Directors and Officers (D&O) insurance policies are intended to cover claims brought against directors and officers for alleged wrongful acts in their official capacity. However, professional services firms relying on D&O coverage may encounter exclusions that significantly limit protection.
In cases where "absolute" professional services exclusions are present, a D&O policy may offer little to no coverage.
D&O policies are designed to address management liability, whereas professional liability claims fall under errors and omissions (E&O) policies. The distinction between the two can become unclear for professional services firms, prompting insurers to introduce professional services exclusions in D&O policies.
These exclusions are intended to prevent coverage from extending to claims involving actual or alleged errors or omissions in the delivery of professional services, according to Joe Robuck, executive vice president, Amwins Brokerage in Los Angeles.
“The problem arises in how those exclusions are worded and their potential broad application when applied,” said Robuck. “In particular, absolute language that is often found can essentially invalidate D&O coverage, such as exclusions for: ‘Any claims based upon, arising from, in consequence of, or in any way directly or indirectly related to or involving the rendering or failure to render professional services.’”
“For a law firm, engineering company or other professional services business, virtually any claim against directors or officers may be construed as ‘arising from’ or ‘related to’ services the entity provides,” he said.
Courts have, in some instances, ruled against broad exclusions that effectively nullify coverage. However, relying on legal challenges carries significant risk.
“Relying on courts to make that determination is a risk you and your clients cannot afford to take,” Robuck said. He emphasised the importance of reviewing D&O policies carefully to understand their exclusions, given the lack of standardised forms in this type of coverage.
Once exclusions are identified, negotiating more favourable terms with underwriters is key. “The best solution is to have the entire professional services exclusion removed from the policy,” he said.
“Most carriers are unwilling to do that; however, some success can be found by changing the absolute language ‘based upon, arising from, etc.’ to a narrower preamble. The exclusion could be written something like: ‘Any claims for the rendering or failure to render professional services.’”
Additionally, many D&O policies contain exclusion sections that apply only to the entity itself. “If the exclusion cannot be removed entirely, it most certainly should only apply to the entity,” said Robuck. “If the exclusion applies to the whole policy, request that the underwriter move the exclusion to the entity exclusion section.”
Another key consideration is negotiating carve-backs – provisions that reinstate coverage under certain conditions. “Following the exclusion, there should be a statement like: ‘However, this exclusion will not apply to…,’” Robuck said.
Some carve-backs to consider include failure to supervise, where claims by third parties allege financial harm due to the company’s failure to supervise individuals involved in professional services. Securities claims, where shareholders allege financial loss due to directors, officers, or employees' errors or omissions in professional services.
Derivative claims, where shareholders bring actions against the board alleging financial harm to the company due to decisions related to professional services. Side A claims, where claims are brought against directors, officers, or employees when the company cannot indemnify them, often due to insolvency.
“Ultimately, as with all matters in insurance, there are compromises, negotiations, and risk management decisions to be made,” said Robuck. “For retail agents, it is important that clients be made fully aware of potential gaps, limitations, and other issues in their decision-making process around the D&O policy they put in place.”
Retail brokers must ensure that clients fully understand these aspects when selecting a policy. Working with a wholesale broker with expertise in negotiating D&O terms can be an advantage.
“Amwins delivers broad market access and has the proven ability to negotiate favourable D&O terms with underwriters to offer the best protection for your clients,” Robuck said.
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