2. Large claims—Coordinate, assume primary lead role, and stay hands-on—work on behalf of client with adjustors and insurers.
  3. Frequency Claims—Develop reporting process, by property; update quarterly, as required.
  4. Crisis response (immediate)—travel and visit as necessary.
  5. Monitor and collaborate with client on claims strategy.
  6. Oversee control adjuster in assembling claim documents.
  7. Provide technical guidance, including on “Proof of Loss.”
  8. Provide coverage opinion.
  9. Alert to potential problems and concerns regarding incidents and claims.
  10. Monitor claim status reports.
  11. Facilitate and monitor cash payments.
  12. Identify and provide local training on claims response required.
  13. Analyze aggregate losses by year, locale, and coverage.

Technology and Communications—Provide access to options for systems that:

  1. Centralize key documents (such as policies, binders, reports, applications, losses, summaries of insurance) electronically, for 24/7 remote access.
  2. Provide client with current research and information on risk and insurance issues.
  3. Dovetail with Enterprise Risk Management system.

Additional Services

  1. Enterprise risk management services.
  2. Risk profiling and modeling.
  3. Due diligence on mergers, acquisitions, or divestitures.
  4. Other—State here, if any____________

Visits

  1. Visit client's key locations once during the term, or at other times as required for emergency purposes.

SUMMARY OF SERVICE

Broker Service Completed Not Completed Comments
Identification and knowledge of local risk exposures
Loss Control
Insurance Placement, Risk Transfer, Risk Financing, and Insurance Consulting
Administration
Billings and Taxes
Contracts and Certificates Risk Management
Claims Management and Incident Response
Technology and Communications
Additional Services
Visits
Completed/Not Completed

Signed and dated, this __________ day of _________, 20___,

By Client: ___________________________________________________

By Broker: __________________________________________________

APPENDIX 35.C: CHECKLIST—THE PROCESS FOR MARKETING LARGE INSURANCE PROGRAMS

  1. Establishing a timetable.
  2. Setting insurance strategy.
  3. Information gathering.
  4. Information analysis.
  5. Review options.
  6. Marketing and buying large insurance programs.

 

1. A typical timetable is as follows:
16 weeks before renewal—a pre-renewal strategy meeting.
12 weeks before renewal—broker given data.
11 weeks before renewal—analysis of the data complete.
10 weeks before renewal—meeting to review the options.
8 weeks before renewal—broker starts marketing.
45 days before renewal—client update.
20 days before renewal—status meeting.
10 days before renewal—quotes received and presented; risk manager decides on the course of action, and coverages are bound.
– Board review and approval as necessary for material matters.
2. Set Insurance Strategy—The intent is to: 1. address current issues; 2. define the assignment; 3. decide on the allocation of resources (i.e., who does what), and what expenditures will be required; and 4. establish preliminary objectives. Other considerations:
Improvement Areas:
State of insurance market (soft or hard?), and material Industry Claims to be reviewed:
When was coverage last reviewed?
Insurance industry capacity for limits required, and projected pricing:
Deductibles/retentions, and the capability of the organization to absorb higher retentions:
Renewal Date Change—must we coincide with our fiscal year-end?
3. Information Gathering—Noted should be the tremendous amount of information required in preparation for complex renewals. This information is not only important for the underwriter but also for internal analysis and risk assessment, prompting these questions: What information is required? How will it be gathered? Who should gather it? It is normal for the broker to provide the following services?
Visits to key locations.
Meetings with different division heads.
Risk identification through surveys, questionnaires, and other means.
The broker should distribute online applications to all divisions, outlining the format in which information is to be provided, commission engineering studies, and obtain loss runs from underwriters so that analysis of loss information can be commenced early.
4. Information Analysis—At this stage the information will have been gathered, the preliminary objectives will have been established, and now the analysis of information will take place. Common analysis that a broker should provide includes:
Limit analysis: What limits do industry peers carry; what is recommended; do we need to have our limits increased?
Claims studies: The broker should establish the expected claims based on past frequency and severity of claims.
Property analysis of maximum foreseeable losses and maximum probable losses: typically, this comes from engineering studies.
Shock losses or losses unlikely to recur: large losses unlikely to recur should reduce the underwriter's bottom line loss perception.
Loss prevention (LP) and engineering recommendation analysis: It is important that inspections and loss prevention work be regularly conducted in key exposure areas (like medical claims, or in large assets), rendered by engineering firms recognized by insurers.
Deductibles: The broker should provide systems analytics on what the absorption would be, and what insurers would insure, at various deductible levels on an untrended and trended to inflation basis; and where the organization has been experiencing losses, the type of losses, and the frequency and severity.
Financial: The organization needs to determine how much risk it can tolerate, i.e., how much to transfer to insurers, and how much to retain in-house. This study should include the capacity to absorb higher losses and it should also include a projection of the payback period required to recover one or two catastrophic losses through premium credits.
5. Review Options—Before going to market you will want to review the options, including: 1. Coverage options—key risks compared with checklists making sure that all areas are addressed; 2. The desired limits should be stated; 3. Desired deductibles should be stated; 4. Insurance company candidate carriers will now be identified.
6. Marketing and Buying Large Insurance Programs—Fundamental to most major renewals are the following key steps in marketing, to be followed by the broker:
Insurer loyalty: Treat incumbent insurers with respect—give them an opportunity to revisit prior offerings. Mistreatment of any insurers could be to your detriment.
Promote your organization's reputation: Your broker is your representative in the marketplace and should promote your business in the utmost professional light.
Sign off on proposals/submissions to insurers: Review and sign off before this important document is submitted to the world-wide insurance marketplace. The impact of professional submissions cannot be overstated. Information is to be clearly presented and analyzed, making the insurer's job easy, and you should make sure that nothing is omitted.
Be involved in marketing meetings: Attend key meetings with the broker, due to: (1) You know the risks best and you are more capable of describing it than anyone else. (2) Your presence at meetings with important insurers builds relationships. (3) Management is kept informed and there are no surprises.
Travel: Often complex negotiations require travel to other countries, such as to London to visit Lloyds, Bermuda, New York, Germany, and other worldwide insurance centers.
Insurer Selection: Management should be comfortable with the insurers that the broker proposes be approached, considering past experience with these insurers, their reputation, and track records on such issues as timely claims payment, depth of policy wordings, etc.
Market security: The broker should be able to advise on the financial strength/market stability of different insurance companies, providing ratings from AM Best and/or other specialty rating sources.
Decision makers: Marketing should be with senior insurer decision makers.
Policy wordings: Thorough analysis must be conducted of the various insurance contracts, with agreed wordings finalized prior to renewal.
Timely quotations: Leave plenty of time to consider options. Don't be that international negotiator who is forced to sign the deal because the plane awaits!

APPENDIX 35.D: DIRECTOR'S QUESTIONS

Board Question(s)—The Key Risks of the Organization

  1. What are the organization's key risks that could impact our objectives, and which ones are insured, and which are not insured, and which could be insured?
  2. Has the organization had an outside audit of each of our insurance coverages, comparing what is insured versus what is available in the insurance marketplace?
  3. Has management reduced, declined, or omitted any coverages, exposing the company and its D&Os to a material additional assumption of risk? If so, please describe.
  4. Are new and/or emerging risks insured and/or insurable?

Board Question(s)—D&O Insurance

  1. Do we have Personal Indemnity Agreements for each director and officer? Will such Indemnity Agreements cover unrestricted Advancement of Defense Costs, and Administrative Monetary Penalties (AMPs), regardless of insurance coverage? What coverage do we have, if any, under our insurance for AMPs? Have the Indemnity Agreements been recently reviewed by a qualified independent outside lawyer?
  2. Have we explored placing more specific and separate insurance in areas where D&O insurance alone will not properly cover the directors and officers, such as Cyber or Pollution? Have we asked our broker where D&O coverage is not adequate to cover company exposures?

Board Question(s)—Summarizing Insurance and Claims for Board Oversight Purposes

  1. Can Management provide a Summary of Insurance that outlines specifics of our insurance such as: limits; deductibles; and key exclusions, comparing same to prior years and/or what we require?
  2. Will Management summarize for the board the material insurance claims of our organization and for those organizations relevant to us?

Board Question(s)—Management Experience in Insurance

  1. What experience has the internal individual managing our insurance in large commercial insurance programs and D&O insurance matters?
  2. Is Management's role in administering our insurance clearly articulated in a job description, addressing in detail the various elements that need to be managed such as claims reporting, risk assessment, and loss prevention?
  3. Are the insurance administration activities reviewed and discussed by senior management at least annually?
  4. What line of reporting exists between the insurance manager and board? Who will report to the board on material insurance matters, and how frequently?

Board Questions(s)—Outside Broker/Insurance Provider Experience

  1. What is our D&O broker's experience in D&O insurance?
  2. What is the broker team's experience in our industry and with other businesses like us, including organizations of our size and geographical locations?
  3. What is the broker team's experience in large claims; risks unique to our organization?

Board Questions—Marketing

  1. When was our commercial coverage last marketed?
  2. Property—have we evaluated, via a qualified engineering firm, our “Maximum Foreseeable Losses” and our “Maximum Probable Losses,” for damage to our key locations and assets and business interruption?
  3. Liability Coverages, including D&O—Have we benchmarked what liability limits we should be carrying, compared to our industry, to other industries, considering lawsuits and historical claims? What limits do you recommend?
  4. Were all candidate insurers that could insure our operation canvassed in our marketing exercise?
  5. What are the material coverages we were not able to get in this marketing exercise?

ABOUT THE AUTHOR

Stephen Mallory, ICD.D, CRM, FCIP, BA, served as a director on two Canadian Government Federal Crown Corporations. From 2012 to 2017 he served on the board of VIA Rail Canada, including as Chair of the Governance, Risk, and Strategy Committee, and was on the Pension Investment Committee. Previously he served from 2008 to 2012 as a director with the Standards Council of Canada and sat on the Audit Committee. He led board risk oversight on both boards and has been a member since 2011 on Canada's CSA/ISO/TC262 Mirror committee: Risk Management.

Steve teaches enterprise risk management to executives, directors, and master's-level university students. He is principal of Directors Global Risk Consulting, Inc., a Toronto-based firm that provides enterprise risk management advice for organizations located across Canada. He also advises clients at Benson Kearley IFG, a top Canadian insurance brokerage. Prior to founding his own firm in 2007, he served as CEO and Region Head within two of Canada's largest insurance brokerages.

Steve is regularly quoted in business publications and has led various charitable initiatives, including funding for water wells supplying nourishment to 15,000 people in Africa.

NOTES

  1. 1.  Geoffrey Morgan, “Ottawa Creates New Fund to Pay for Crude Rail Spills, Hikes Insurance Requirements,” Financial Post, February 20, 2015, http://business.financialpost.com/news/transportation/shipping-oil-by-rail-in-canada-is-about-to-get-more-expensive.
  2. 2.  Selena Lee-Anderson, “Update on Directors' and Officers' Environmental Liability: Lessons From Northstar Aerospace,” McCarthy Tétrault, January 26, 2014, www.mccarthy.ca/article_detail.aspx?id=6607.
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