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Don't Get Cut Off

Will your D&O coverage be there when you need it?

Lawsuits, scandals and corporate collapses have made even small companies aware of the need for directors and officers (D&O) liability insurance, which protects company leaders from personal liability and financial loss arising from actions they take in their professional capacity. Can you be sure your D&O coverage will be there if you need it? Steve Shappell, managing director of Chicago-based Aon Financial Services Group's legal and claims practice, says you can-if you understand two important concepts: rescission and severability.

D&O coverage can be rescinded if the insurer finds that you made a material misrepresentation when you applied for the policy. But what if one of your officers failed to disclose information and the others didn't know about it? That is where severability comes in.

Severability means if one part of the coverage is invalidated for the misrepresentations of some D&Os within a firm, the coverage will remain intact for those D&Os who are not guilty of fraudulent behavior. "Severability is the most important provision of a policy," says Shappell. "You must protect individual [D&Os] from omissions [by] other [D&Os] to prevent them from losing their coverage."

Jacquelyn Lynn is a freelance business writer in Orlando, Florida.

This story appears in the October 2006 issue of Entrepreneur. Subscribe »