Blog Liability Insurance

Is a Traditional D&O Policy Enough?

By Sherwood Bowditch

General Liability policies typically cover the cost of defense outside of the limit of insurance meaning attorney costs do not reduce the amount of insurance available to pay a claim if you or your business are found to be negligent.  Conversely, on a professional liability policy, defense costs are typically “inside” the limits of insurance.  In that case, attorney’s fees will diminish the limit of insurance available to pay any resulting claim(s).  Example: An engineer is sued under his Professional Liability policy. The policy limit is $1M. The cost of defense is $75,000 and settlement is $150,000. In this case, the remaining limit available for the policy term is $775,000. In a similar situation where the General Liability policy responds the $1M limit would only be diminished by the $150,000 cost of a settlement.

Oftentimes, a requirement to purchase Directors & Officers Liability (D&O) Insurance is inserted in a term sheet. Limit requirements vary based on the size of the investment. D&O is a management liability policy that responds when it is alleged that the directors, officers, and senior managers made a decision on behalf of the business that results in an adverse finical consequence. D&O policies come with three parts or “sides” for which the policy will pay for claims and defense of alleged wrongdoing.

  • Side A: Covers directors or officers when the company cannot or does not indemnify.
  • Side B: Covers the company’s obligation to indemnify directors or officers.
  • Side C: Covers the corporation as a defendant in litigation involving securities (public or private) that have been issued.

From a practical sense, this means that a potential claim could exhaust the limits on a traditional policy leaving no limit for defense or indemnification. Some directors feel that it may be better to have a policy that can only be accessed to defend or indemnify directors and officers. These policies are known as Excess Side A or Side A Only. As with most D&O policies not all products are created equal and should be examined closely.

Winters-Oliver has a specific focus on life sciences and biotech companies, so we’ll use an example from that industry.  Typically, a business owner doesn’t know everything about the commercial insurance policy they purchased.  They depend on their insurance agent and trust that agent to provide sound advice.  One more reason it is important to work with someone who understands your industry.  You are working at the edges of technology, life sciences, biotechnology and providing new solutions.  Your insurance and risk management plan must keep up.  Will your current insurance program respond, as expected, to the following scenarios?

  • How would a fire in your lab affect future revenues?
  • A data breach destroys countless hours of research or discloses the medical records of persons involved in clinical trials?
  • A clinical trial results in injuries to participants.
  • What would happen if you had to institute a product recall?
  • Do your various insurance policies fully satisfy the insurance and indemnification requirements of your investors?

Winters Oliver is focused on emerging companies doing business in new ways. We want to be your partner as you move from the whiteboard to the lab, and from the lab to production.

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