Most D&O and other forms of liability insurance policies contain what are referred to as action against insurer or no action clauses within the Conditions section of the policy. The following is a typical example of such clauses.

No Action Against Insurer

No action may be taken against the Insurer unless, as a condition precedent thereto, there has been full compliance with all of the terms of this policy and until the amount of any Insured's obligation to pay Loss has been finally determined either by judgment against such Insured after adjudicatory proceedings, or by written agreement of the Insured, the claimant and the Insurer.

RSUI Indemnity Co., RSG 21003 (02/04)

The clause bars anyone from bringing suit against the insurer unless “there has been full compliance with all of the terms of this policy” and “the Insureds' obligation to pay has been finally determined” by adjudication or agreed settlement. When compliance with the provision is met, any party to the policy may bring an action against the insurer to enforce the contract.

One purpose of no-action clauses is to prevent insurance coverage issues from being brought into the underlying tort action before liability has been established. However, the requirement that the insured's liability be established before a suit can be brought against the insurer could cause problems in certain situations. For example, some D&O policies contain affirmative-expense-advancement provisions that provide for the insurer to pay defense costs and expenses at the time they are incurred and prior to liability being established. If the insurer fails to provide advancement when it has promised to do so, a no-action clause might prevent an action by the insured to enforce the obligation. There is, however, some authority that has held that no-action clauses do not bar a declaratory action adjudicating defense or other coverage issues and that such clauses are intended only to prevent actions by third parties.

Although the courts might favorably interpret a no-action clause to allow a declaratory judgment of coverage, the less restrictive language found in the following example is preferable.

Action Against Us

No action shall be taken against us unless, as a condition precedent, there shall have been full compliance with all the terms of this Policy.

No person or organization shall have the right under this Policy to join us as a party to any action against any “insured person” and/or the “company” to determine the liability of any “insured person”, nor shall we be impleaded by the “insured persons” and/or the “company” or their legal representatives.

Bankruptcy or insolvency of any “insured person” or of their estates shall not relieve us of any of our obligations under this policy.

Insurance Services Office, MP 00 01 (04/03)

Policies that provide that coverage disputes to be resolved by arbitration usually do not contain no-action clauses. A few D&O policies contain neither an arbitration provision nor any type of no-action clause.