A.6. for service by the Insured Person in any position or capacity in any organization other than the Company even if the Company directed or requested the Insured Person to serve in such other position or capacity, except to the extent such coverage is otherwise provided by this Coverage Section or by written endorsement to this Coverage Section for Outside Positions;

Great American Ins. Co. D9100 (6/97)

It is not uncommon for directors and officers to serve on outside boards for business or philanthropic reasons. Because service on outside boards often is suggested or requested by the corporation, the question invariably is raised regarding the applicability of corporate indemnification provisions and insurance in such situations. There is a significant distinction between service independent of the corporation's desires, suggested by the corporation, or requested or directed by the corporation.

As a general rule, state statutes provide for corporate indemnification of directors and officers and others who have been directed or requested to serve on outside boards. Outside service not requested or directed by the corporation, or merely encouraged by the corporation, or undertaken strictly as a personal matter, may fall outside the corporation's power, desire and requirement to defend and indemnify.

Early D&O policy forms were silent regarding coverage for outside service, probably because it was not the intent of the underwriters to cover this exposure. Insurers argued that such outside service did not meet the criteria for coverage. Specifically, they said that serving in an outside capacity was not within the scope of the individual insureds' capacities as directors of the insured company. Conversely, insureds argued that when service on outside boards is at the request of the corporation or is otherwise made a requirement or condition of the director's or officer's service, such requests or requirements modify the scope of the director's duties to the corporation and coverage should apply. Underwriters were quick to incorporate exclusionary language clarifying their positions on the matter.

In recent years policy language has been developed that provides some exceptions to the blanket exclusions of outside-directorship service. The most common is the broad exception for service on outside, not-for-profit boards when at the direction or request of the corporation, as shown in the following example:

     The Insurer shall not be liable under any Coverages to make any payment for Loss as a result of a Claim made against an Insured:

1,(e) alleging, arising out of, based upon or attributable to any actual or alleged act or omission of the Insured Persons in their capacities as directors, officers, trustees, governors, employees . . . of any organization other than the Organization, even if service in such capacity is with the knowledge and consent of, at the direction or request of, or part of the duties regularly assigned to the Insured Person by the Organization; provided, however, this exclusion shall not apply with respect to any Claim for Wrongful Acts in a Non-Profit Outside Position;

Arch 00 ATL0003 00 (04/05)

Whether the outside-directorship exclusion appears in the policy form or is added by an endorsement, the insurer may provide that the insurance shall be excess of any indemnification and/or insurance available from the outside entity as shown above. In some cases, coverage may not apply at all if indemnification from the outside entity or its insurer is available.

A few outside-directorship exclusions contain more limiting language than that shown above and require that service on the outside board be at the “specific written direction” of the organization for coverage to apply. This more limited wording probably would obligate the insured corporation to provide indemnification. If so, coverage would be under the corporate-reimbursement section and subject to the applicable deductibles, retentions and coinsurance provisions of the policy. Insureds would be wise to ensure that their actions conform with these exception provisions when coverage is desired, especially as respects documentation of the “request in writing” provision. A permanent record of such requests should be kept to substantiate indemnification decisions.

Because language granting coverage or making exceptions to the outside-directorship exclusion is found in only a few policy forms, it may be necessary to request such modification to the policy when coverage is desired. Most insurers have a number of endorsements available to include coverage for the outside-directorship exposure, including one of more or a combination of the following.

·   Blanket coverage for all insurers when serving in outside directorships in not-for-profit organizations

·   Endorsements providing coverage to scheduled individuals only

·   Endorsements providing coverage for service by individuals in scheduled outside organizations

·   Endorsements extending coverage to service by individuals in political-action committees or joint ventures

·   Separate policies or coverage parts addressing the outside directorship exposure

Some of these endorsements restrict coverage to the individual-liability section only, or impose warranty clauses in respect to the outside entity. While most do not amend the limit of liability, some impose or provide the option of a sublimit. When the extension is provided as a separate coverage part, a separate limit of liability normally will apply.

Insurers vary in their willingness to provide coverage for outside-directorship service. In many instances, the additional premium requirements or limited scope of coverage makes the coverage cost-prohibitive or otherwise undesirable. For corporations that encourage or require their directors and officers to engage in such activity and find it difficult to add the necessary coverage to their existing D&O policies, separate stand-alone policies may be available to provide the needed protection.