The five previous lessons showed who is insured, under which part, in what circumstances and subject to which exclusions. There remains the question that decides who actually receives anything, and it fits in one sentence: a directors' and officers' policy carries a single limit, shared by everyone it insures and by the company. Fifteen directors and a business draw on the same bucket, and the bucket does not refill.
The first consequence is the order of service. A contract almost never says who must be paid first; it pays as demands present themselves. And they do not present themselves at the same time: defense costs arrive early and steadily, judgments and settlements arrive late and all at once. Whoever's file settles last therefore finds a limit already largely consumed by the others' costs, and that outcome rewards neither merit nor severity, only the calendar.
The second consequence is the conflict of interest between insureds, and it is structural rather than accidental. In one file a director may have an interest in showing the fault lies with another, the company may have an interest in showing the fault lies with a director, and each consumes the same limit paying lawyers to say so. That is not a pathology of the product, it is its direct consequence: a collective cover over individual liabilities.
One must therefore know that defenses separate quickly. A director whose interests diverge from the group's needs its own counsel, and the policy generally allows for it. It is expensive, since five separate defenses consume more than one shared, and it is nonetheless necessary: a director defended by the company's lawyer will discover late that the lawyer could not argue what would have saved him. The point to check in the contract is whether free choice of counsel is available, and from what degree of divergence.
The third consequence bears on defense costs themselves, and is the most misunderstood. In most contracts in this line, defense costs erode the limit rather than sitting on top of it. A limit of ten million of which seven has been absorbed by five years of proceedings leaves only three million to indemnify anyone. A contract where costs come in addition exists and costs more; knowing which one you hold is a question to ask before the first writ and not during.
The mechanism answering all of this must be added, already named in the second lesson, because here it takes on its full meaning. A layer reserved for directors alone, untouchable by the company, placed above the main contract, is the only structural answer to the order of service and to the conflict of interest. It triggers only where the shared limit is exhausted, that is, in the files where everything else has failed, and that is exactly why it is hard to sell and useful to hold.
The useful reading therefore comes to three questions, asked together and before the loss. Do defense costs erode the limit or sit on top of it. What happens where two insureds have opposing interests, and from when may each choose its own lawyer. And is there anything left for the directors when the shared limit is empty. A director who knows those three answers knows what it holds; one who knows only the figure at the front of the contract knows a number it will share with fourteen other people and a business.
A medical technology company and eleven of its directors face claims after a device is withdrawn from the market. The policy carries 20 million euros, a single limit across all parts, defense costs eroding the limit, with no reserved layer. The file lasts five years. Years 1 to 3: joint defense, 6.4 million. Year 3: the chairman and the quality director take separate counsel, their positions having become irreconcilable, adding 4.1 million over two years. Year 4: the company settles with the regulator for 7 million, charged to the policy in respect of its own exposure. Year 5: nine directors obtain a global settlement of 5.5 million, and the quality director is separately ordered to pay 2.2 million. Who receives what?
The sums must be added before anything is characterized, because the total alone says the essential: 6.4 plus 4.1 plus 7 plus 5.5 plus 2.2 comes to 25.2 million asked of a 20 million limit. The shortfall is 5.2 million, and the only question worth asking is on whom it falls. Chronology answers it, since the contract pays as demands present themselves and does not say who goes first. The 6.4 million of joint defense over the first three years erodes the limit rather than sitting on top, bringing it to 13.6. The 4.1 million of separate counsel brings it to 9.5: that is the price of the conflict of interest, and it should be read for what it is, not waste but the direct consequence of a collective cover over individual liabilities, since a director defended by the company's lawyer could not have argued what saved him. The company's 7 million settlement with the regulator in year 4 brings the limit to 2.5, and that is the file's decisive moment: the business, which pays the premium, has just absorbed at one stroke more than a third of what remained, and did so before the directors settled. In year 5 there is therefore 2.5 million for 7.7 million of demands, the nine directors' settlement and the tenth's judgment. The nine and the quality director share a cover two thirds exhausted, and the 5.2 million shortfall weighs on personal assets. Three lessons, of which only the last is actionable. The outcome rewards neither merit nor severity, only the calendar. Defense costs eroding the limit consumed 10.5 million, more than half the contract, without indemnifying anyone. And the only thing that would have changed the outcome was decided at placement: a layer reserved for the directors, untouchable by the company, would have left intact what went to pay the company's settlement with its regulator.
- 01One limit, shared by every director and by the company: fifteen people and a business draw on the same bucket, and it does not refill.
- 02The order of service decides, and it rewards neither merit nor severity: costs arrive early, settlements arrive late.
- 03The conflict of interest between insureds is structural, not accidental: it is a collective cover laid over individual liabilities.
- 04In most contracts defense costs erode the limit rather than sitting on top, and they often consume more than half of it.
- 05A layer reserved for the directors is the only structural answer: it serves only in the files where everything else has failed.