By Natasha Fuentes, Risk Placement Broker
As a business owner, you understand the importance of having a directors and officers (D&O) liability insurance policy to protect your company’s leadership team. A key component of this coverage is safeguarding the management team’s and the board’s personal assets if they are sued for claims related to financial losses, mismanagement, regulatory non-compliance, and other alleged wrongful acts.
However, D&O insurance policies can vary, making it crucial to know not only what’s covered but also what may be excluded. One common exclusion to be aware of is the major shareholder or principal shareholder exclusion.
What does the major shareholder exclusion cover?
The major shareholder exclusion precludes coverage for claims made by shareholders who own a significant portion of the company – usually 15% or more of the voting shares or rights. This can include individuals on the company’s board who represent these shareholders.
This exclusion aims to reduce conflicts between large shareholders and the company’s managers, such as issues of collusion or conflicts of interest. By excluding these claims, the insurance ensures that coverage is focused on protecting directors and officers from external claims rather than internal disputes. It also prevents major shareholders with significant control from benefiting by filing claims against directors for actions they were involved in or could have stopped. Since the exclusion can significantly reduce exposure for underwriters, the cost is typically lower with this exclusion included.
However, depending on the business’s ownership and board structure, the major shareholder exclusion can remove critical protection for directors and officers.
What is the possible impact on your business?
When securing a D&O liability insurance policy, it’s essential to check if the form excludes claims made by major shareholders. Policyholders may have the option to maximize the coverage available for claims brought against their directors and officers by negotiating the deletion of any significant shareholder exclusion or its amendment. Alternatively, it may be possible to negotiate the trigger shareholding amount upwards. The trigger amount, often 15% (claims by shareholders owning 15% or more are excluded) should be compared to the cap table (capitalization table) to determine the potential impact of the exclusion. Eliminating the exclusion or raising the trigger amount may cost more, but it is an important coverage consideration.
Conclusion
The major shareholder exclusion in a D&O insurance policy can be helpful in reducing cost and limiting potential exposures, depending on a business’s specific needs and risk profile. In some cases, it can be beneficial for companies looking to reduce costs and avoid internal conflicts, but it can also create gaps in coverage. Regardless, the exclusion shouldn’t be ignored.
If you aren’t sure what’s in your D&O insurance policy or need more information, eSpecialty experts are here to help.
About eSpecialty Insurance
eSpecialty Insurance was established to revolutionize the customer journey in specialty insurance. We’re helping small-to-medium businesses secure the most comprehensive insurance solutions – including D&O and cyber – at competitive rates.
To learn more, email Natasha Fuentes at [email protected].