Directors' and Officers' Cover for Past Directors - Navigating the "Claims Made" Policy Maze

Ensuring your company has a solid Directors’ & Officers’ (“D&O”) insurance policy in place is a pre-requisite for most individuals to take on the role.  Claims against directors personally put a director’s assets and career on the line, and the D&O policy provides comfort that an individual can manage a business and make decisions with insurance protection if legal claims arise. 

However, what happens when a director leaves the role?  Does the insurance still apply?  And, with claims having limitation periods of six years (or more) what if the company becomes insolvent or stops buying insurance before claims are made?

Claims Made Policy – What does that mean?

First, a reminder of some fundamentals.  A D&O policy is triggered by a claim that is made during a policy period.  However, the act that forms the basis of the claim (e.g. the director breach of duty) could have taken place at any point.  Subject to any other limitation on past acts[1], therefore, a breach of duty in 2021 leading to a claim against a director in 2023 will be covered under the 2023 policy.

That is all fine where the director is in place and has some control over or at least oversight of the D&O policy.  But what if the director retires from the role and a claim is made some time later?

Past, present and future

D&O policies cover (or, at least, should cover) directors even if they are no longer directors (and even directors who are not yet directors).  Typical language is found in the Directors or Insured Persons definition, along the lines of “…any natural person who is, was, or during the Policy Period becomes…a director…”.  As long as there is a policy, the retired director will be covered.

So far, so good.  So why are we even talking about cover for former directors (which appears as an extension in many policies) if the director is still covered under the main insuring clauses?  Well, settle down and we’ll begin… 

This is an Ex-Policy!

As you may well have guessed, the key here is that the extension for Former or Retired Directors will provide cover if there is no regular policy in place.  Reasons why a policy may not be renewed include insolvency of the entity, sale of the business, administration, or purely the cost and availability of cover (rarer, but possible). 

A Former Directors extension would also pay out only after cover available under any run-off policy.  Run-off is insurance that may be purchased to cover past acts if a company is no longer purchasing D&O on an ongoing basis (although cover will not always be available). Depending on the terms of the run-off cover, it may mean there is no cover available under the Former Directors extension (as the run-off is effectively treated as a renewal so far as the former directors are concerned).

Beware the change of control

A key limitation of the cover is that it is unlikely to apply if the director leaves the role because of a change of control event, such as a takeover or insolvency (when most or all directors resign).  There is a subtle difference, therefore, between cover for former directors who find that there is no renewal policy because of a change in control, and those retiring directly as a result of the change in control.

The reason is that, at takeover or insolvency, cover for directors in situ will usually cease, and the company will be required to purchase run-off cover for any future claims relating to the period before the change of control event.  If cover were automatically provided under the Retired Directors extension, there would be no need for run-off cover (and insurers would have accepted a risk that had not been priced in).

When is a renewal not a renewal?

The general position, therefore, continues to be relatively straightforward to follow.  However, inevitably, there are nuances in the wording:

• What is the position if a £20m limit of insurance is replaced with a £1m limit on renewal?  Would that be sufficient to extinguish any liability of prior insurers under the Former Director extension?  The terms of the extension must be reviewed carefully and (if market conditions allow) amended to provide the protection.
• Equally, what if the terms on renewal insert additional exclusions?  The same point applies as with limits – review and amend.
• We have also seen examples of policies that cover directors only if they retire during the policy period.  To be properly effective, the policy must cover all directors whenever they retired (subject to the insolvency and takeover points, above).  Coverage for directors retiring “before the end of the policy period” (or equivalent) is the preferred language.
• Is the period of cover sufficient?  Generally, in the UK six years is sufficient to cover most limitation periods and many Former Director extensions are based on a six-year period of cover.  However, other jurisdictions have longer periods and UK limitation can be for a longer duration in some circumstances.  Lifetime cover ensures full protection, but may not always be available.
• Some director duties continue after leaving the role[2].  An extension that provides cover solely for pre-retirement acts would not pick up such claims.
• Does the cover include only directors or does it extend to other Insured Persons (given the variety of roles that are covered under a modern D&O policy)?

Gardening, Golf and Grandkids

Our final tip is that the terminology for the extension is often couched in terms of “retirement” of directors, rather than “former” directors cover.  The extension should not require retirement of the bus pass variety (or the more pleasant pursuits listed in the heading of this section); rather the intention is retirement from that specific director role.  Reviewing the definitions and tracking through what the language actually said is important to ensure the extension meets expectations.

Dude, where’s my policy?

There are some legal issues and practicalities to work through if a director is to leave a role when it comes to protection for future claims.  Will the company be obliged to continue to buy D&O cover that would pick up claims against the director? Do the policy limits have to be maintained at a certain level?  What indemnities will the company provide to a director once they have left the post?  And, practically, how does a former director obtain a copy of the relevant policy and/or contact details for insurers to make a claim, bearing in mind that insurers on a D&O programme could change year to year?  All points for an outgoing director (and the company) to consider.

As easy as that

From a basic premise, we have mapped the intricacies of cover for former directors.  A simple idea requires some specific drafting to ensure all bases are covered, and a knowledge of circumstances that will impact cover.  The extension must also work with director indemnities and the practicalities of making a claim once an individual leaves office.  It is a key, but, often, confusing, part of the D&O policy that merits close attention to ensure it is there when required.