The document discusses the importance of Directors and Officers (D&O) liability insurance in protecting individuals and organizations from legal claims arising from management decisions. It outlines various scenarios where D&O coverage is vital, such as litigation from employees, shareholders, and competitors, while also highlighting the potential costs of defending these claims. Additionally, the text touches on employment practices liability insurance and fiduciary liability, emphasizing the need for comprehensive protection against wrongful employment practices and the risks associated with managing employee benefit plans.

1. Management Liability
The illustrations present main coverage features of the
base policy form only. Refer to the actual policy forms
and endorsements for a complete scope of coverage

2. Chapter 1
Directors and
Officers
Liability

3. Directors and Officers Liability
In today’s business climate of corporate transparency and accountability, an
organization’s officers and directors face a myriad of employment-related
exposures. Sarbanes-Oxley regulatory mandates and shareholder activism mean
directors are more frequently at risk, translating to rising claims and escalating
settlement costs.
In the wake of unprecedented corporate scandals in recent years, clearly the trend
of corporate accountability applies to large corporations. But privately held
companies, including nonprofits, are not exempt from litigation arising out of the
management decisions of their boards. They, too, are at risk.
Regardless of your company’s size, the legal cost to defend a director is
substantial, as are the potential penalties that can be personally incurred. Due to
the personal liability risk, which is not covered under a personal insurance policy,
protecting boardroom talent can be a challenge. To help ensure both your officers’
and company’s well-being, a directors’ and officers’ liability insurance (D&O) policy
is part of a comprehensive risk financing strategy.
D&O Fills the Coverage Gap
Unlike a commercial general liability policy that provides coverage for claims
arising from property damage and bodily injury, a D&O policy specifically provides
DIRECTORS AND OFFICERS
Directors and Officers of public, private and
non-profit corporations are subject to
stringent duties of care, loyalty and obedience
imposed upon them by federal, state and
common law.
They are compelled to use their best business
judgment in making decisions for the
corporation.
The initiators of lawsuits against directors and
officers in the public, private and non-profit
arena are diverse and can include:
1. - Family members
2. - Employees
3. - Investors
4. - Shareholders in derivative actions
5. - Competitors
6. - Customers, Vendors, Suppliers
7. - Government Agencies
8. - Creditors
9. - Donors, Beneficiaries
2
Section 1

4. coverage for a "wrongful act,” such as an actual or alleged error,
omission, misleading statement, neglect or breach of duty.
For example, a manufacturer told one of its suppliers to increase
inventory because they were expecting a large increase in
production. As predicted, demand for the manufacturer’s product
grew, but the manufacturer increased its inventory with another
vendor. The original supplier successfully sued the manufacturer,
alleging they suffered damages as a result of having relied on the
manufacturer’s promise.
A D&O policy provides defense costs and indemnity coverage for
allegations arising out of the management of the enterprise and is
typically made up of:
• Coverage for individual directors and officers;
• Reimbursement to the organization for a contractual
obligation to indemnify directors and officers that serve on
the board; and
• Protection for the organization or entity itself.
Ordinarily indemnification provisions are included in the charter/
bylaws of a corporation. Small to midsize privately held
companies or nonprofit organizations often do not have the
financial resources to fund the indemnity provisions, making the
bylaws hollow. A D&O policy can provide an extra blanket of
security in the event of a covered loss.
Coverage
A “fraud” exclusion is included in a D&O policy, which eliminates
coverage for losses due to dishonest or fraudulent acts or
omission, or willful violations of any statute, rule or law.
D&O coverage can be tailored to your needs, but be aware that
D&O carriers are not consistent with their policy forms. This fact,
plus the complexity of D&O claims, requires the carrier to have
market commitment and deep expertise, as well as the financial
resources to handle potential claims.
There are also additional forms of coverage to adequately protect
directors and officers, including:
• Entity coverage;
• Payment priority for insured persons;
• Severability of the insured as well as severability of the
application;
• Coverage over time, meaning coverage responds to past,
present and future directors and officers;
• Pay on behalf clause; and
• Duty to defend clause.
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5. Who can bring a D&O lawsuit? According to St. Paul Travelers,
statistics show that shareholders and employees are the most
likely groups to sue private companies. Other parties bringing
suits may include corporations against themselves, and a variety
of third parties, such as competitors, creditors, and regulatory
bodies.
Link to a video Directors and Officers claim scenario.
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6. Section 2
Directors & Officers Claim Senarios
Interference with a contract
A competitor sued the a privately held flooring company with 15
employees for conspiracy to divert a potential contract from their
company. Allegations included interference with a contract and a
knowing participation in a breach of duty. The plaintiff sought
direct and consequential damages, including lost profits, punitive
damages and attorney’s fees. Resolution The case was resolved
after mediation. Hartford paid over $193,000 of defense costs.
Misrepresentation of the market
Two minority shareholders filed suit against the board of directors
of a telecom company after a less-than-stellar year. The plaintiffs
claimed the board breached its duty to the shareholders by
mismanaging the business, which resulted in a loss, despite
previous forecasts of a significant profit. The plaintiffs alleged
that the board misrepresented the state of the market, which
influenced their decision to invest. Travelers paid $300,000 in
defense expenses before settling the case for $500,000.
Unfair methods of competition and unfair trade practices
The government sued an internet marketing company asserting
causes of action including failure to disclose material terms,
misrepresentation* and negative marketing. Specifically, it was
alleged that the insured improperly sought personal information.
The data would then allegedly be analyzed and sold to third
parties. Travelers paid in excess of $800,000 in legal defense
fees and paid an additional $75,000 to settle the case.
Misrepresentation
An officer of a private corporation generating $55 million in sales
held a conversation with a potential investor in which they
discussed the launch of new products over the coming six
months. Based on this information, the investor committed over
$500,000 to the company. After a year, the products the investor
anticipated did not appear in the marketplace.
During this time period, the value of the original investment
declined. The investor sued XYZ and its directors and officers for
misrepresentation, seeking over $10 million in compensatory and
punitive damages.
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7. Following two years of litigation and $250,000 in defense costs,
the parties finally reached a settlement with the plaintiff for
$335,000. Defense costs and settlement were paid by Chubb.
Fraudulent Misrepresentation, Breach of Duty of Care
The distributor generating $11 million in sales was sold to an
unrelated third party. The plaintiff, a former investor, sued the
company and its officers for fraudulent misrepresentation and
breach of duty in connection with the alleged undervalued buy-out
of the investor’s interest in the company just prior to the sale.
The case went to trial and was decided in favor of the
defendants. The defendants incurred $1.2 million in defense
costs. Defense was provided by Chubb.
Theft of Trade Secrets
ABC Company, privately held company generating $80 million in
sales sued directors and officers of competitor XYZ after three
employees of ABC left to join XYZ. ABC alleged that the three
were still employed by ABC when they began sharing proprietary
information with XYZ. ABC charged theft of trade secrets. After
more than a year of legal wrangling, the case settled. XYZ agreed
to pay ABC $160,000 as a settlement, but not before incurring
$355,000 in defense costs. Defense costs were paid by Chubb.
Theft of intellectual property
A software developer sued the insured’s directors and officers for
misappropriation of his intellectual property. After a joint venture
between the parties failed, the plaintiff claimed the insured
organization took his ideas and developed its own software,
allegedly retaining and using the intellectual property to create a
competing product. Travelers paid in excess of $200,000 in
defense expenses, in addition to making a $50,000 contribution
toward the settlement.
Misrepresentation and fraud
The insured was a privately held manufacturer with 5 employees.
An investor sued the insured’s chairman and director asserting
that he was misled regarding how his investment would be used.
Allegedly he was told his $525,000 investment would be used for
capital improvements, but his investment was instead used to
pay operational expenses and existing debt. The investor sought
recession and damages based upon the alleged
misrepresentations. The case was resolved after mediation for
$285,00 on behalf of the insured. Approximately $262,500 was
paid by Hartford in defending the claim.
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8. Chapter 2
Employment
Practices
Liability

9. From the moment that you start the pre-hiring process until the exit interview, you
are vulnerable for a lawsuit. As a result, your business should take a hard look at
whether it can afford to defend itself against alleged wrongful employment
practices accusations. If not, there is an insurance solution called Employment
Practices Liability that protects against wrongful termination, discrimination (age,
sex, race, disability, etc.) or sexual harassment suits from your current, prospective
or former employees. This coverage applies to directors, officers and employees,
and can sometimes extend to third party liabilities.
Why Choose Employment Practices Liability Insurance?
According to researchers, three out of five employers will be sued by a
prospective, current or former employee while they are in business. While many
suits are groundless, defending against them is costly and time-consuming.
Employment Practices Liability Insurance provides protection from the following
wrongful employment practices, including:
• Harassment
• Discrimination
• Actual or alleged wrongful dismissal, discharge or termination
Section 1
EMPLOYMENT PRACTICES LIABILITY
Employment matters are at the core of
millions of dollars in lawsuits filed every year.
From contract or compliance issues to Title
VII allegations, employment exposures are
some of the most complex for modern
companies to navigate, and among the most
costly to defend.
Employment Practices Liability coverage
provides protection for employment causes of
action including:
1. - Wrongful Termination
2. - Sexual Harassment
3. - Wrongful Discipline
4. - Wrongful failure to employ or promote
5. - Unlawful Discrimination
6. - Negligent Employee Evaluation
7. - Retaliation
8
Employment Practices Liability

10. • Employment-related misrepresentation
• Employment-related libel, slander, humiliation, defamation or
invasion of privacy
• Wrongful failure to employ or promote
• Wrongful deprivation of a career opportunity, wrongful
demotion or negligent evaluation
• Wrongful discipline
• Vicarious liability for intentional acts
• Punitive damages
• Discrimination in relation to race, marital status, gender,
age, physical and/or mental impairments, pregnancy, sexual
orientation and any other protected class established by
federal, state and local statutes
Many policies offer the following inclusions and add-ons:
• Consultation, HR assistance and other risk management
consultative services.
• Coverage for defense costs outside the policy limits (for
qualifying risks).
• Third party liability coverage (for qualifying risks).
• Wage and Hour Coverage for claims alleging wage and hour
violations.
• Volunteer workers can be added as additional insureds.
• Extended reporting periods may be added
Link to a video Employment Practices Liability claim scenario.
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11. Section 2
Employment Practices Claim Senarios
Wrongful Termination
A mid-level supervisor, working for a privately held company
employing 40 people, with a long history of documented
performance issues was terminated for smoking in a restricted
area of the company’s building where flammable chemicals were
stored. The terminated employee, who was 54 years old,
responded by suing the company for wrongful termination, He
alleged age discrimination on the basis of comments made by
his supervisor (such as “You’re too old”) and disability
discrimination because the company refused to make
accommodations for his high blood pressure. He also alleged he
could only be terminated for good cause. The plaintiff sought
back pay, front pay, special damages, and attorney fees totaling
an estimated $275,000, in addition to punitive damages. Chubb
settled with the former employee, paying $350,000, but not
before it had paid $130,000 in defense costs.
Age Discrimination
ABC International, a privately held company with120 employees,
terminated a long-time manager for alienating employees and
customers and disinterest in his job. The manager was 59 years
old when the termination took place, and ABC checked off
“other” instead of “poor performance” on the termination form as
the reason for the termination. The manager filed a charge of
discrimination with the Equal Employment Opportunity
Commission, alleging he was terminated because of his age. In
his charge, he stated that he had always received regular merit
pay increases, was replaced by a worker in his 30s, and that
some members of senior management had made comments
about needing “to get rid of the old guys.” The manager
subsequently filed a lawsuit against the company seeking two
years of lost wages and benefits, as well as compensation for
emotional distress. Although ABC believed it was innocent of the
allegations, the company determined that defending against the
lawsuit would be costly. The case eventually settled out of court
by Chubb for $250,000, while expenses totaled more than
$60,000.
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12. Sexual Harassment
According to a female employee, a supervisor allegedly made
abusive and sexually explicit comments to her and several
coworkers. The supervisor also made sexual advances toward
the employee, who rebuffed the advances. Shortly thereafter, the
employee was terminated as part of a wider company reduction
in force. The former employee later brought suit against the
company and two managers, alleging sexual harassment,
intentional infliction of emotional distress, wrongful termination,
retaliation, and sex discrimination. She sought $275,000, plus
reimbursement of legal fees. The employer, a private company
with 140 employees, responded with a defense stating that the
ex-employee’s personnel file showed she had often been tardy for
work, had conflicts with managers, and had patchy performance
and that her termination was the result of a broad reduction in
force. Records indicated she had been a problem employee,
frequently talked about her sex life, and made vulgar comments
at work. However, it also came to light that management had
tolerated sexual jokes around the office but assumed no one was
offended. A court panel ruled against the company, ordering it to
pay the plaintiff $100,000 plus her legal fees. In addition, the
company accrued $31,000 in defense costs.
Sexual Harassment
A female employee, with XYZ Corporation for two years, exhibited
a sudden drop-off in her work performance. Her supervisor set up
a meeting to discuss her performance, but she failed to show up.
She did show up for a rescheduled meeting, but had alcohol on
her breath. She complained during the meeting that she faced
continuous sexual harassment from a senior manager and his
unwanted advances created a hostile work environment. At the
suggestion of her supervisor she agreed to take another position
at a different location. She failed to show up for work at the new
location and skipped several more meetings with her supervisor.
The company terminated the employee. She filed a lawsuit
alleging sexual harassment and wrongful termination seeking $1
million in damages. She alleged that a senior manager maintained
an uncomfortable closeness with her in the workplace and
continually harassed her with questions about her personal life. In
subsequent employee interviews, it was discovered the employee
and the senior manager were engaged in a consensual romantic
relationship over the two-year period. Witnesses said that the
employee was also engaged in another love affair at the time, but
she and the second lover had broken up at about the time her
performance dropped off. The company determined that it would
rather settle than go to court. After paying more than $120,000 in
defense costs, the company settled with the former employee for
$250,000.
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13. Chapter 3
Fiduciary
Liability

14. Employee benefits are a key piece of the job market today. To employers, excellent
benefits like health care and retirement funding are an essential for attracting
committed, quality workers.
Sometimes though, problems arise even when programs are set up with the best
of intentions. Whether a shaky market shrinks funds or bad investment advice
leads to sudden loss, companies need to know what kind of protection they
provide their fiduciaries.
Fiduciary Liability Basics
Fiduciary liability got its start in 1974 with the passing of the Employee Retirement
Income Security Act (ERISA). In short, the act made companies accountable for
the security of their employees’ retirement fund. ERISA’s goal was to have money
put into retirement funds treated like money in a savings account rather than
money invested in the market. Since workers are not responsible for the decisions
made, they should not be punished for foolish investing.
Although the government requires that all employers secure the funds of their
workers through fidelity bonds, they do not require that companies take any
precautions against fiduciary liability. While some aspects of fiduciary risk could be
covered by directors’ and officers’ (D&O) or commercial general liability insurance,
Section 1
Fiduciary Liability
FIDUCIARY LIABILITY
In 1974 The Employee Retirement Investment
Security Act (ERISA) established standards of
conduct for the Fiduciaries of employee
benefit plans. Fiduciaries are held to the
highest standard of care in the administration
and management of these plans, and can be
held personally liable for failure to act
prudently on behalf of plan beneficiaries in
violation of ERISA.
Who is a Fiduciary?
Anyone who exercises discretionary
administrative or management
control or authority over a sponsored
retirement or welfare plan or the plan assets.
Who should be concerned with Fiduciary
Liability?
1. Plan Administrators
2. Trustees
3. Directors or Officers
4. Human Resource personnel
5. Persons with clerical or administrative
responsibility for pension or welfare plans
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15. this is rare. Fiduciary liability resembles these other forms of
insurance, but resides in its own distinct category.
Fiduciary Liability: What it’s Not
Fiduciary coverage protects a company’s designated retirement
fund managers from allegations of irresponsibility. Having this
specific role, it complements other policies but does not extend
over them.
Employee benefit liability (EBL) protects benefit managers from
mistakes and omissions made in the administration of various
employee programs. Such policies cover the typically minor
issues that arise over proper filing and enrollment, but do not
protect against lapses in how a manager does investing. EBL is
largely meant to watch over company paperwork.
Fidelity bonds are requirements of the government to ensure the
protection of plan assets. These bonds may only be used to
restore funds of the retirement plan in the event of a loss. Charges
may be brought against a fiduciary regardless of the coverage
provided by bonds.
D&O liability, which protects from improper behavior by company
executives and managers, does not provide coverage for actions
pertaining to ERISA.
Protecting the Company
Due to the complex communication, advisements and stock
market risks inherent to the role of a fiduciary, liability for
retirement funds is often shared unfairly or misplaced entirely.
Poor recommendations made by third-party financial advisors
and sudden swings in a turbulent market can leave responsibility
solely on even the best of fiduciaries. Fiduciary liability coverage
can help defend a company’s reputation and the reputation of its
management.
Link to video of Fiduciary Liability claim scenario.
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16. Administrative Error
A management-level employee of the ABC Hotel, earning a
$50,000 annual salary, died in an automobile accident. The
employee’s widow, who was the primary beneficiary of the
employee’s group life insurance, wrote a letter to hotel
management with 150 employees claiming that the life insurance
benefit paid to her under the benefit plan should have been five
times her deceased husband’s salary, not two times his salary.
The hotel denied the widow’s benefit claim. She sued, alleging
that, although the benefit amount had been twice his salary at
one time, her husband had requested that the amount be
changed to five times just weeks prior to his death. The hotel
denied that any change had been requested.
After the hotel investigated the widow’s claim, they learned that
indeed her spouse had requested an increase in the amount of
his group life insurance coverage, but that the hotel’s human
resource representative had not properly processed the request.
As a result of this revelation, the hotel settled the widow’s case
for more than $250,000. The hotel’s defense costs exceeded
$25,000
Denial of Benefits, Improper Advice
The HMO under the media company’s health plan denied
payment of medical costs for an employee who was hospitalized
following an accident. The HMO claimed that the employee never
notified the HMO of her hospitalization, as required under the
health plan. In fact, the employee had called her employer’s plan
administrator, who advised her that because she’d called the
employer it wasn’t necessary that she call the HMO, forgetting
that the notification rules had recently changed. The employee
sued her employer and the plan administrator over the benefits
denial, alleging that she had received improper advice. The case
settled for more than $500,000—the amount of the benefits, plus
attorney fees.
Section 2
Fiduciary Claim Senarios
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17. Cause of action Negligent Selection of Advisor
It turned out that the internal investment manager hired by a
sports apparel retailer to manage investments of its 401(k) plan
was allegedly skimming money off the top of employees’
retirement fund contributions. He was also a relative of the
company’s plan administrator and, therefore, a thorough criminal
background check was not performed. The Department of Labor
(DOL) discovered the scheme during a spot audit. The DOL
issued a letter advising the sports apparel retailer of its findings
and demanded that the retailer and the investment manager
make the plan whole (i.e., replace the funds that were stolen, as
well as the investment income the
funds would have earned had they been invested as directed by
the participants.) If the plan was not made whole, the DOL would
pursue additional courses of action, including litigation.
The retailer settled with the DOL prior to litigation and agreed to
contribute more than $2 million to the employees’ 401(k)
accounts—the amount of funds skimmed from the top of the
employees’ contributions and the investment income the funds
would have earned had they been invested as directed by the
employees. Total legal expenses incurred by the sports apparel
retailer topped $75,000.
Imprudent Investment
Employees who participated in a 401(k) plan formed a class
action and sued the investment committee, the plan
administrator, the plan, and the sponsor organization, a health
care equipment and services company. They alleged that $12
million invested in ABC Company guaranteed investment
contracts (GICs) was imprudent because of that company’s
extensive junk-bond holdings. They further alleged that the
investment violated the terms of the master trust agreement,
which authorized GIC investments underwritten only by AAA-rated
companies. ABC Company was not AAA-rated and was
eventually placed in receivership.
Participants and their beneficiaries sued for breach of fiduciary
duty. Plaintiffs sought to recover their lost profits—the difference
in the value of their investments in ABC Company and the value
their investments would have had if they would have been placed
in AAA-rated investments. It took three years to arrive at a
settlement of more than $4 million, including plaintiffs’ attorney
fees. Defense costs totaled approximately $750,000.
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18. Chapter 4
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