Why senior leadership carries personal legal exposure, and why corporate insurance alone does not protect the individuals making decisions on behalf of the company
When Management Responsibility Becomes Personal Exposure
A management decision made in good faith can still give rise to a claim. A financial report that is later challenged. A conflict of interest raised by a shareholder. Each of these scenarios can give rise to a personal claim against a director or officer, regardless of whether the company itself is also involved.
In the current business and regulatory environment, liability is no longer confined to the corporate entity. Directors and officers may face personal exposure arising from their role, including risks that extend to their private assets.
Who Is Covered Under a D&O Policy
The policy typically covers two main categories of insureds:
Directors, being members of the board responsible for oversight, governance, and approval of corporate decisions.
Officers, being senior executives with decision making authority and operational responsibility within the organization.
In a private company, the policy covers officers only.
Depending on the structure of the company, coverage may apply to board members, senior management, and additional role holders defined within the policy.
What the Policy Covers
A Directors and Officers Liability Insurance policy provides coverage for claims arising from wrongful acts committed in the course of their managerial duties.
Wrongful acts may include acts, errors, omissions, breach of fiduciary duty, misstatements, negligence, or omission.
Coverage applies to claims brought by shareholders, employees, creditors, regulators, and other third parties, and typically includes legal defense costs, including investigations, criminal proceedings, and disciplinary proceedings, reimbursed against receipts and subject to prior approval by the insurer, settlements, and judgments, subject to the terms of the policy.
How the Policy Operates
D&O insurance operates on a claims-made basis. Coverage is triggered when a claim is first made during the policy period, regardless of when the underlying act occurred, subject to retroactive provisions.
Maintaining continuity of coverage is therefore essential, particularly when renewing or replacing a policy, in order to avoid gaps in protection.
The Policy Is Not Standardized
D&O insurance is not a uniform product. Policy wording, scope of coverage, and exclusions may vary significantly between insurers.
For this reason, it is important to review the policy terms in detail, including endorsements, definitions of insured persons, and the specific scope of coverage granted.
Before issuing coverage, insurers typically require underwriting materials, including financial statements, corporate information, and disclosure of existing or potential claims.
Coverage After Leaving the Role
Exposure does not end when a director or officer leaves their position. Claims may arise in relation to acts performed during their tenure, even after they have ceased to serve.
This exposure is addressed through Run-off coverage, which extends protection for former directors and officers for a defined period following their departure.
Run-off coverage is particularly relevant in the context of transactions such as mergers, acquisitions, or public offerings.
Key Considerations and Coverage Boundaries
Claims Between Insured Parties
Policies often include an insured versus insured exclusion, limiting claims brought by one insured party against another, in order to prevent misuse of the policy.
Geographic Scope
It is important to verify whether the policy applies only within The State of Israel, including territories covered under the policy, or extends to additional jurisdictions, depending on the scope of the organization’s activity.
Retroactive Coverage
When replacing an existing policy, it is standard practice to maintain the retroactive date, ensuring that prior acts remain covered under the new policy.
It should be noted that if the act giving rise to the claim was not known to the officer at the time, coverage may still apply under the policy.
Public Companies
For publicly traded companies, it is advisable to extend coverage to include securities claims, such as class actions or derivative actions, subject to policy terms.
Permanent Exclusions
Certain exclusions apply under all D&O policies, including fraud, criminal acts, and personal profit obtained unlawfully, subject to final adjudication.
Coordination with Other Coverages
D&O insurance is designed to protect individuals, not the corporate entity. It operates alongside other policies, such as professional liability or cyber insurance, each addressing different categories of risk.
Proper coordination between policies is required in order to avoid gaps or unintended overlaps in coverage.
The Real Question Is Whether the Individual Is Personally Protected
In many organizations, there is an assumption that corporate insurance protects management. In practice, this is not always the case.
Standard commercial policies protect the company. D&O insurance protects the individuals responsible for its management.
Gur Insurance Group works with companies to structure D&O coverage that reflects their actual governance structure and risk environment, so when claims arise, the response is structured, not improvised.
