One of the most striking things I have found when talking to corporate officials about D&O insurance is how different the conversation can be when talking to non-officer directors compared to talking to corporate officers. Without meaning to over-generalize, the two groups sometimes have different questions and concerns. And indeed there are very good reasons why the insurance needs and interests of non-officer directors should be analyzed differently from those of the corporation and its officers.


By way of background, these issues arise in the context of the traditional D&O insurance policy, which may have potential conflicts of interest built right into its frame. By way of illustration, after I recently made a recent presentation about D&O insurance to a group of noninsurance professionals, one of the audience members (an economist) came up to me to express his astonishment that both a company’s inside officers and its non-officer directors would be insured under the same policy of insurance. When you think about it, it may not make much sense, but that is the way the insurance typically is structured.



Not only are there two potentially conflicting sets of individuals yoked together in the traditional D&O insurance policy, but since the mid-90s, the traditional D&O insurance policy has also incorporated so-called “entity coverage” for securities claims, providing the company with balance sheet protection and representing yet another potential conflict within the policy with respect to the interests of the non-officer defendants.



In recent years, the insurance marketplace has developed and materially improved a variety of alternative insurance vehicles designed to ensure a dedicated source of insurance protection for the individuals insured under the D&O insurance program. These alternative approaches include excess Side A insurance, which effectively provides catastrophe insurance for the protection of individual directors and officers, and individual director liability insurance (IDL), which protects a single individual. These products can be further customized to protect a specific group of individuals – for example, the non-officer directors.



Not every company wants, needs or can afford to acquire these alternative products in addition to their traditional D&O insurance. But every company should consider them. And these days, an increasing number of companies do purchase some form of these alternative products, typically Side A excess insurance. But both with respect to the companies declining to purchase these products and with respect to many of the companies that do, the assessment of these alternative or supplemental structures often is not taken from the perspective of the needs and interests of the non-officer directors.



It is this conversation topic – the one about the non-officer board members’ interests in the structure of the D&O insurance program – that represents the heart of the difference that arises between speaking about D&O insurance to outside board members compared to talking about these issues to corporate officers.



In my experience, outside board members are keenly interested in learning more about the protection afforded by these alternative products and the ways the D&O insurance program can be structured to maximize their protection. In particular, non-officer directors want to know about the ways the insurance program can be structured so that there is dedicated insurance set aside that cannot be eroded or exhausted by the defense expenses and indemnity obligations of the company or the company’s officers. They want as much reassurance as they can get that no matter what happens, they will not have to go out of pocket in any way.



Corporate officers, even those who recognize the theoretical value of these products, often are most concerned with considerations pertaining to cost. Even officials persuaded of the need for the company to acquire excess Side A insurance to protect the individual directors and officers may not be susceptible to persuasion of the need for separate limits set aside just for the outside board members, and frequently the stumbling block to further consideration of these issues is an unwillingness to incur additional D&O insurance expense.



These issues recur with sufficient frequency that it is my universal recommendation to non-officer board members that they request a separate presentation directly to the board about the company’s D&O insurance, to afford all of the board members a separate opportunity to inquire about their interest and the level of insurance protection available to them.



Another step I have found an increasing number of concerned board members requesting is a separate review of their company’s D&O insurance program by an outside and independent insurance professional, on behalf of the board. An independent review not only facilitates a separate determination whether or not the non-officer board members’ needs and interests are appropriately addressed, but it also facilitates a separate inquiry whether the terms, conditions, and structure of the program adequately addresses all of the interests insured.



This latter point bears emphasizing – that is, there is considerable value in having the D&O insurance program separately and independently reviewed. D&O insurance is of course only one part of the company’s overall insurance program, but from the outside board members’ perspective, the D&O insurance is the only insurance the company has that insures them directly, so they are highly motivated that the insurance program is the best available.



Though both the company’s officers and its board members are equally interested in ensuring the adequacy of the D&O insurance program, my own experience is that a separate insurance audit on behalf of the non-officer board members frequently discloses a variety of ways the overall D&O insurance program might be improved, sometimes materially.



Another constituency that may have an interest in having an independent insurance review is the board of a corporate subsidiary, particularly where the subsidiary’s board is separately constituted from the parent company’s board. Though the corporate parent’s D&O insurance typically will provide protection for the subsidiary’s directors and officers, there are occasions when the subsidiary board’s interests are sufficiently distinct that the subsidiary’s board would be well advised to at least consider whether or not to acquire a separate policy dedicated to their own protection. These interests are particularly noteworthy for subsidiaries of large financial services companies, when the subsidiary board may have its own distinct liability exposures as well as a separate interest in the availability of insurance limits dedicated to their protection.



As I noted above, the interests of a wide variety of insureds are yoked together in a single D&O insurance program. But that does not mean that the various constituencies’ interests cannot be considered separately. A separate consideration of competing and sometimes conflicting interests can sometimes result in the selection of different insurance structures. In addition, as noted above, an independent insurance audit can provide an opportunity for the separate review of the adequacy and appropriateness of the terms and conditions in the applicable policies.