Severability clause
A clause in a directors' liability policy that prevents attributing one director's misrepresentation or misconduct to an honest one, so that one person's fraud does not deprive all the others of cover.
A directors' liability policy is bought by the company, on the basis of an application signed by one of its officers, to cover all directors. If that application is inaccurate because the signatory knew of a fraud and kept silent, the insurer might want to rescind the policy for everyone, including directors who knew nothing. The severability clause prevents this by providing that one insured's knowledge or conduct is not imputed to the others: each director is treated as if it had bought its own policy, and only those who knew or took part lose cover. It applies at two points. At underwriting, for risk disclosure, where some wordings nevertheless impute to the company the knowledge of its principal officers. During the contract, for conduct exclusions, which target only the person who acted. For an independent director, who cannot check everything management knows, the clause is decisive, since the most serious accounting scandals arise precisely from information hidden by a few people from the rest of the board.
Textbook case: the chief financial officer of a listed company signs the renewal application while concealing accounting irregularities he is orchestrating. The scandal breaks and shareholders sue the whole board. Thanks to the severability clause, the insurer can rescind the policy only as to the CFO; directors unaware of the fraud remain covered.
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