A directors' and officers' policy insures natural persons, and that must be stated first because almost every error in this field follows from it. It does not protect the company against its own faults: it protects those who run it against claims aimed at them personally, in their own assets. The company pays the premium, the company negotiates the contract, the company decides whether to renew, and yet the company is not the principal insured. That gap between who pays and who is protected runs through the rest of this course.
The reason for that arrangement lies in a feature of company law that must be understood in order to read a policy. A director committing a management fault in principle engages the company, which answers for the acts of its organs. But in certain situations it engages its own assets: where the company is insolvent and can no longer indemnify it, where legislation makes it personally liable, or where its fault is severable from its functions. In those cases its personal property answers, and no insurance of the company comes to its aid.
One must then know who counts as a director within the meaning of the policy, since the answer is wider than the organization chart. Appointed corporate officers do, without argument. But most contracts also cover de facto directors, that is, persons who in reality exercise management without holding the title, and that category catches people who do not know they are exposed: a shareholder deciding in the manager's place, a subsidiary head signing contracts alone, a founder who has left the office but stayed in control.
Three extensions of that definition recur and deserve checking one by one, because their absence is discovered at the wrong moment. Former directors, for faults committed during their term, who stay exposed for years after leaving. Directors of subsidiaries, including foreign ones, whose cover depends on a definition of subsidiary with its own thresholds and dates. And heirs and spouses, who may be pursued against transmitted or jointly held assets, and whom many policies expressly bring within the cover.
A fourth category deserves isolating because it is the most forgotten: the employee who is not a director. Most policies cover such a person only in named cases, for instance where pursued jointly with a director, or where holding a function that legislation makes liable. A compliance officer, a finance director without a mandate or a holder of delegated powers can therefore find itself pursued without being insured, while believing otherwise because its employer holds a directors' policy.
What this insurance is not must be added, because two confusions are costly. It is not insurance of the company against its own losses: if a director causes the company to lose ten million by an unfortunate decision, the policy does not reimburse the company for its loss, it responds if the company or a third party pursues the director and obtains a judgment. And it is not professional indemnity: that covers errors made in a service sold to a client, this covers faults committed in the direction of a company.
The useful step therefore comes to a check of perimeter, made on people and not on amounts. Take the list of the group's corporate officers, add the probable de facto directors, the former directors still exposed, the directors of subsidiaries and the employees holding personally risky functions, then set that list against the contract's definition of insured. A name fitting none of the categories is not covered, and it is better to notice while reading than on receiving a writ.
An industrial group of 900 employees holds a directors' and officers' policy taken out by the parent company. Four people face claims following an industrial accident at a subsidiary. The parent's chairman, a corporate officer, is pursued for a failure of oversight. The subsidiary's managing director, a corporate officer of that company, is the primary target. The former chairman, retired eighteen months earlier, is pursued over investment decisions taken during his term. And the site operations director, an employee holding delegated powers over safety, is pursued personally. The contract's definition of insured covers "the corporate officers of the policyholder and of its subsidiaries held at more than 50 percent, present and past". Who is covered?
Three of the four fall within the definition as written, and the fourth is the file's real subject. The parent's chairman is a corporate officer of the policyholder: covered without argument. The subsidiary's managing director is a corporate officer of a subsidiary, and cover then depends on a fact to be verified rather than assumed, the shareholding at the time of the fault and not at the time of the claim: above 50 percent he is covered, below he is not, and a subsidiary held at exactly half falls outside the text since it says "more than 50". The former chairman is expressly caught by the word "past", and his cover therefore depends not on his departure but on the contract's basis: on a claims-made basis what counts is that the claim arrives while the policy runs, which it does, and the retroactive date must cover the date of his decisions. The operations director is the one who fits nowhere, and he is the most forgotten category in this lesson: he is an employee, he is a corporate officer of nothing, and the contract's definition covers only corporate officers. His delegated powers over safety do not make him a director within the meaning of the policy; they make him personally liable within the meaning of the law, which is exactly the most dangerous combination, a personal exposure without the matching cover. Three steps follow. Verify at once the subsidiary's shareholding at the date of the facts, with documents. Notify all four claims to the insurer without sorting them oneself, since an insured does not decide its own perimeter and a written position from the insurer is worth more than an abstention. And put to the board, separately from this loss, that the group exposes holders of delegated powers without insuring them, which is a question of future cover and not of this file.
- 01The policy insures natural persons: the company pays the premium and is not the principal insured, and all the rest follows from that gap.
- 02Director within the meaning of the policy is wider than the organization chart: de facto directors count, and they do not know they are exposed.
- 03Three extensions are checked one by one: former directors, subsidiary directors with their shareholding threshold, heirs and spouses.
- 04The employee who is not an officer is the most forgotten category: delegated powers make a person liable without making them insured.
- 05This is not insurance of the company against its losses, nor professional indemnity: it is the fault committed in directing a company.