In short. This module covers the liability of management and supervisory board members and the structure of D&O insurance: insured persons, coverage sides, defence costs and the conduct exclusion.
Learning outcomes
After completing this module you will be able to:
- distinguish a director's personal liability from the company's loss;
- read the definition of insured persons and the coverage sides;
- check the conditions of exclusions and defence costs.
Key points
Directors' liability
A management board member must perform his or her duties with the diligence of a prudent businessperson; members who cause damage to the company by breaching their duties are jointly and severally liable, and a member is released if he or she proves that this standard was met (ÄS § 187 for private limited companies, § 315 for public limited companies). D&O insurance covers the director's liability and defence costs within the terms of the contract; it is not a guarantee against every economic loss of the company.
Insured persons and coverage sides
Who is an insured person (current and former directors, directors of subsidiaries, employees in certain roles) follows from the policy definition. The content of the coverage sides must be taken from the particular contract: typically Side A covers the director's loss not indemnified by the company, Side B the company's indemnification of the director, and Side C the company's own liability, often only for securities claims.
Limits and defence costs
A shared aggregate limit, defence costs eroding the limit and the treatment of related claims as a single claim can substantially reduce the remaining cover. Advancement of defence costs and the insurer's consent requirements must also be checked.
The conduct exclusion
In D&O policies the intent and fraud exclusion is often tied to a final adjudication: defence costs are advanced and must be repaid if intent is established. A severability clause prevents one director's intent from being imputed to others. Suspicion or the opening of criminal proceedings does not in itself trigger the exclusion.
Read before the quiz
Articles on this site:
- D&O claims in Estonia: director liability and insurance
- D&O case studies: data breaches, investor claims and limits
- Typical coverage disputes in cyber, crime and D&O insurance
Legal sources:
Practical case
Write down your own answer before opening the suggested approach.
A company brings a claim for damages against a former management board member and at the same time reports a suspected offence to the police. The director wants the D&O insurance to pay the defence costs. Which terms and documents must be checked?
Suggested approach
Check: whether the former director is an insured person; the definition and timing of the claim (claims made); whether the company's claim against the director is covered or whether an insured vs insured exclusion and its carve-backs apply; the defence costs clause, advancement and the insurer's consent; the threshold for applying the intent and fraud exclusion (final adjudication or otherwise); severability; the repayment condition; the aggregate limit. Suspicion of an offence alone does not decide the question of cover.
Self-check quiz
Answer the three questions and press "Check answers". An explanation is shown for each question.