Most D&O policy forms are subject to a single annual aggregate limit, applicable to both the individual-liability and the corporate-reimbursement coverage parts. This provision is illustrated in the following sample policy language.

The most we will pay for all “loss” under Coverage A or Coverage B or both, resulting from all “claims” first made during the “policy period” and Extended Reporting Period, if applicable, is the aggregate Limit of Liability shown in the Declarations.

If the aggregate Limit of Liability is exhausted by the payment of “loss”, we will have no further obligations or liability of any kind under this Policy.

ISO Properties, Inc., MP 00 01 04 03

Notable exceptions are policy forms that provide only individual-liability coverage or policies that have multiple coverage parts that may stipulate separate limits for employment practices liability, fiduciary liability, or other coverage extensions such as for securities claims or investigative expenses. This approach is illustrated in the following example.

The Limits of Liability and Retentions for each Coverage Section are separate Limits of Liability and Retentions pertaining only to the Coverage Section for which they are shown. The application of a Retention to Loss under one Coverage Section shall not reduce the Retention under any other Coverage Section and no reduction in the Limit of Liability applicable to one Coverage Section shall reduce the Limit of Liability under any other Coverage Section.

Westchester Fire Insurance Company, PF-15191NFP (07/05)

Most policy forms clearly state that costs and expenses associated with defense of claims are included in and are not in addition to the overall limit of liability. Coverage for such expenses normally applies in the same fashion as indemnity for liability, subject to the applicable deductible or retention.

The overall aggregate limit of liability also normally applies if the insured actuates the policy's Extended Reporting Period (ERP). Aggregate limits are not usually reinstated or increased by purchase of the ERP. However, reinstatement of full or partial limits may be available in limited circumstances for additional premium.

Retentions

Most D&O policies contain a retention, deductible, or some other provision that requires the insureds to first bear a portion of loss before the insurer pays any loss. When the deductible or retention applies as respects claims against the individual directors and officers, the clause may provide for a specified amount to apply per individual insured for each claim. The clause also may provide for a single retention applicable to claims made against several insureds for the same or related wrongful act(s). When the sum of the individual-insured retentions exceeds the individual-insured aggregate deductible, only the aggregate retention normally applies.

Retention or deductible amounts that apply to the individual coverage part generally are quite low; it may not be unusual to have per-insured retentions of $500, $1,000, or $5,000 with the aggregate retention being between $25,000 and $50,000. The trend in recent years, however, has been for the individual coverage part to have a small flat deductible or no deductible at all.

The trend toward elimination of the individual deductible, while beneficial to the individual insureds, may be more the result of changes in attitudes toward indemnification than any deliberate improvement in the policy forms by insurers. Most claims paid by D&O insurers are under the corporate-re­imbursement section when the corporation is allowed to provide and/or has provided indemnification to its executives. Removal of the already-low deductible probably has little impact on overall loss costs to insurers. This is especially true considering that claims are infrequently paid under the individual-coverage section.

Some recent D&O policies contain a creative provision that applies the retention applicable to securities claims (or under a few policies, all claims other than employment practices claims) only to defense costs, not to any settlement or judgment. In addition, this type of provision frequently provides that the retention does not apply to defense costs if all defendant insureds successfully defend the claim without the payment of any settlement or judgment. This type of provision appears to be intended to encourage insureds to define an exit strategy early in the D&O litigation process. If the insureds believe they must ultimately settle the case, this type of provision may encourage an early settlement, thereby triggering coverage sooner, and thus avoiding needless defense costs that are otherwise payable by the insureds within the retention. However, if the insureds believe they can successfully defend the case, this type of provision rewards such success by waiving the retention entirely.

Retentions under the corporate-reimbursement section of the policy often are substantially larger, reflecting both the organization's greater capacity to bear risk and the frequency of claims paid under this section. For even medium-size corporations, the retention can be into six figures.

Presumptive Indemnity

Some policies may contain what are referred to as presumptive-indemnity clauses, which can include language that

•Deems that the corporation's bylaws, articles of incorporation or resolutions have been amended to allow or require the corporation to provide indemnification to the fullest extent permitted by law.

•Provides that claims paid directly to the individual insureds will be subject to the corporate-reimbursement deductible when the corporation is allowed by law but chooses not to indemnify its directors or officers.

The following sample policy language illustrates presumptive-indemnity.