One of the first actions by a director at entering office is to ensure his directors and officers insurance. This is obvious in an era where Courts tend to increase responsibility of directors in the process of decision making in the company, and where sometimes a decision made may cause damage to the company and its shareholders. In such a case the director may find himself under a personal attack. But will the insurance company supply coverage when the time comes?
Directors and officers insurance is intended to vest the directors and officers with protection in the case of a personal claim against them with connection to their position in the company. The importance of this type of insurance is not just the protection at the end of the day but also the legal protection for the director during the process of the claim. Although the insurance company is obligated to protect the director during the process, in many cases the insurance company refuses to honor the insurance coverage contending that the legal claim indicates that the director committed fraud or other actions that are not covered by the insurance. This is, of course, even before the claim was considered by Court. This means that there is a probable chance that the director would not be able to properly fend such claim due to lack of funds to finance the defense costs and may ultimately be found responsible for acts he should not have been liable for. In such a case the insurance company will later argue that it was right to decide not to supply coverage (although had the covarage been supplied it may well be that the Court would have rejected the claim and the insurance company would have been forced to admit that the director did not commit the fraud and that coverage should have been afforded).
In other cases, the insurance company may apply the provision in the insurance policy enabling it to demand securities from the director against supply of temporary coverage. The insurance company will afford protection but demand a bank guarantee to ensure return the funds if the director is found liable. This means that the director efectively financs his own defense because to supply the guarantee he will need to deposit the funds in the bank.
Acceptance of this position of licensed insurance companies means undermining the basic principles of insurance because if the insurance company may decide by itself and without due process that a person is guilty, the insurance is meaningless. Even the Israeli Supreme Court in a recent judgment criticized this approach of an insurance company who chose to to renounce its obligation under the insurance in a similar way. Although it was in a side comment, it may indicate the approach of the Court on such issue if brought before it in the future.
Therefore, it is very important to carefully examine the directors and officers insurance policy before purchasing it, including its exceptions. For example, it is important to ensure that the policy includes a “run-off” clause allowing coverage for past events even after the termination of the insurance. In the event of a claim it is important to proceed vis-à-vis the insurance company in the proper manner and it is sometimes advisable to move the Court to declare the existence of coverage, in order to enable proper protection for the director or office.