Know the risks - Zurich

• An institution may be insolvent or otherwise unable to make indemnification.• Existing and proposed federal regulations may restrict indemnification. Forexample, under the current regulations of the Comptroller of the Currency,indemnification for civil money penalties is prohibited.Directors’ & officers’ liability insuranceD&O liability insurance provides a substantial measure of protection against thegaps in corporate indemnification, including coverage for most judgments andsettlements in derivative actions and protection when the institution is not permittedor financially unable to indemnify its directors. This section will briefly describe D&Oinsurance policies and the protections they generally offer.D&O policies issued by different insurance companies differ widely in their coverage.In most cases, directors should ensure that a qualified broker, counsel, risk manageror other expert is involved to critique their D&O insurance program and assist inimproving the protection afforded by that program.“Most D&O policies offer atleast two forms of coverage.The first, referred to as thepersonal, direct, or “Side-A”coverage, provides coverage forclaims made against individualdirectors and officers for lossesthat are not indemnified by thecompany. The second form ofcoverage, referred to as thecorporate reimbursement, or“Side-B” coverage, providesreimbursement for sumsthe company incurs in itsindemnification of loss incurredby the directors and officers.”1. Basic features of D&O policiesD&O policies are “claims made” policies, which means that they cover claims firstmade during the policy period, whether the alleged wrongdoing occurred during orbefore the policy period. Therefore, it is important for corporations to maintain highqualityD&O policies for many years after a director’s or officer’s service ends, as coveragefor the former director or officer will be determined based on the policy in existencewhen the subsequent claim is made, and not when the alleged wrongdoing occurred.Most D&O policies offer at least two forms of coverage. The first, referred to as thepersonal, direct, or “Side-A” coverage, provides coverage for claims made againstindividual directors and officers for losses that are not indemnified by the company.The second form of coverage, referred to as the corporate reimbursement, or “Side-B”coverage, provides reimbursement for sums the company incurs in its indemnificationof loss incurred by the directors and officers. Both forms of coverage apply only to lossincurred by the directors and officers in claims made against the directors and officers.Although both types of coverage are contained in the same insurance policy, each willbe set forth in a separate insuring clause and each will be subject to different retentions,and perhaps exclusions.Many D&O policies can also cover the institution’s liability to third parties in connectionwith certain types of claims against it for its own alleged misconduct. Unless a D&Opolicy explicitly covers the institution’s liability to third parties, an institution will notbe entitled to coverage under its D&O policy, except with respect to its obligation toindemnify its directors and officers.2. Self-insured amounts and policy limitsNormally, a D&O policy will include a retention (the amount the insureds must paybefore the insurer’s obligations attach) under the Company Reimbursement (Side-B)coverage for loss the institution is required or permitted to pay as indemnification.A different self-insured retention may apply with respect to the institution’s ownliability to third parties, or to other specific types of claims. Typically, D&O insurers do26Financial institutions guide