U.S. Specialty NP0002 (10/01))

The most common uninsurable loss elements are:

·   Fines and penalties imposed by law. Almost all D&O insurers exclude coverage for both civil and criminal fines and penalties.

·   Punitive and exemplary damages. Although often excluded, some insurers may include coverage for such damages within the Loss definition or by endorsement. When coverage is granted, it is usually to the extent allowable by governing law or by applicable law in the most favorable jurisdiction.

·   Multiplied damage awards. A multiple of compensatory damages is sometimes awarded by the courts in certain types of claims (such as those involving anti-trust violations). Because multiplied damages are punitive in nature, most D&O insurers exclude coverage for them.

·   Taxes. Payment of taxes is a corporate responsibility under city, state, or federal law. Even if a D&O policy did not list tax liability as uninsurable loss, most state and federal courts would consider such liability to be outside the scope of coverage.

·   Matters Deemed Uninsurable Under Law. Includes any other types of loss for which public policy or statute may preclude insurance coverage.

It should be noted, however, that coverage sometimes can be added by endorsement or may otherwise be included in the policy form to grant back certain otherwise excluded forms of loss. Such coverage, also called “carvebacks,” may be available for certain defense costs associated with civil penalties, such as under the Foreign Corrupt Practices Act, and taxes, which in the event of bankruptcy become personal obligations of insured persons.

Great care should be given to whether investigation costs are included within the definition of loss as some policies specifically state that claim investigation expenses are not considered to be loss under the policy. In a recent court case (Office Depot, Inc. v. National Union Fire Insurance Co. of Pittsburgh, PA) the United States District Court for the Southern District of Florida found that Office Depot could not recover some $23 million in legal costs and fees associated with their voluntary response to a Securities and Exchange Commission (SEC) investigation. The court determined that such costs and fees did not meet the definition of loss in the policy and that such costs and expenses were related to investigation of a “potential claim,” not an actual “claim.”

Some D&O policies also exclude damages for which the insured is not liable. Such damages might include expenses incurred by the directors and officers, which were determined by the courts to be nonindemnifiable by the corporation.