Giving the board discretion

A new directors’ and officers’ liability policy endorsement gives a company’s board the power to elect to stop paying defence costs for individuals who have committed fraudulent or illegal acts.

Allied World Assurance Company Holdings Ltd’s board-powered conduct exclusion endorsement provides the insured board of directors with the right to have a conduct exclusion (fraud, criminal conduct, illegal profit, etc) applied to a claim where a non-final judgment, an arbitration proceeding, a guilty plea or an admission under oath by an insured director or officer establishes that this individual committed such excluded acts. This right is exercisable only at the board’s sole discretion and after a two-thirds majority vote in favour of such action.

Such a move would allow the board to proactively maintain and preserve D&O policy limits for innocent members by preventing further payment under the policy of defence costs incurred by the guilty individual concerned.

Allied World senior vice president and global professional lines manager, David Bell, said, ‘We’ve seen recent situations where D&O limits were being exhausted by “black hat” executives known to have committed fraud, while both the innocent insureds and the insurer were helpless to preserve policy proceeds to defend innocent board members. This can result in directors and officers paying millions of dollars out of their own pockets to satisfy a settlement of a securities class action lawsuit. Directors and officers are rightfully concerned about facing such a scenario, particularly where all or a portion of their personal assets may be at risk. We believe that the board powered conduct exclusion endorsement provides them with the means to address this concern without the fear typically associated with providing the insurer more power to trigger the exclusion.’

The endorsement is available through Allied World’s subsidiaries in Bermuda, the US and the UK.