There is a little known secret within many directors & officers insurance policies. This dirty little secret is one that could significantly affect (and limit) the amount of insurance protection you think you are purchasing to protect the interests of your company and its executives.
Many directors & officers (D&O) policies include a “noncumulation of limits” provision. It typically comes into play when multiple lines of executive liability coverage (D&O, Employment Practices Liability, Fiduciary Liability, etc.) are purchased and separate limits apply to each coverage line.
The implications of this provision are best described in the following example:
An insured organization had declared bankruptcy, which brought with it several securities class action claims. In addition, since shares of the firm’s stock had been rendered worthless, claims were also filed by employee 401(k) plan participants who had invested in the company’s stock.
The insured maintained D&O and Fiduciary policies; however, with different limits applying to each line (D&O with a $10,0000,000 limit and Fiduciary with a $5,000,000 limit). The D&O policy also included a noncumulation of limits endorsement. That endorsement stated that in the event of a fiduciary claim emanating from essentially the same events as a D&O claim, $10,0000,000 was the most the insurer would pay for both claims.
So what could the company have done differently to protect itself from this type of failed coverage scenario?
1.The company (and/or its broker) can attempt to negotiate with the insurance carrier to remove the noncumulation language. Often times, when available, this change will result in an additional premium charge. Unfortunately, not all carriers will agree to removing this language due to their own philosophies, discomfort with affording the coverage, and in many cases due to reinsurance treaty restrictions to which carriers must comply with.
2.The company (and/or its broker) should consider a “floating excess” policy. These policies cover both types of exposures and their limits can be applied, in any proportion, to any combination of policies (D&O and Fiduciary in the example). In practice, this floating excess policy negates the effect of the noncumulation of limits endorsement.
A number of companies (public and private) have had to deal with the issues associated with these types of claim scenarios. By engaging a qualified broker and being educated on the nuances within your insurance policies, you and your company can avoid multi-million dollar pitfalls like those associated with the noncumulation of limits provision, common in many insurance policies.