D&O Insurance GLOSSARY

Defence Costs Allocation

Defence Costs Allocation refers to the percentage of defence costs that the insurer will pay when there are covered and uncovered allegations within the same claim.

Derivative demand

A derivative demand or derivative action occurs when shareholders, who act as the corporations, bring a suit against the directors and officers of the corporation.

Discovery Period

The period of time after the expiration of a policy, where the insured is able to identify and report losses where the wrongful act occurred during the policy period and prior to the wrongful act cut-off date specified in the policy.

Duty of Diligence

Also referred to as duty of care, this fiduciary duty requires directors and officers to act in good faith. This means that directors and officers must consider all available information before making decisions, and act in the same manner a reasonable person faced with the same decision and responsibilities would act.

Duty of Loyalty

The duty of loyalty is meant to prevent directors and officers from engaging in conduct that would otherwise hurt or take advantage of the company they serve. Through this fiduciary duty, directors and officers have an obligation to avoid any conflicts of interest or self dealing transactions.

Duty of obedience

The duty of obedience specifies that directors and officers are obligated to follow the statutes and terms set out in their corporation’s by-laws. Directors and officers may be held liable if they allow actions that are beyond the powers established by their company’s by-laws.

Employed Lawyers coverage

This provides affirmative coverage for appointed officers of the corporation for the lawyer or notary services performed for the corporation in their capacity as such.

Employment Practices liability

Employment Practices Liability, commonly referred to as EPL, is the area of insurance coverage that protects the organization, directors and officers, and employees against claims that arise for employment related disputes. This includes things like wrongful dismissal or termination, breach of employment contract, constructive dismissal, workplace harassment, sexual harassment, workplace bullying.

excess side a

Similar to Insuring Agreement Side A coverage, Excess Side A coverage provides an additional limit of insurance for non-indemnified losses to the directors and officers. Since there are numerous coverage available under a D&O policy that could dilute the limits available to the directors and officers, this was introduced as additional protection for them.

Fiduciary liability

Fiduciary Liability provides coverage for liability exposures arising from the administration and management of employee benefit and pension plans.

hammer clause

The hammer clause within an insurance policy is a clause that allows an insurer to induce an insured to settle a claim. In the event that insured decides not to settle a claim, the hammer clause specifies the amount of settlement and defence the insurer will pay going forward. This is typically in a range from 50%-80%, and the insured will need to pay the fees over and above the specified percentage.

Insuring agreement - side a

The Side A insuring agreement insures individual directors and officers against losses that the corporation is not legally or financially able to indemnify them.  

This coverage protects the personal assets of directors and officers in the event a company does not pay defence costs or fund indemnification. Side A coverage is essential to helping organizations attract qualified individuals to serve on their boards.  

Insuring agreement - side b

The Side B insuring agreement, sometimes referred to as the corporate reimbursement coverage or indemnified loss coverage, reimburses corporations for the damages and defence they would incur when defending directors and officers in a suit that arises from a claim.  

Side B coverage, however, does not provide coverage for the corporation in the event that the corporation is sued.  

Insuring agreement - side C

Corporations are often named in lawsuits in conjunction with their directors and officers, resulting in additional legal exposure for the corporate entity. Side C coverage, also referred to as entity coverage, is there to protect the entity for claims alleging wrongful acts committed by the corporation.

non-indemnified loss

This refers to the type of loss that occurs when the corporation fails or refuses to indemnify the directors or officers due to financial impairment or because the indemnification is not allowed due to any law or contract or the by-laws, charter, operating agreement or similar documents of the corporation.

retention

Is the portion of loss which will need to be paid by the insured. Amounts of the loss in excess of this retention are then paid by the insurance policy.

run-off coverage

Run-off coverage is coverage that can be purchased by an organization when they have been acquired, merged, or ceased operations. The run-off coverage allows for an additional period of reporting for claims that occurred prior to the date of acquisition, merger, or cessation of operations.

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