As I set out in my previous article, ‘Responsibility Matters’, every European CEO should feel comfortable that their D&O policy is reviewed sufficiently so that it stands up to the rigours of their ever-changing risk environment. While that still stands, however, I would also caution against simply changing for change’s sake.

Do you have the right D&O policy?
When purchasing a D&O policy, the primary point is to ensure you have a policy wording in place that is fit for purpose and addresses the risks faced as a director or officer.  Your D&O policy is like any other commercial contract your business enters into – it is a contract that reflects the legal agreement between two parties. Coverage provided under a D&O policy can run to hundreds of millions of euros and should be reviewed with the same level of scrutiny as any other large commercial contract. Coverage should be broad enough to include cover for any liability directors and officers face personally for acts or omissions as a director or officer, as well as for any liability which attaches simply because they serve as a director or officer.

As D&O policies are significant commercial contracts, they should not be judged on their length, appearance or glossy marketing materials, but rather on performance. While policy wordings should be clear and precise, they should not be written in easy to understand language for sales purposes, but should be drafted to be legally watertight to protect the interests of directors and officers. Accordingly, directors and officers should be wary of revolutionary changes to legally tested policy provisions in the same way that you would think carefully about a fundamental rewrite of any other existing contract.

You should also carefully consider any new ‘enhancements’ of cover which may contain onerous provisions for triggering the enhanced coverage or low sublimits. Frequently such coverage either already exists in the policy or could easily be built into the existing structure. However, some insurers prefer to add such cover by extension which can have the effect of limiting the additional coverage provided, while at the same time marketing the new enhancement as a significant improvement to coverage. Not all extensions operate in this fashion, but it is important to review new coverages that contain any limitations with your insurance advisors.

What’s driving policy evolution?
That is not to say that your policy should never change, but any change needs to be thoughtfully drafted to respond to the exposures faced and to improve policy performance based on prior claims experience. Where the legal and regulatory environment changes so that personal liability is introduced or altered, the policy should be reviewed to ensure that the additional exposure is covered. In many cases this may not result in adding specific new cover, but ensuring that any exclusions or limitations do not operate in an unexpected way to limit the existing coverage.

Similarly, where claims have occurred and the insurance market has questioned coverage or delayed payment based on their interpretation of a policy provision, such provisions should be reviewed to make sure that the intent is clear and that the same problem is avoided in future claims. Because of this, it is important that your insurance advisor reviews your policy wording with full knowledge of the current claims trends, as well as market behaviours.

Can you access your policy when needed?
Your D&O policy is only valuable if you can access it when you are faced with a claim. It may be tempting not to think about your D&O policy once it has been purchased, but directors and officers will be well-served to ensure they are provided with a copy of their policy wording and understand how it works – particularly how to notify a claim and seek defence costs cover. Not only should you inquire as to your own internal reporting and notification process, but also be fully equipped to be able to notify a claim without the assistance of the company should you find yourself in conflict with your company or board.

This is relevant not only for your current position, but also if you have served as a director or officer for another organisation. If the relevant limitations or prescription period has not expired, a claim can still be brought against you for your actions at that previous organisation. Similarly, if you sit on another board at the request of your current company, that board may well have a separate D&O policy which may be the first to respond to any claim made against you as a director of that other board. It is essential to understand how and when you can retain defence counsel and have these costs covered under the policy.

Most D&O policies require insurers’ consent before costs are incurred except in cases where it is not practicable to seek consent before incurring costs. From a practical standpoint it is useful to make your defence counsel aware of the policy requirements regarding costs so that they can present their fees in a manner that evidences the reasonableness of their work and avoids disputes over costs. D&O policies contain provisions limiting or prohibiting cover where an insured party admits liability or enters into a settlement without the insurers’ consent, so it is vital that you are familiar with these provisions to avoid unintentionally limiting your rights.

Be aware of indemnification
Your D&O policy is just one piece of your protection against claims made against you. You should also be fully versed on what indemnities are available to you under the law, what indemnities have been specifically granted to you by your company, and the situations in which you cannot legally be indemnified.  By having access to both your D&O insurance and indemnification rights you can have a complete picture of your protections in the event of a claim.

For more information please visit Aon online at aon.co.uk