Understanding Important Exclusions in Directors and Officers Liability Insurance
Many Directors and Officers of private companies and non-profit organizations understand the importance of D&O insurance to protect their personal assets, as well as the entity’s balance sheet. Yet, many fail to take the time to understand important exclusions that are embedded in the policy.
One such exclusion: professional services rendered by the company. Underwriters seek to exclude claims arising from professional services, as such claims are more appropriately covered by an Errors & Omissions or Professional Liability Policy. Nonetheless, true D&O claims may arise out of professional services rendered by a firm and without careful crafting of the exclusion may result in a claim denial.
A payroll service company makes an error with the processing of paychecks for several clients due to a glitch in their payroll software. This error causes an overpayment to be issued for all checks released over a three-month period. Due to this error, the payroll company is being held responsible to reimbursement to all clients for the overpayment.
Shareholders of the payroll company file suit against them for this as it has created a loss in revenue and decrease in share value of the company.
The company files a claim under their D&O policy in response to the suit that has been brought against them. The carrier denies the claim because it arose from a professional service error and the D&O policy contains an absolute Professional Services Exclusion.
Although many carriers do exclude any claims arising from professional services, there are carriers that will provide the following amendments to the professional services exclusion:
- Losses that arise from a failure to supervise those who failed or improperly performed those services.
- Losses on account of a security holder derivative demand or action.
This amended wording is important as it may mean the difference between a covered and uncovered management liability claim.
Ultimately, if your firm provides any professional services to clients it may be appropriate to consider purchasing a separate E&O policy. Clients should not assume that a claim brought against their firm for any type of error/omission will be covered under a standard, or even amended, D&O policy. Consider consulting with a knowledgeable insurance broker who specializes in management liability and ask them for a full risk assessment and policy review.
About the Author:
Mary Fessler is a Client Manager with Oswald Companies and works in the Professional/Health and Human Services division of the Property & Casualty department. Her responsibilities include placement of specialty risk coverages, client contract reviews, coverage negotiations with carriers and performing policy audits. She has a special focus on technology and professional services companies. She has more than 15 years of experience in the insurance industry.
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