Directors and Officers Liability Insurance > Common Exclusions from D&O Coverage

Common Exclusions from D&O Coverage

1.   Dishonesty Exclusion

Dishonesty exclusions bar coverage for claims made in connection with an insured’s dishonesty, fraud, or willful violation of laws or statutes. The dishonesty exclusion also may be coupled with a personal profit exclusion, barring coverage in connection with an insured’s illicit gain. These exclusions typically are followed by a severability clause – that is, a caveat providing that the acts or knowledge of one insured will not be imputed to any other insured for the purposes of applying the exclusion. In other words, the exclusion only bars coverage for the insured(s) whose acts or knowledge are the basis of the claim at issue.

As mentioned above, many dishonesty exclusions include an adjudication clause, which provides that the exclusion only applies if the fraud or dishonesty is established by a judgment or other final adjudication. In connection with this clause, the question arises whether the judgment or other final adjudication must be in the underlying litigation. For the most part, the case law on this subject supports the position that most adjudication clauses, as they currently are written, require a final adjudication in the underlying litigation, rather than in a parallel coverage action or other lawsuit. Courts have held either that (1) the adjudication clause is ambiguous, so must be interpreted in favor of coverage, or (2) the clause explicitly requires a finding of fraud or dishonesty in the underlying litigation.  This issue has a significant impact on the effect of settlements. Essentially, if an underlying lawsuit is settled without a specific admission of liability, a dishonesty exclusion is unlikely to apply.

2.   Insured v. Insured Exclusion

As the name implies, an insured versus insured (“IvI”) exclusion bars coverage for claims made by an insured (e.g., a director, officer or corporate insured) against another insured. In addition, the exclusion may bar coverage for claims brought (1) by anyone directly or indirectly affiliated with an insured, (2) by a shareholder unless the shareholder is acting independently and without input from any insured, or (3) at the behest of an insured. The exclusion essentially prevents a company from suing or orchestrating a suit against its directors and officers in order to collect insurance proceeds. Questions regarding the application of the exclusion arise in the context of derivative lawsuits, bankruptcies and receiverships.

Specifically, it is clear that where a lawsuit is brought with the “active assistance” of an insured, the exclusion bars coverage.  It is not always clear, however, when a lawsuit is brought with the indirect involvement of, or at the behest of the insured, and there is very little case law expounding on the issue.

Where the policy only provides coverage for insureds when acting in their capacities as insureds – such as through a restrictive insuring agreement or definition of insured – the IvI exclusion likewise may be interpreted so as to apply only where the insured is bringing suit in an insured capacity. Where coverage does not depend explicitly on whether an insured was acting in an insured capacity, however, the IvI exclusion does not turn on the capacity issue either.

Courts have held that where suit is brought by the receiver of a failed bank, an IvI exclusion bars coverage. Depending on the particular wording of the exclusion, some courts have held that an IvI exclusion does not bar coverage for a suit brought by a bankruptcy trustee.

3.   Professional Liability Exclusion

As a general matter, D&O policies do not provide coverage for liability associated with the provision of professional services. Thus, where a bank officer is liable for acts as a banker rather than an officer of the bank, a D&O policy with a professional liability exclusion would not provide coverage. Similarly, where a doctor is the president of a professional corporation, the D&O policy would only protect him or her against liability from acts as president of the corporation, and would not provide coverage for professional malpractice claims. The line between professional services and acts outside the scope of this exclusion can be a fine one. Courts often draw a distinction between those acts that require special training or are at the heart of the profession and those acts that are administrative in nature.

4.   Prior Acts Exclusion

Prior acts exclusions bar coverage for claims arising out of an insured’s wrongful acts prior to a specified date. The date may coincide with the termination of coverage under a previous policy. The date may also coincide with a change in corporate status – such as a merger or acquisition. For example, where a subsidiary is acquired, the prior acts exclusion may exclude coverage for the subsidiary prior to the time it became a subsidiary. In such situations, the subsidiary may have run-off coverage from a previous policy to protect against liability arising from those excluded acts.

5.   Prior and Pending Litigation Exclusion

Prior and pending litigation exclusions generally exclude coverage for (1) claims pending prior to the inception of the policy, or another agreed upon date, and (2) subsequent claims based on the same facts or circumstances. Conflicts primarily arise regarding the second component of this exclusion. Specifically, the question arises as to when a subsequent claim is based on sufficiently overlapping facts and circumstances to fall within the scope of the exclusion. Courts have held that the two claims need not be brought by the same plaintiffs to trigger the exclusion.  Furthermore, the claims can allege different harms, and still be excluded from coverage by this provision.  The exclusion additionally may apply even if the two claims allege different legal violations, or are brought in different courts and pursuant to the authority of different jurisdictions.

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