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D&O DICTIONARY

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Copyright Francis Kean, Willis Limited

May 2012

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TABLE OF CONTENTS 10(b)(5), Rule: ...................................................................................................................................... 6 ‘33 Act: ................................................................................................................................................. 6 ‘34 Act: ................................................................................................................................................. 6 Admitted Coverage: ............................................................................................................................. 6 ADR (American Depositary Receipt): ................................................................................................ 6 ADRs, Level I: ..................................................................................................................................... 7 ADRs, Level II: .................................................................................................................................... 7 ADRs, Level III: ................................................................................................................................... 7 Aggregate Limit of Liability: ............................................................................................................... 7 Allocation: ............................................................................................................................................ 7 A-Side Coverage: ................................................................................................................................. 7 B-Side Coverage: ................................................................................................................................. 8 Bump-up Claims: ................................................................................................................................. 8 Bump-up Exclusion: ............................................................................................................................ 8 Capacity or Insured Capacity or Covered Capacity ............................................................................ 8 Claim: ................................................................................................................................................... 8 Claims-Made: ....................................................................................................................................... 9 Claims-Made and Reported: ................................................................................................................ 9 The Class Action Fairness Act (CAFA): ............................................................................................. 9 Clawback: ............................................................................................................................................. 9 Co-Defendant Coverage: ..................................................................................................................... 9 Co-Insurance: ....................................................................................................................................... 9 Combination or Combined Policy: ...................................................................................................... 9 Continuity: .......................................................................................................................................... 10 Control-Master Programme: .............................................................................................................. 10 C-Side coverage (or Entity Coverage): ............................................................................................. 10 Conduct Exclusions: .......................................................................................................................... 10 DARCstar: .......................................................................................................................................... 10 Deductible: ......................................................................................................................................... 10 Defence Outside the Limits: .............................................................................................................. 11 Derivative Proceedings: ..................................................................................................................... 11 Difference in Conditions (DIC): ........................................................................................................ 11 Discovery: .......................................................................................................................................... 11 Dodd-Frank Act: ................................................................................................................................ 11 Domestic Partner Extension: ............................................................................................................. 12 Duty to Defend: .................................................................................................................................. 12 EEOC: ................................................................................................................................................ 12 Effective Association: ........................................................................................................................ 12 Employment Practices Claim: ........................................................................................................... 12 Endorsement: ...................................................................................................................................... 13 Entity Coverage: ................................................................................................................................. 13 Entity versus Insured Exclusion: ....................................................................................................... 13 ERISA: ............................................................................................................................................... 13 Excess Insurance: ............................................................................................................................... 13 Exhaustion of Limits (aka Shaving of Limits) Provision: ................................................................ 13 Extended Reporting Period: ............................................................................................................... 14 Extradition Costs Coverage: .............................................................................................................. 14 Follow Form: ...................................................................................................................................... 14 Foreign Corrupt Practices Act (FCPA): ............................................................................................ 14 Fraud-on-the-Market: ......................................................................................................................... 14 Freedom of Services (FOS): .............................................................................................................. 14 Hammer Clause: ................................................................................................................................. 15 Indemnifiable: .................................................................................................................................... 15 Independent Director Liability (IDL) Coverage: .............................................................................. 15 Insurance Premium Taxes (IPTs): ..................................................................................................... 15 Investigative Cost Coverage: ............................................................................................................. 15 

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Insured Versus Insured Exclusion: .................................................................................................... 15 Interrelated Wrongful Acts: ............................................................................................................... 16 Initial Public Offering (IPO): ............................................................................................................. 16 Multi-Line Policy: .............................................................................................................................. 16 Multi-Year Policy: ............................................................................................................................. 16 Non-Admitted Coverage: ................................................................................................................... 16 Non-Indemnifiable Loss: ................................................................................................................... 16 Notice of Facts or Circumstances: ..................................................................................................... 16 Outside Directorship Liability (ODL) Coverage: ............................................................................. 17 Other Insurance Clause: ..................................................................................................................... 17 Order of Payments Provision: ............................................................................................................ 17 Pink sheets: ......................................................................................................................................... 17 Predetermined allocation (PDA): ...................................................................................................... 17 Presumptive Indemnification: ............................................................................................................ 18 Priority of Payments (aka Order of Payments) Provision: ................................................................ 18 Primary Insurance: ............................................................................................................................. 18 Private Securities Litigation Reform Act of 1995: ........................................................................... 18 Proposal Form: ................................................................................................................................... 18 Proposal Form at Renewal: ................................................................................................................ 19 Proxy: ................................................................................................................................................. 19 Reinsurance: ....................................................................................................................................... 19 Rescission: .......................................................................................................................................... 19 Retention: ........................................................................................................................................... 19 Retroactive Date: ................................................................................................................................ 19 Road show: ......................................................................................................................................... 19 Run-Off: ............................................................................................................................................. 19 Sarbanes-Oxley Act (SOX): .............................................................................................................. 20 Secondary Offerings: ......................................................................................................................... 20 Securities Claim: ................................................................................................................................ 20 Severability: ....................................................................................................................................... 20 Severability of the Exclusions: .......................................................................................................... 20 Severability as to the Proposal: .......................................................................................................... 20 Spousal Extension: ............................................................................................................................. 20 Territory: ............................................................................................................................................ 20 U.K. Bribery Act: ............................................................................................................................... 21 Ventilated Limits: .............................................................................................................................. 21 Warranty: ............................................................................................................................................ 21 “Wells Notice”: .................................................................................................................................. 21 Whistleblower: ................................................................................................................................... 21 

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10(b)(5), Rule: A rule created by the U.S. Securities and Exchange Commission (SEC), under the ‘34 Act which prohibits any act or omission causing fraud or deceit in connection with the purchase or sale of any security. It is the most frequently alleged violation in D&O securities claims: Rule 10b-5: Employment of Manipulative and Deceptive Practices: “It shall be unlawful for any person, directly or indirectly, by the use of any means or

instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact

necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security."

‘33 Act: The Securities Act of 1933 deals with the offer and sale of securities. Prior to the ’33 Act, this was regulated primarily by state law (usually referred to as “blue sky laws”). Enacted in the aftermath of the U.S. stock market crash of 1929 and during the ensuing Great Depression, the ‘33 Act left existing state securities laws in place. The Act requires issuers to fully disclose all material information that a reasonable investor would require in order to make up his or her mind about the potential investment. It also requires offers or sale of securities using the means and instrumentalities of interstate commerce to be registered with the SEC unless an exemption exists under the law. The term "means and instrumentalities of interstate commerce" is interpreted very broadly, making it virtually impossible to avoid this statute. Any use of a telephone, for example, or the mails, would probably be enough to subject the transaction to the statute. See: Section 11, Section 12, Section 15.

‘34 Act: The Securities Exchange Act of 1934 (also called the Exchange Act), governs the secondary trading of securities in the U.S., that is, trading between shareholders on a stock exchange (in contrast with the ’33 Act which regulates the initial sale of securities from the original issuing firms to investors). The Act and related statutes form the basis of regulation of the financial markets and their participants in the U.S. In regulating the secondary trading of securities, the ’34 Act often deals with persons other than the issuer; most frequently, this includes securities brokers or dealers. See 10(b)(5).

Admitted Coverage: Insurance which is purchased from an insurance company licensed in the state/country in which the policy is purchased. Insurance is regulated locally, as a general rule, and where there is local property or persons that would be covered by the insurance, local country insurance regulators may require admitted (local) policies to be used. See: Non-admitted insurance.

ADR (American Depositary Receipt): An ADR is a stock that trades in the U.S. which represents a specified number of shares in a foreign corporation. ADRs are bought and sold on American markets just like regular stocks, and are issued/sponsored in the U.S. by a bank or brokerage firm. U.S. financial institutions purchase a bulk lot of shares from the company, bundle the shares into groups, and reissue them on a stock exchange, with the foreign company providing detailed financial information to the sponsor institution. There are three different types of ADRs issued: z ADRs Level I, II and III.

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ADRs, Level I: ADRs which are not listed on any U.S. stock exchange, but are traded in the over-the-counter (OTC) market, most commonly on the Pink Sheets electronic market. They offer a foreign company the opportunity to diversify their shareholder base by giving U.S. investors an easy way to purchase securities while remaining exempt from U.S. reporting requirements under SEC Rule 12g3-2(b) and SOX. Registration of these ADRs under the ‘33 Act only requires the filing of a short-form registration statement, and the underlying ordinary shares are exempt from registration. These facilities have been growing due to the implementation of more stringent reporting and regulatory requirements under SOX for Level II or III ADRs and the ‘34 Act. A drawback is that Level I programs cannot be used to raise capital in the U.S.

ADRs, Level II: ADRs which are listed on a U.S. stock exchange and may better position a firm to move to a Level III program to raise capital, as they may qualify to use a short-form registration statement (not available to Level I issuers). Level II ADR programs must comply with the full registration and reporting requirements of the ‘34 Act.

ADRs, Level III: Are the most prestigious of the three ADRs and is where an issuer raises capital in the U.S. by floating a public offering of its ADRs on a U.S. exchange. Level III ADRs must comply with various SEC rules, including the full registration and reporting requirements of the ’34 Act.

Aggregate Limit of Liability: An insurance term which refers to the total amount that the insurers will potentially pay under a given insurance policy. For D&O insurance, this would generally include defence costs, settlements and judgments. This amount is not increased by the number of claims made under the policy, the number of insureds who seek payment under the policy, or otherwise. The retention or deductible is not included or added to the Aggregate Limit of Liability. Any retention or deductible on the policy must be spent by the insured before any payment will be due under the policy.

Allocation: A determination of the portion of a loss that will be covered by an insurance policy when less than 100% of the loss is covered. It refers to the determination of the precise portion of a loss that will be allocated to the insurance policy (and therefore payable by the insurer) and which portion will not. Allocation issues arise when the insurance doesn’t cover all of the defendants in a claim and/or when the policy doesn’t cover all of the allegations in a claim. In the D&O world, allocation issues had historically arisen when both a company, or entity, and its insured directors and officers were named in proceedings, but the entity was not covered by the policy. Under these circumstances, insurers took the position that a portion of loss relating to defence costs, settlement or judgment should be allocated to the entity and, therefore, not covered by the policy. There has been a substantial amount of litigation in the US regarding the issue of allocation and, as a result, most D&O carriers now offer entity coverage in some form, or contractually agree to a pre-set allocation. See: C-Side or Entity Coverage.

A-Side Coverage: D&O insurance coverage for the directors and officers for situations when the company legally or financially cannot (or possibly just does not) indemnify them for the costs of defence, settlements or judgments resulting from claims made against them.

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The traditional D&O policy includes both A-Side and B-Side coverage (and today, C-Side as well). Note that the A-side of a D&O policy generally has no retention or deductible, because individuals are not expected to bear the retention themselves. Today, many companies purchase dedicated A-Side policies (with no B- and C- side coverage). These forms usually contain fewer exclusions and other limitations, but as a note of caution, the terms of dedicated A-Side policies can vary significantly. Some are triggered only if the company is not legally permitted or financially able to indemnify the Ds and Os. Others are more liberal and apply where the company simply does not indemnify the individual. See: Presumptive Indemnification.

B-Side Coverage: Coverage under a traditional D&O policy to pay the company for amounts it pays, or would be obligated to pay, on behalf of its directors and officers for defence costs, settlement amounts or judgments resulting from claims made against them relating to their service to the firm. Most D&O claims fall under the B-side of the policy, since most companies are legally required and financially able to indemnify their directors and officers. The B-side of the policy usually has a retention which is paid by the company. In the U.S., where there is a long-standing tradition and legal basis for indemnification, companies almost always indemnify their directors and officers, and therefore, B-side coverage is most often utilized. See: Presumptive Indemnification.

Bump-up Claims: In the context of an acquisition, these are claims by the company-to-be-acquired’s shareholders alleging that the company has been undervalued. These actions seek to have the purchase price raised or “bumped-up.” See Bump-up Exclusion.

Bump-up Exclusion: An exclusion found in many D&O policies with US exposure, this precludes coverage for settlements or court awards resulting from Bump-up claims or claims broadly based upon, arising from, or in consequence of the actual or proposed payment of allegedly inadequate consideration in connection with its purchase of securities by the company.

Capacity or Insured Capacity or Covered Capacity: The role or position in which the insured individual was acting when the acts at issue were alleged to have occurred. Under a D&O policy, directors and officers are insured for acts undertaken in their capacity as directors or officers. If an individual who just happens to be a director or officer of a company is sued unrelated to his or her service to the company, then the individual was not acting in his or her capacity as a director or officer and so would not have the benefit of the D&O policy. Capacity issues can arise when an individual acts in more than one capacity (i.e., a shareholder).

Claim: The coverage trigger for a D&O insurance policy. This is exceedingly contract-specific. Most D&O policies would cover legal proceedings (including arbitration and mediation) along with written demands where there is an allegation of a wrongful act by a Director or Officer, but the definition of claim usually varies based on who is insured – with broader coverage for Ds and Os than for the entity or company.

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Where a public company is involved, coverage may be triggered only for Securities Claims. Today, much of the focus is on pre-claim investigations, where there is an inquiry but no specific allegation of wrongful acts by an insured. See: Investigative Cost Coverage.

Claims-Made: A claims-made insurance policy is one that covers claims that are first asserted during the policy, generally without regard to when the alleged wrongful acts occurred (unless the policy specifically excludes claims arising from acts that occurred prior to a specific date). The opposite of a claims-made policy is an occurrence policy which responds to covered events that arose during the coverage period (past or present) – regardless of when those claims are reported. As a result, occurrence policies are significantly more expensive and not available for D&O coverage.

Claims-Made and Reported: A claims-made policy that specifically requires that any claim made during the policy period also be reported to the insurance carrier during that same policy period. D&O policies are usually very specific as to when the insured must provide notice to the insurer of a claim and the notice requirements may be identified as a condition precedent to coverage. Most D&O policies are claims-made and reported policies. Many policies require notice as soon as practicable during the policy period or during some identified period (most commonly, 60 days) after the end of the policy, sometimes referred to as a post-policy reporting window.

The Class Action Fairness Act (CAFA): A federal law enacted to reduce forum shopping by plaintiffs in class action-friendly states. Signed into law in 2005 in the US, it was intended to reduce perceived abuses of the class action structure by expanding federal courts’ original jurisdiction, relaxing limitations on defendants’ ability to remove actions from state court, hindering federal courts’ authority to remand actions back to state court, and regulating settlements.

Clawback: Generally, money or benefits that were distributed and later taken back under special circumstances. Both SOX and the Dodd-Frank create circumstances where compensation may be “clawed back” from executives following financial restatements at their companies.

Co-Defendant Coverage: Coverage granted to individuals or entities that would otherwise not be covered by the D&O policy, so long as at least one insured under the policy is also named as a defendant in the same Claim.

Co-Insurance: The percentage of all loss that is the company’s sole responsibility. Sometimes co-insurance applies only to defence costs, or only to settlements and judgments, but usually it applies to all loss under a D&O policy. Today, most D&O policies do not contain a co-insurance provision.

Combination or Combined Policy: See Multi-Line Policy.

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Continuity: Continuous coverage without gaps. The issue of continuity most commonly arises when there is a change in insurance carriers as the new insurers may add wrongful acts dates (or other limiting wording) on new policies that precluded coverage for acts that occurred prior to their inception.

Control-Master Programme: This refers to a type of D&O program structure where there is both a global master policy and separate locally admitted policies, all tied in to a single global aggregate limit of liability or coverage in the master policy.

C-Side coverage (or Entity Coverage): Coverage under a D&O policy for claims against the company or entity (typically limited to Securities Claims where the company is publicly traded). Historically, D&O policies didn’t provide entity coverage, as the intent of the policy was to protect the directors and officers from the risk of personal liability. However, the company itself was typically named in lawsuits along with the directors and officers, especially in the securities context. Heated debates over allocation then arose over just what portion of defence costs, settlement amounts and/or judgments should properly be credited to the insured directors and officers and what should be credited, or allocated, to the uninsured company. The result is that D&O policies in the U.S. now typically include entity or C-Side coverage or have an express allocation provision. See: Allocation.

Conduct Exclusions: This refers to the exclusions found in virtually every D&O policy addressing intentional illegal conduct, fraud and illegal personal profiting by insureds.

DARCstar: Directors’ All Risk Cover (DARCstar™) is an innovative new D&O product introduced by Willis in London for non-U.S. D&O clients. The groundbreaking new D&O policy seeks to eradicate the indemnification uncertainties in D&O insurance (especially prevalent outside the U.S.) and cut through the complexities of traditional D&O cover to advance all directors’ costs in the event of an allocation dispute. In less than half the length of a standard D&O policy, it delivers broad and relevant cover in an easy to understand policy that offers directors and officers significantly enhanced protection.

Deductible: In the D&O world, the terms deductible and retention are often used interchangeably. The term refers to the amount of covered loss that the company has to pay before the policy will come into play. [It should be stressed that these terms are NOT interchangeable when used as respects other types of insurance.] A policy’s deductible or retention only applies to covered loss. Accordingly, if there is an allocation because some part of a claim is not covered by the policy, then the allocation must be determined before the deductible or retention is applied. For example, several defendants are sued, some of which are insured under a D&O policy. It costs a total of $5 million to defend and settle the suit and the insurer and insured agree to allocate 50% of the costs of defence and settlement to the insureds. Since the deductible or retention only applies to “covered loss”, the allocation must occur before the deductible or retention is applied. In this case, the allocation results in a potential maximum of $2.5 million being covered by the insurance. However, it takes $1 million in paid loss by the company before the assumed policy deductible or retention of $500,000 is satisfied; the insurer then pays only 50% of the remaining $4 million loss or $2 million. See: Allocation.

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Defence Outside the Limits: This refers to a provision where the defence costs provided under a D&O policy would be paid in addition to, or “outside” the aggregate limit of liability. In the absence of specific local law, requirements for “costs in addition”, this cover is generally not available. This means that all costs and expenses paid by the insurer in the defence of the claim are “inside” the limits and serve to erode or reduce the limit of coverage provided under the D&O policy. Accordingly, if an insured has a $10 million policy, and spends $2 million on defence costs alone, there is only $8 million left to satisfy a settlement or judgment, or deal with other claims, assuming that the policy’s retention has already been met.

Derivative Proceedings: A claim by a shareholder of a corporation to enforce or defend a legal right or claim of the corporation. Made against both individual directors or officers and the company itself, the stated goal of a derivative claim is to put the company back in the position that it would have been in but for the breach of duty by the executives. The corporation is therefore both a defendant and the nominal plaintiff, while the relief which is granted goes to the corporation itself. Typical allegations include the failure to properly manage or supervise the company and/or conflicts of interest. In the world of D&O liability and insurance in the US, these claims have special significance, as settlements and court awards of derivative claims are generally understood to be non-indemnifiable and thus fall within the A-Side of D&O policy. See: Derivative demands.

Difference in Conditions (DIC): An insurance provision sometimes found in excess insurance which states that the excess policy will drop down within an insurance programme and in-fill coverage where the excess coverage is broader, paying a claim (or portion of a claim) otherwise uncovered under an underlying policy. See: Primary Insurance and Follow Form.

Discovery: An additional extended period of time after the end of the D&O policy during which the insureds can notify the insurer of claims made against them (“discovered”) during the extended period for alleged wrongful acts that took place during or prior to the original policy period. Most D&O policies will have two alternatives: both an embedded post-policy reporting window (usually 30, 60 or 90 days during which to report claims that were made against the insureds during the policy period) and a multi-year option. The multi-year option is generally only available where coverage is not renewed with the carrier. It will have a specific length of time and cost (usually a percentage of the premium originally paid for the expiring policy). Note that the discovery or extended reporting period usually does not have its own, additional limits of coverage but instead, is an extension of the original aggregate limit of liability in place immediately prior to the election of discovery. The right to purchase discovery (or an extended reporting period) can be triggered mid-term in a D&O policy upon a particular occurrence, such as the acquisition of the company by another firm or group of owners acting in concert.

Dodd-Frank Act: The Dodd-Frank Wall Street Reform and Consumer Protection Act became law in the US in 2010 as a response to the global financial crisis and the resulting calls for sweeping overhaul of the U.S. financial system. The emphasis in the mammoth new law is on addressing systemic risk and protecting the economy as a whole. While it deals largely with firms in the financial sector, it also creates new rules

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for U.S. public companies in the areas of executive compensation (and clawbacks), proxy voting and whistleblowing.

Domestic Partner Extension: This provision extends coverage to domestic partners of directors and officers (similar to the Spousal Extension) who are sued solely because of their position as a domestic partner. Domestic partners may be sued in jurisdictions where a judgment against a director or officer would not otherwise be fully collectible because his or her domestic partner has a significant ownership interest in the assets of director or officer. See: Spousal Extension.

Duty to Defend: A contractural right and obligation of an insurer to appoint counsel, develop and implement defence strategy, and generally take care of a claim against an insured. The fact that most public company D&O policies are not duty-to-defend policies means that it is the insured’s responsibility to retain defence counsel and make defence decisions. Even without a defence obligation, however, the insurer usually has a contractural right to participate in the defence of a claim covered by the D&O policy. Different insurers want to participate to different degrees but usually this includes approval over the selection of counsel, the reasonableness of defence expenses and settlement approval. See: Effective Association.

EEOC: The U.S. Equal Employment Opportunity Commission (EEOC) enforces US federal laws that make it illegal to discriminate against a job applicant or an employee based on a protected category (such as race, color, religion, sex [including pregnancy], national origin, age, disability or genetic information) along with illegal employment retaliation against a person who complained about discrimination, filed a charge of discrimination, or participated in an employment discrimination investigation or lawsuit. The Commission investigates charges of discrimination against employers covered by federal law. Where they determine that discrimination has occurred, they will try to settle the charge. If this isn't successful, they have the authority to file a lawsuit to protect the rights of individuals and the interests of the public; in the alternative, they may issue a "right to sue" letter to potential plaintiffs allowing the individuals to bring their own legal actions. Most employers with at least 15 employees are covered by EEOC laws (20 employees in age discrimination cases).

Effective Association: This term is used by insurers to stress the amount of participation they desire in the claim handling process. Some insurers want to have a say in trial strategy and settlement negotiations. Effective association usually means more than keeping the insurer informed of the progress of the claim, but less than having an actual duty to defend. This term has not been examined in any detail by a court to date. Some carriers have established claim handling guidelines (usually not referenced in the actual D&O policy) that can provide additional insight into a carrier’s expectations.

Employment Practices Claim: Usually, this means a claim by an employee against his or her employer (or prospective or former employer) and perhaps against other individuals employed by the employer relating to the terms of employment. Separate policies are sold that specifically address these types of claims and each such policy has its own definition. Some D&O policies include specific provisions clarifying that the D&O policy includes elements of employment practices coverage. Employment practices claims are usually defined to include, at a minimum, wrongful termination, failure to promote, breach of employment contract, discrimination and harassment.

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Endorsement: A separately negotiated clause (sometimes referred to as a rider) in the insurance contract that is not part of the main form or boilerplate of the policy. Endorsements are added to modify or amend the basic or boilerplate policy.

Entity Coverage: See C-Side Coverage.

Entity versus Insured Exclusion: A recent (favorable) variation on the Insured vs. Insured exclusion found in a D&O policy. It precludes coverage for claims brought by the company or insured organization against other insureds. So the company itself can’t sue its Ds or Os and gain coverage for their defence or settlement under the D&O policy. See: Insured vs. Insured exclusion.

ERISA: The Employee Retirement Income Security Act of 1974 (ERISA) is the U.S. statute which regulates privately sponsored pension and welfare benefits provided for employees and their beneficiaries. The Act:

■ Broadly defines the term "fiduciary" and creates a high level of personal liability for ERISA fiduciaries: the prudent-expert rule

■ Instructs ERISA fiduciaries that their primary duty is to the plan and plan beneficiaries

■ Acknowledges the fact that many fiduciaries may wear two hats as employees of the organization and fiduciaries of the employer's plan

■ Limits an organization's ability to exculpate or hold harmless such fiduciaries ■ Mandates the purchase of an ERISA surety bond which protects plan assets

against theft ■ Permits the purchase of ERISA Fiduciary Liability insurance

Excess Insurance: Companies who want a substantial amount of D&O coverage may not be able to buy or may prefer not to purchase it all from a single insurer. In that case, companies will buy insurance from more than one insurer and each insurer will have a different attachment point, at which time their insurance may be implicated by a claim. The first insurer that would be called upon by the insured is referred to as the primary insurer. Excess policies are specifically identified as such and generally triggered only after the primary insurer and all intervening insurers have paid, have committed to pay, or are otherwise obliged to pay, their full limits. Excess policies may follow form (duplicate the wording) of the primary policy or provide broader coverage. See: Difference in Conditions.

Exhaustion of Limits (aka Shaving of Limits) Provision: This refers to a policy provision relevant to excess layers of coverage. A number of U.S. courts have held that a plain reading of some excess D&O insurance policies requires the actual payments of full policy limits by all underlying carriers before additional excess insurance is triggered. The outcome of such decisions, if unaddressed, would be the potential loss of excess coverage if someone other than an underlying carrier paid all or part of a claim. In response, exhaustion of underlying limits provisions were negotiated to address the situation where someone else – the company itself, a third party, excess insurance under a difference in conditions provision – pays part or all of a claim. Note that the provision does NOT provide that the excess carrier itself will drop

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down, but rather that it will recognize the erosion of the underlying limits by payment by someone other than an underlying insurer.

Extended Reporting Period: See: Discovery.

Extradition Costs Coverage: A coverage clarification for the (reasonable and necessary) costs associated with responding to extradition demands which may be made against a director or officer in relation to a D&O claim. This is usually found in either the definition of loss in a D&O policy or within the definition of the claim.

Follow Form: This term is usually used in an excess policy and means that the excess insurance incorporates by reference all of the provisions of the primary policy, except as may be specifically changed in the excess policy itself. The variation of this is a difference-in-conditions policy or provision where the excess coverage is intended to be broader than the underlying or primary insurance. See: Difference in Conditions.

Foreign Corrupt Practices Act (FCPA): The U.S. Foreign Corrupt Practices Act makes it unlawful for persons and entities to make payments to foreign government officials to assist in obtaining or retaining business. Since 1977, these anti-bribery provisions have applied to all U.S. persons and certain foreign issuers of securities. After amendment in 1998, the anti-bribery provisions of the FCPA now also apply to foreign firms and persons who cause, directly or through agents, an act in furtherance of such a corrupt payment to take place within the territory of the U.S. The FCPA requires companies whose securities are listed in the U.S. to meet its accounting provisions which are designed to operate with its anti-bribery provisions. These provisions require relevant corporations to (1) make and keep books and records that accurately and fairly reflect the transactions of the corporation and (2) devise and maintain an adequate system of internal accounting controls. Violations of the FCPA can result in fines, penalties, and for the individuals involved, possible jail time. Today, most major nations around the globe have local provisions similar to the FCPA. See: UK Bribery Act.

Fraud-on-the-Market: In US D&O securities fraud cases, a legal theory under which the plaintiffs are presumed to have relied (versus needing to prove reliance) upon the defendant's material misrepresentation regarding a security traded in the open market where the (mis)representations affected the price of the security.

Freedom of Services (FOS): Under this Insurance Directive, an insurance policy issued in any one European Union member country is deemed to be legal, binding and enforceable in any other EU country. This is directly relevant for EU countries when considering rules on non-admitted coverage, as such rules might otherwise impede the free movement of insurance services. Within the European Union, Article 56 of The Treaty on the functioning of the European Union provides that any restrictions on "freedom to provide services" within the Union are prohibited. Article 57 specifies that the provisions on the free movement of services cover all industrial and commercial activities – which would include insurance. This is further expanded to include Iceland, Liechtenstein and Norway under the European Economic Area (EEA) Agreement which guarantees the freedom to provide services on a non-discriminatory basis anywhere within these countries and the EU.

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Hammer Clause: Although the term of art is not actually used in a D&O policy, it refers to a provision typically found in the defence section of a D&O policy which relates to the carrier’s right to consent to a settlement. Most D&O policies give the insured the right to consent, and therefore, to withhold consent, to covered settlements. It applies in situations where the carriers and the claimants want to settle a claim, but the insureds refuse. It provides that in the event that the insureds’ refusal to settle a claim results in additional costs (i.e., the case settles for more, or results in a higher judgment) then the insurer is not liable for those additional amounts. For the hammer clause generally states that the insurer’s liability for any subsequent settlement is limited to the amount for which the case could have been settled, plus defence costs incurred to date. Carriers may be willing to delete the hammer clause on some policies or to modify it.

Indemnifiable: Whether a loss is “indemnifiable or not”, dictates whether the relevant loss falls under A Side or B Side coverage.. The sections of the UK Companies Act which deal with the extent to which indemnification of directors and officers is permissible are sections 205, 232, 233 and 234. There is a general prohibition on a company against exempting a director or indemnifying him against liability for any negligence, default, breach of duty or breach of trust in relation to the company or any associated company. This prohibition is subject to a number of statutory exceptions known as “qualifying third party indemnities”. These in turn are subject to a number of provisos which, in essence, prohibit indemnity in respect of fines imposed in criminal proceedings, sums payable to a regulatory authority of the penalty, costs in proceedings where a director is convicted and loss in respect of a judgement given against them in civil proceedings instituted by the Company.

Independent Director Liability (IDL) Coverage: A newer form of A-Side coverage which responds to claims solely against the independent or non-executive directors (that is, without coverage for inside directors or any officers). Typically, this is the last layer of coverage after the depletion of all other insurance in the tower.

Insurance Premium Taxes (IPTs): Insurance is a service and many jurisdictions impose a tax on insurance premiums (or that portion of a premium allocable to that jurisdiction).

Investigative Cost Coverage: Sometimes referred to as Inquiry Coverage, this refers to what are typically considered to be pre-claim costs relating to informal investigations where documents or interviews are sought from a company’s executives, but where there is no actually alleged wrongful act by or involving such individual.

Insured Versus Insured Exclusion: This exclusion precludes coverage for claims by any insured under the policy against any other insured. The exclusion (also referred to as the “one v. one exclusion” and the “1v1 exclusion”) was intended to preclude collusive suits between insureds (i.e., you sue me, our insurance will pay, and we will recover under the policy); however, it is not limited to only collusive suits. Any claim by an insured against another insured is precluded from coverage unless it falls within one or more of the many caveats to this exclusion. Other

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than for US exposures, it is often possible to persuade carriers to remove this exclusion. See: Entity versus Insured Exclusion.

Interrelated Wrongful Acts: Most D&O policies include a provision or definition of what is “interrelated” in order to treat the potential host of claims that might arise out of a single event or series of events – as a single D&O claim. This means that if more than one claim is made which alleges the same or similar acts, then even if the claims are not consolidated by their respective courts, they will be treated by the insurer as if they were consolidated into a single claim. The good news is that a single retention applies to the interrelated claims, but the bad news is that so does a single aggregate limit of liability.

Initial Public Offering (IPO): Refers to the first time a private firm sells stock to the investing public. See: Secondary Offerings.

Multi-Line Policy: This type of policy provides more than one kind of insurance coverage. For example, D&O insurance may be sold as a package with Pension Trustee Liability Insurance, Employment Practices Liability Insurance, and/or Commercial Crime or Fidelity coverage. This is how D&O coverage is typically purchased at private firms and not-for-profit organizations. There may be a shared aggregate limit of liability or separate limits of coverage for the differing types of coverage.

Multi-Year Policy: Most D&O policies are for a one-year period, which commits both insurer and insured to that time frame. Other than multi-year discovery policies, most carriers are highly reluctant to write D&O insurance for longer periods.

Non-Admitted Coverage: Insurance issued by an insurer not licenced in that location (state, country, etc.). Insurance is regulated locally, as a general rule. Local country insurance regulators may require locally issued admitted policies to be used where there is property or persons in the local country that would be covered by the insurance. Otherwise, non-admitted coverage may be unenforceable, or in the worst cases, illegal, in jurisdictions which mandate admitted insurance. See: Admitted insurance.

Non-Indemnifiable Loss: Generally, an insurer will either define “Indemnifiable loss” as to which see appropriate definition above, or employ a definition of that part of loss which is “non-indemnifiable”. Either way, the purpose behind the definition is generally to distinguish between an A Side and a B Side claim.

Notice of Facts or Circumstances: While reporting actual claims to a D&O carrier is mandatory, most D&O policies also allow for the discretionary reporting of facts or circumstances that, while not claims, are reasonably believed to potentially result in claims. The positive reason for providing a carrier with notice of facts and circumstances is that if these facts and circumstances do later result in a claim, that claim will be covered by the earlier policy under which the notice of facts and circumstances was given. However, such notice will require some elements of specificity. A simple notice to the carrier that the insured is at risk that someone will sue them for something, is insufficient to meet the requirements of this provision.

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The downside is that if a notice of circumstances is provided and it lacks specific details, there may be both a disagreement as to whether the notice was sufficient to trigger coverage under the earlier policy and a prior claim exclusion on a later policy which may preclude coverage under the subsequent/current policy.

Outside Directorship Liability (ODL) Coverage: This is an extension of coverage to include claims against a director or officer for acts taken in the officer’s or director’s capacity as a director of another company, as long as the officer or director is acting in that “outside” director capacity at the request of his or her employer.

Other Insurance Clause: All D&O policies contain Other Insurance Clauses which are intended to indicate that if other insurance applies to a claim, then the other insurance applies first. This clause is widely quoted in coverage coordination disputes. While different insurers use different language in this section, all generally indicate that their insurance is excess over any other insurance that might be applicable to the claim. Courts have interpreted Other Insurance Clauses, finding that most are equivalent and therefore, all other coverage issues being equal, the policies will attach on a proportionate basis. Courts vary as to whether this proportionate basis will be determined based on differing limits of liability, or some kind of analysis of which policy the court believes to be the most applicable. Companies may ask their own directors or officers to act as directors on unrelated outside company boards because of a particular business deal in the works, to protect a security interest, to enhance a business relationship, or for any number of other reasons. Outside Directorship Liability, or ODL coverage is usually on a “double excess” basis which means that the insurance will apply as excess over the outside company’s indemnification obligations and then excess over the outside company’s insurance. If coverage is on a “triple excess” basis, then in addition to exhausting the insurance and indemnity at the other organization, coverage only applies excess of indemnification from this firm.

Order of Payments Provision: See Priority of Payments Provision.

Pink sheets: This is a daily publication compiled by the US National Quotation Bureau with bid and ask prices of over-the-counter (OTC) stocks. Pink sheets also refers to OTC trading generally. Unlike companies which trade on a US stock exchange, companies quoted on pink sheets don’t need to meet minimum requirements or file with the SEC. OTC Pink companies choose the level of information they provide to investors and may have limited or no public disclosure. [Pink sheets got their name because they were actually printed on pink paper. Companies traded on the pink sheets will have a stock symbol ending in PK.]

Predetermined allocation (PDA): Where A- and B-Side D&O coverage is purchased, without entity or C-Side coverage, a way of addressing the uncertainty as to how shared costs will be handled by the policy when both the insured executives and the uninsured company are tagged with a claim. This is done by presetting the percentage of the joint expenses that will be attributed or allocated to the insured persons versus the uninsured entity. There may be different percentages for defence costs versus settlements and court awards. This percentage allocated to the insured persons could be as high as 100%. See: Allocation.

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Presumptive Indemnification: The insurer presumes that the company will indemnify its directors and officers to the fullest extent allowed by law. The D&O insurer not only hopes that the company will take care of its directors and officers in the event of a claim but typically states in a D&O policy that it will presume that the company has done so when interpreting the terms of the D&O contract. Indemnification is central to determining whether the A-Side or the B-Side of a traditional D&O policy has been triggered, which determines whether there is an applicable deductible or retention to be paid (the B-Side having a retention). Under a standalone A-Side policy, this analysis may be critical to determining if there is any coverage at all for a claim.

Priority of Payments (aka Order of Payments) Provision: A provision often found in or added to D&O insurance policies addressing the order in which the policy’s proceeds will be applied if the amount of insurance is exceeded by the size of the claim payment to be made. Generally it provides that claims are paid for persons before parties (entities) and non-indemnifiable claims prior to indemnifiable claims. In D&O jargon, this is “A before B before C” when referring to the traditional insuring agreements. This can aid in understanding the intent of the parties as to how the policy’s proceeds shall be administered. Also see: A-Side, B-Side and C-Side coverages.

Primary Insurance: The first layer of insurance coverage which will respond to a claim. It sets out the basic terms and conditions which may then be followed by the additional excess insurance, if the excess is written as follow form.

Private Securities Litigation Reform Act of 1995: The US Reform Act was designed to reduce the number of frivolous federal securities suits in the U.S. It provides that investors cannot proceed with a case unless they already have facts that strongly suggest a deliberate wrongful act. Previously, some cases could proceed with minimal evidence and use pre-trial discovery to search for more, depending on the jurisdiction. Now, plaintiffs need such evidence just to begin, which may be difficult to obtain. The Act imposes new rules on securities class action lawsuits. It allows judges to decide the most adequate plaintiff in class actions and mandates full disclosure to investors of proposed settlements, including the amount of attorneys' fees. It bars bonus payments to favoured plaintiffs and permits judges to scrutinize lawyer conflicts of interest. Some of the main provisions in this Act include:

■ A safe harbour for forward-looking statements ■ Limitations on joint and several liability ■ Increased pleading and proof requirements ■ Class action procedural reforms

Proposal Form: A formal written submission for D&O insurance that asks for all pertinent information about the company applying for insurance, including financial information about the company and any subsidiaries, identification of all directors and officers sought to be covered, current insurance information, and claim history, among other things. The most significant feature of a proposal is that it expressly asks about potential claims or circumstances that could lead to claims and requires that the signatory indicates (often on behalf of all potential insureds) that no such potential claims or circumstances exist. Where potential claims or circumstances are indicated on the in the

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proposal form, the insurance typically would not cover those potential claims or circumstances. Where it is later determined that at the time the proposal form was signed, an insured knew or should have known of the existence of a potential claim or circumstance likely to lead to a claim, the insurer may seek to rescind or revoke the entire policy, as to all insureds. This is in contrast to proposal form at renewal, which typically does not ask such questions. See: Severability.

Proposal Form at Renewal: A renewal proposal is typically shorter than a proposal form and does not usually require a statement that no potential claims or circumstances exist.

Proxy: A written authorisation by a shareholder for another person to represent him/her at a shareholders' meeting and exercise voting rights.

Reinsurance: A mechanism used by insurers to pass on some of the risk that the insurer is assuming or underwriting – it is essentially insurance for the insurer. Reinsurance is not available directly to the insured to pay claims.

Rescission: This means undoing a transaction so that each side to the transaction is back to where they started before the transaction took place. In the D&O insurance context, an insurer who attempts to rescind wants to negate the policy, as if it never existed, by giving the insured its premium back. Rescission is an extreme remedy that is not often asserted. Proving a basis for rescission differs from country to country but generally requires that the insurer be able to show that the insured made material misrepresentations or non-disclosures regarding the risk being insured and that, but for the misrepresentations or non-disclosures, the insurer would not have issued the policy. English Law relating to insurer’s rescission remedies is generally considered very insurer-friendly.

Retention: See: Deductible.

Retroactive Date: D&O policies with retroactive dates, or retro dates, provide coverage for wrongful acts that allegedly occurred any time after this date (precluding coverage for wrongful acts that occurred prior to that date). Some insurers identify the retro date as the inception date of the first D&O policy issued to the organization and continuously renewed.

Road show: A tour taken by a company preparing for a security offering in order to attract interest in the deal. Attended by institutional investors, analysts and money managers by invitation only.

Run-Off: A D&O policy automatically converts into a “run-off” policy when there has been a change in control of the company, or the company ceases to exist. Most D&O policies contain a Changes in Control provision stating that once a change in control has occurred, then coverage will continue only for claims arising from wrongful acts that allegedly occurred prior to the date of the change in control. In the context of a corporate transaction, the Merger or Sales Agreement will typically include a provision requiring the continuation of discovery coverage for a multi-year period for the target company.

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Coverage is usually requested for six years to protect (and collateralize any indemnification) for the Ds and Os for acts taken prior to the transaction. See: Discovery.

Sarbanes-Oxley Act (SOX): U.S. legislation enacted in 2002 in response to the corporate governance and financial scandals of the day. Its goal was to heighten corporate responsibility and transparency.

Secondary Offerings: The issuance of new stock for sale to the public from a company that has already made an initial public offering (IPO). Usually made by companies wishing to refinance or raise capital for growth. The additional shares may be primary shares (shares actually being sold by the company itself) or may come from large existing holders of the stock. See: ’34 Act.

Securities Claim: Securities claims are the most severe of all D&O claims and also have a high frequency level. Most D&O policies today define securities claim, usually in the context of providing the entity some coverage if a claim occurs. Definitions vary with the broadest being any claim brought by or on behalf of a security holder.

Severability: In the D&O context, severability means that the wrongful acts or misstatements of one insured will not void the contract or otherwise adversely impact coverage thereunder for other insureds. Severability typically comes up in two ways: Severability of the exclusions and Severability as to the Proposal.

Severability of the Exclusions: Such a provision states that if the conduct of one insured implicates an exclusion (for example, the illegal personal profiting exclusion) then while coverage will be denied to that individual insured, coverage for the other insureds will not be negatively impacted. Most D&O policies automatically include a statement about severability either at the beginning or end of the exclusions section, or directly underneath the exclusions relating to wrongful conduct.

Severability as to the Proposal: This provides that if the signer of the application and/or any warranties made a material misstatement or misrepresentation which induced the carrier to issue the D&O policy, that individual’s misstatement or misrepresentation will not void the coverage for all other insureds. Some D&O policies automatically provide severability of the application. Other insurers are typically willing to consider providing severability. See: Warranty.

Spousal Extension: Extends coverage to spouses of directors and officers who are sued solely because of their position as a spouse. Spouses run the risk of being sued primarily in community property states where a judgment against a married director or officer would not be fully collectible because his or her spouse has a significant ownership interest in the assets of a director or officer. Spousal extensions expressly do not provide coverage for claims against a spouse alleging wrongful act by the spouse.

Territory: The geographic scope of coverage. However, even where a D&O policy has a worldwide Territory clause, this does not mean that the carrier will necessarily pay claims locally. If non-admitted coverage is not permitted in that jurisdiction, the carrier may instead pay where the D&O insurance contract was (legally) made rather than where the claim was brought

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U.K. Bribery Act: The new U.K. law focuses on bribery, historically illegal under prior legislation and common law in the U.K., but for which there had been only limited enforcement activity. Companies subject to the Bribery Act include companies with operations or a presence in the U.K. The Act is similar to but not the same as the U.S. anti-bribery provisions; in some respects, surpassing the FCPA. See: Foreign Corrupt Practices Act.

Ventilated Limits: An insurance program with multiple layers of coverage, where the same carrier(s) provide more than one layer separated by intervening coverage supplied by other carriers (example: the same carrier is on both the first and fifth layers of a D&O program, while the third carrier also provides the eight and twelfth layers).

Warranty: Unusual in a straightforward D&O policy these days although still sometimes to be found in blended-programmes (i.e. D&O mixed with other financial lines risks). A statement (usually in the proposal form) in which the proposer warrants that the information contained (usually with respect to the existence or otherwise of claims or circumstances which may give rise to a claim are true). If the information subsequently turns out to be inaccurate, the carrier may apply a draconian remedy. It can effectively treat the contract as discharged from the date of breach even if it placed no reliance on the information and it was immaterial to the risk. Language to the effect that the proposal form or information contained within it or attached to it should be treated as “the basis of the contract” is regarded by English Courts as akin to a warranty.

“Wells Notice”: A preliminary decision by SEC staff recommending civil action. At times, the Commission has moved to formal legal action very quickly after issuing such a notice.

Whistleblower: A person (usually an insider at an organization, but potentially a client, customer, business partner or other) who raises a concern about wrongdoing occurring at the organization. Whistleblowers may make their allegations externally (to regulators, law enforcement agencies, to the media or to groups concerned with the issues) or internally (to other people within the accused organisation).