Accidental Direct Physical Loss (ADPL) Property insurance that covers an insured against essentially all perils except those specifically excluded.
Act of God An occurrence which results from natural causes without any human intervention and could not have been prevented by reasonable care or foresight (e.g., flood, lightning, earthquake, hurricane).
ADA (Americans with Disabilities Act) The Americans with Disabilities Act (“ADA”) prohibits discrimination against otherwise qualified individuals with mental or physical disabilities. The Act requires employers to provide “reasonable accommodation” to such workers. The Act applies to all employers with 15 or more employees. An employee must exhaust his/her administrative remedies before the EEOC first, prior to bringing a civil court action. Compensatory damages are available if the defendant acted intentionally. Punitive damages are available if the defendant acted intentionally with malice or reckless indifference to the plaintiff’s rights.
Additional Living Expense Clause A type of coverage that may be included in a policy that provides funds to pay for increased living costs that result from damage covered by the policy.
ADEA (Age Discrimination in Employment Act) The Age Discrimination in Employment Act (“ADEA”) prohibits discrimination in employment of persons 40 years of age or over. The Act applies to most employers with 20 or more employees. Requires exhaustion of administrative (EEOC) procedures first.
Adjuster An individual representing the insurance company who works on agreements regarding the amount of a loss and liability issues.
All-Risk Coverage — see Accidental Direct Physical Loss
Allocation Allocation is the degree of coverage which must be determined between two opposite opinions / sides / points of view.
Under Directors and Officers Liability three types may apply:
- Between covered individuals and uncovered individuals (example: Directors and Officers vs. employees).
- Between Covered Acts vs. Excluded (uncovered) Acts (example: When an exclusion applies).
- Between Directors and Officers and the corporate entity (example: Because the corporate entity is not covered under the Directors and Officers policy).
Under Employment Practices Liability Policies two types may apply:
- Between covered parties and uncovered parties (example: employees vs. independent contractors).
- Between Covered Acts and Excluded (uncovered) Acts (example: When an exclusion applies).
Unlike Directors and Officers Liability policies that may not provide coverage for the entity, Employment Practices policies generally do insure the entity. Therefore, no allocation need be made between the insured individuals and entities. In addition, Employment Practices Liability policies are frequently duty-to-defend policies which, based on many state’s laws, do not permit allocation of defense costs between covered and uncovered allegations.
Appraisal Clause Used when the insured and insurer agree that the loss is covered, but the amount of the loss is in dispute. In general, each party selects its own appraiser. If the appraisers cannot agree, they select an umpire. An agreement by any two is binding on all parties.
Binder The document that outlines and “binds” the purchase agreement between the client, the broker, and the carrier while the insurance contract in being issued.
Capacity The amount of insurance that is available either by an individual insurance company or the entire insurance industry. The major Directors and Officers Liability and Employment Practices Liability insurance companies typically have between $25mm and $50mm in capacity.
Carrier Any Insurance Carrier or Insurance Company that provides insurance contracts for a premium.
Change of Control Event Ann event that changes the control of the Board of Directors or changes the ownership of a majority (over 50%) of the voting securities. Typical Change of Control events occur include when a corporation is acquired or merged into another organization, or following a bankruptcy proceeding.
“Claims Made” Policy “Claims Made” policies cover only claims that are filed during the policy period for Wrongful Act(s) committed before or during the policy period.
Co-Insurance Co-insurance is a provision that obligates the Insured to absorb a specified percentage of Loss that otherwise would be paid by the insurance company. Co-Insurance in the Employment Practices Liability context is often used as an alternative to a “Hammer Clause” discussed below.
Concurrent Liability “Concurrent Liability” means “damages, settlements and ‘Costs’, ‘Charges’ and ‘Expenses’ incurred jointly by both the Company and the Directors or Officers.”
Continuity Continuous insurance coverage without any interruption or gaps in coverage terms, conditions, and endorsements. Continuity Dates are often used in Directors and Officers Liability and Employment Practices Liability policies to either identify how far back in time the policy will respond to litigation or to identify the last warranty statement completed by the Insured. Also known as Pending or Prior Litigation Date.
Corporate Reimbursement (Coverage B) Coverage B is the corporate reimbursement portion of a Directors and Officers liability policy. The policy will pay on behalf of (or will reimburse to) the corporation the amount the corporation is required (or permitted) to pay as indemnification to the directors and/or officers.
Deductible/Retention Amount The portion of a claim that the Insured is required to fund. Also known as “Self-Insurance.”
Defendant The individual or entity charged with wrongdoing in a legal suit.
Derivative Action When a claim is brought by the company against is own directors and/or officers.
DIC (Difference in Conditions) This will apply to an excess wording that does not follow form to the primary wording. Where the different conditions apply, this excess policy may drop down to become primary.
Directors and Officers Liability (Coverage A) Coverage A pays on behalf of the directors and officers for any alleged wrongful act in their capacity as directors and officers. This coverage does not apply if the individual insureds are indemnified or entitled to indemnification by the corporation. Coverage would then fall under Coverage B (Corporate Reimbursement).
“Directors and Officers Liability”(Directors and Officers) Policy Terms A company, through its by-laws can indemnify directors and officers for most situations. Because a company can indemnify for most things, when a claim comes along it is necessary to determine which agreement the claim would fall under.
Directors and Officers Liability Policies have two insuring agreements:
- Directors and Officers Liability. If the situation is not indemnifiable (i.e., derivative action) by the corporation, then it falls under the Directors and Officers Liability portion of the policy.
- Corporate Reimbursement. If the situation is one in which a company is allowed by law to indemnify their directors or officers, then the coverage falls under Corporate Reimbursement.
Discovery Period / Extended Reporting Period / Run-Off Coverage Usually purchased when the policy is cancelled and normally for 6 months to a year to follow a policy period to provide time to the Insured in order to file a claim for a Wrongful Act committed before the end of a policy period. If a policy is cancelled and no Discovery Period is purchased and a claim is brought forth after the policy period, it will not be covered by the carrier. Run-Off is the term commonly used to describe a Discovery Period purchased for longer than one year. Typical Run-Off coverage lasts between three and six years.
Duty of Care A standard of determining whether or not the directors of a corporation have properly performed their functions. Directors must exercise the “prudent man” standard of care.
Duty of Loyalty A standard of determining whether or not directors of a corporation have properly performed their functions. Directors must act in good faith and in the best interest of the corporation and its shareholders.
Duty of Obedience A standard of determining whether or not the directors of a corporation have properly performed their functions. Directors must act within the scope of authority conferred upon them.
EEOC (Equal Employment Opportunity Commission) The U.S. Equal Employment Opportunity Commission (EEOC) is an administrative body of the federal government. The EEOC was established by Title VII of the Civil Rights Act of 1964. The EEOC enforces the principal federal statutes prohibiting employment discrimination, including:
- Title VII of the Civil Rights Act of 1964, as amended, which prohibits employment discrimination on the basis of race, color, religion, sex, or national origin;
- the Age Discrimination in Employment Act of 1967, as amended (ADEA), which prohibits employment discrimination against individuals 40 years of age and older;
- the Equal Pay Act of 1963 (EPA), which prohibits discrimination on the basis of gender in compensation for substantially similar work under similar conditions;
- the Title I of the Americans with Disabilities Act of 1990 (ADA), which prohibits employment discrimination on the basis of disability in both the public and private sector, excluding the federal government;
- the Civil Rights Act of 1991, which includes provisions for monetary damages in cases of intentional discrimination and clarifies provisions regarding disparate impact actions; and,
- Section 501 of the Rehabilitation Act of 1973, as amended, which prohibits employment discrimination against federal employees with disabilities.
In most cases an employee is required under the federal statutory scheme to bring a charge or complaint before the EEOC prior to filing a federal civil court action under alleging violations of any of the above statutes.
Entity Coverage (Coverage C) Entity Coverage is when the entity (corporation) is covered under the Directors and Officers policy. (The traditional Directors and Officers policy only covers Wrongful Acts of directors and officers and not the entity.
EPA (Equal Pay Act) Part of the Fair Labor Standards Act (“FLSA”), the Equal Pay Act requires employers to provide “equal pay for equal work” regardless of gender unless the differential is due to a factor other than gender (i.e. merit, seniority, etc.). The only available remedy under this Act is back pay, but shifting the costs incurred by the successful plaintiff is mandatory.
EPLI (Employment Practices Liability Insurance) EPLI provides coverage for claims brought by past/present employees, job applicants, administrative agencies, or in some cases, outside third parties, against the corporation and its directors, officers, and employees. Covered perils include allegations of wrongful termination, sexual harassment, discrimination, employment-related emotional distress and invasion of privacy, defamation, etc.
ERISA – Employment Retirement Income Security Act This act prescribes federal standards for funding, participation, vesting, termination, disclosure, fiduciary responsibility and tax treatment of private pension funds. This is where Fiduciary Liability got its beginnings.
ERISA Section 510 Section 510 of ERISA prohibits discrimination in the provision of employee benefits. Alleged violations of most parts of ERISA are specifically excluded by Employment Practices Liability policies because this risk is traditionally address by Fiduciary Liability policies. However, Section 510 is often covered under Employment Practices Liability policies because it involves discrimination in the granting of benefits which is more appropriately addressed under Employment Practices Liability coverage.
Estoppel A legal doctrine that prevents a person from denying the truth of a previous representation of fact, especially when the representation has been relied on by the one to whom the statement was made.
Exclusion Something not covered by the policy and specifically so stated in the policy contract.
Extra Expense Coverage This protects the policyholder against the extra expense that may be involved in carrying on his/her business after the occurrence of a loss. For example, if a newspaper plant was damaged by fire, the publishing company might have to get their paper published by a rival plant until their own could be restored. Thus, they could carry on their business, but at extra expense to themselves.
Fidelity As mandated by the 1974 ERISA (Employee Retirement Income Security Act), all fiduciaries must have a fidelity bond on the pension plan itself. Fidelity Bond guards against theft, dishonesty, fraud, misappropriation or mysterious disappearance of money, securities and other property.
Fiduciary For Fiduciary Liability Insurance purposes, a fiduciary is any person or personal entity who has discretionary authority over plan assets. A fiduciary is held to a higher standard than other individuals because a third party relies upon the integrity and expertise of that fiduciary.
Exposure arises for a fiduciary from decisions made. This is very similar to the exposures faced by directors and officers of companies.
FLSA (Fair Labor Standards Act of 1938) The Fair Labor Standards Act of 1938, as amended, (“FLSA”) sets standards requiring employers to pay a minimum wage, overtime pay, equal pay for equal work and governs child labor standards.
FMLA (Family and Medical Leave Act of 1993) The Family and Medical Leave Act of 1993 (“FMLA”) allows employees up to twelve (12) weeks of job protected leave in any 12 month period for (i) birth of a child (ii) the placement of a child for adoption or foster care; or (iii) the serious health condition of an employee or immediate family member. To be eligible for protection, an employee must have been employed at least 12 months and worked at least 1250 hours in the 12 months prior to leave.
Gross Earnings Revenue from operating sources, before deducting expenses incurred in gaining such revenue.
Hammer Clause This language of many insurance policies states that if the Insured refuses to accept a settlement offer from the claimant/plaintiff that is acceptable to the Insurer, then the Insurer’s liability for damages and defense costs is limited to amount of the proposed settlement and defense cost incurred up to the point of the settlement offer.
Hazard Any factor that creates or increases the chance of loss.
A physical hazard is created by the condition, occupancy or use of the property itself. Examples include faulty brakes increasing the chance of collision and faulty electrical wiring increasing the chance of fire.
A moral hazard is a subjective characteristic of the insured that increases the chance of loss. Examples include arranging an accident to collect the insurance and inflating the amount of a claim.
A morale hazard is carelessness or indifference to a loss because of the existence of insurance. Leaving the car keys in an unlocked car is such an example.
Hold-Harmless Agreement An agreement by which one party assumes the liability of another. Hold-harmless agreements are often found in leases; the lessee (tenant) agreeing to assume the lessor’s (landlord’s) liability if members of the public are injured through some faulty condition in the premises occupied by the lessee.
Improvements and Betterments Insurance Additions or changes, made by a lessee at his/her own cost to a building which he/she is occupying, which enhances its value. These become part of the realty and require special insurance consideration.
Incidents of Ownership The rights to exercise any of the privileges in the policy: to change the beneficiary, withdraw cash values, make loans on the policy, assign it, etc.
Indemnification When the directors and officers are paid by the company for their expenses resulting from claims, investigations, etc.
Indemnify To restore an individual to the approximate financial position occupied before the loss.
Independent Contractor An Independent Contractor is a person who contracts with another person or entity to do something for them. The Independent Contractor is not controlled by the other person/entity. In particular, the other person/entity does not have the right to control the Independent Contractor’s physical conduct in the performance of the undertaking.
Indication The insurance carrier’s offer of insurance coverage for the client. An indication outlines the terms of the offer including limit of liability, retention, premium and policy terms, conditions and endorsements.
Inherent Vice A condition which is in the very nature of the property and results in damage. For example, if you fill an ordinary glass vessel with very hot water, it will crack. This is an inherent vice. It is in the very nature of ordinary glasses to crack under such conditions.
Insurable Interest A relationship or condition such that loss or destruction of life or property would cause a financial loss. For property insurance, such interest much exist at the time of loss.
Insured(s) Any Insured Person (example: Directors and Officers) or Insured Organization (example: the Corporation or its Subsidiaries) who is afforded coverage under the terms of the contract.
Insuring Agreements This section of the insurance policy sets forth the specific obligations assumed by the insurance company. Here is where the coverages of the policy are defined.
Lapse The termination of a policy because of the failure of the insured to pay the renewal premium.
Law of Large Numbers A mathematical principle of probability stating that the actual losses in a given category of insurance will come closer to a predictable number as the number of units of exposure increases. In insurance, a prediction must be made from actuarial experience or statistical analysis of the number of losses to be expected in a group of exposures. (The larger the sample, the more accurate the prediction.)
Liability Insurance Insurance protecting the insured against financial loss arising out of legal liability imposed upon him/her in connection with bodily injuries (or death) suffered, or alleged to have suffered, by persons of the public, or damage caused to property other than property owned by or in the custody of the insured as a result of the maintenance of the premises, or the business operations of the insured.
Limit of Liability The maximum amount of insurance available to pay for claims under a policy. Directors and Officers Liability and Employment Practices Liability carriers typically offer an aggregate limit of liability. This means that one amount is the maximum available for all claims made during the policy period. (For example: If you purchase a $1mm Limit of Liability and your first claim made during the policy period utilizes the full $1mm, there will be no Limit of Liability left for any subsequent claims that may be made during the remainder of the policy period.)
Moral Hazard The effect of personal reputation, character, associates, personal living habits, financial responsibility, and environment upon an individual’s general insurability.
Morale Hazard An insured’s definite indifference to loss. An attitude that increases the probability of loss from a peril. The attitude of “it’s insured, so why worry?” is an example of a morale hazard.
Mortgagee The party loaning money toward the purchase of personal property. Usually a bank or other lending institution.
Mortgagee Clause A clause making the proceeds payable to a named mortgagee, as interest may appear, and stating the terms of the contract between the insurer and the mortgagee.
Named Perils Named peril property coverage specifies perils insured against, as compared to “all risk” coverage which specifies perils not covered.
Non-Monetary Relief When used in Employment Practices Liability policies, this term generally refers to equitable style relief such as injunctive relief, declaratory relief, or specific performance granted by a court or agreed to in a settlement. Examples include a court ordering an employer to build a ramp in a disability discrimination case, a court order an employer to implement a sexual harassment or discrimination sensitivity training program for all employees, or forced implementation of a specific plan for increased minority participation in management. Generally, such relief is not covered under Employment Practices Liability policies.
NLRA (National Labor Relations Act) The National Labor Relations Act (“NLRA”) is a comprehensive federal employment law regulating private sector employers and unions. It establishes the National Labor Relations Board (“NLRB”) to administer the law and resolve disputes that arise under the law. The Act prohibits discrimination based on union membership or non-membership, participation in union activities or filing or testifying as part of an unfair labor practice.
Occupancy This term refers to the type and character of the use of property in question; business enterprise at that specific location.
Occurrence An event that results in an insured loss. Coverage on an “occurrence” basis is generally considered to differ from coverage on an “accident” basis in that “occurrence” connotes gradual or accumulative damage without regard to exact time or place, whereas “accident” refers to instantaneous damage, unidentifiable as to time and place. In other words, “occurrence” may be defined as an event, or repeated exposure to conditions, that results in injury during the policy period.
OFCCP (Office of Federal Contract Compliance Programs) The Office of Federal Contract Compliance Programs (OFCCP) is part of the U.S. Department of Labor’s Employment Standards Administration. The Office of Federal Contract Compliance Programs enforces various statutes largely through conducting compliance reviews and complaint investigations of federal contractors and subcontractors personnel policies and procedures.
OSHA (Occupational Safety and Health Act) The Occupational Safety and Health Act (“OSHA”) provides a means of reducing incidents of illness and injuries caused by substandard safety and health conditions in the workplace. OSHA prohibits retaliation against workers reporting unsafe conditions.
Pending or Prior Litigation Litigation that exists as of the effective date of the policy. The litigation can be both open (currently active and working) or closed (resolved). Typically, administrative actions such as EEOC actions are included as prior and pending litigation under Employment Practices Liability policies.
Personal Lines Used to refer to insurance for individuals and families, such as private passenger automobile insurance and homeowner policies.
Plaintiff The individual or entity who brings a legal suit against any other party.
Policyholder The person in possession of an insurance policy.
Policy Period The period of time from the inception date or effective date of the policy to the expiration date or cancellation of the policy.
Pre-Existing Condition A physical or mental condition that existed before issuance of a policy.
Prior Acts/Prior Acts Date (Retroactive Date) Actions or Wrongful Acts that occur prior to a date in time. Policies may have “Prior Acts Dates” or “Retroactive Dates.” Carriers will not pick up litigation that arises out of actions that occur prior to these dates.
Proof of Loss A formal statement that the insured typically must furnish before the insurance company will pay any property insurance loss.
Pro Rata Cancellation A cancellation by the insurer that refunds an amount equal to the daily earned premium multiplied by the days remaining in the policy.
Pro Rata Distribution Clause A form usually attached to a fire policy covering several buildings. It provides that the insurance shall apply to each building only in the proportion that the value of such building bears to the total value of all buildings covered under the policy.
Retaliation When used in Employment Practices Liability policies, this term generally means an adverse employment decision allegedly taken in response the following:
- An employee’s actual or attempted exercise of a right that such employee has under law
- An actual or threatened disclosure by an employee of an act by the employer or a fellow employee that is allegedly in violation of the law
Examples include firing, demoting or refusing to promote an employee for filing a worker’s compensation claim, for reporting a toxic spill to the government or for filing a claim under the Federal False Claims Act. Generally, retaliation is a covered wrongful act under most Employment Practices Liability policies.
Retention — see Deductible
Retroactive Date — see Prior Acts Date
Run-Off Coverage — see Discovery Period
Subrogation The substitution of one person in the place of another with reference to a lawful claim, demand or right, so that he who is substituted succeeds to the rights of the other in relation to the debt or claim, and its rights, remedies, or securities. Insurance companies generally have the right to step into the shoes of the party whom they compensate and sue any party whom the compensated party could have sued.
Surplus Lines Tax (SLT) Surplus Lines is specialized property or liability coverage provided by a non-admitted insurer in instances where it is unavailable from insurers licensed by the state. Examples of surplus lines are coverage for some environmental impairment liability risks or liability coverage for directors and officers of certain companies.
Term Generally, the period of time for which a policy or bond is issued.
Theft The willful taking of one person’s property by another, wrongfully. To recover indemnity, an intent permanently to deprive the owner of his/her property need not be established for there to be a theft under the policy.
Third Party (Under a Liability Insurance Policy) A person, not a party to the insurance contract, who has an alleged or actual claim for injury or damage against the person insured under the policy.
Third Party Claims In the context of Employment Practices Liability, Third Party Claims usually refers to claims of discrimination or harassment brought by clients, customers, vendors or other non-employees of an entity.
Title VII of the Federal Civil Rights Act of 1964 Title VII of the Federal Civil Rights Act of 1964 (“Title VII”) prohibits discrimination in employment on the basis of race, color, religion, sex or national origin. Title VII applies to all employers with 15 or more employees. An employee must exhaust administrative remedies (EEOC) first. The Act permits recovery of back pay and front pay with discretion to award fees to successful plaintiff. Compensatory and punitive damages are available in cases of intentional violations of Title VII. Available equitable relief includes hiring, reinstatement or promotion.
Vicarious Liability Under certain circumstances, a person is liable for the actions of (or damage done by) someone else. For example, if the owner of an automobile gives permission to a friend to drive the automobile, and the friend negligently causes an accident, the owner can be held liable.
Waiver The voluntary surrender of a known right.
WARN (Worker Readjustment and Retraining Notification Act) The Worker Readjustment and Retraining Notification Act (“WARN”) requires employers to give notice to employees and other interested individuals and parties prior to implementing a wide range of work force reductions.
Warranty A question in an application form which asks if the directors and officers are aware of any issues which are not currently claims, but have the potential to become claims in the future. Underwriters will not want to provide coverage for any such issues.
Worker’s Compensation Each state has a worker’s compensation statute. Generally, the worker’s compensation system requires an employer to provide compensation and pay for medical expenses incurred by injured employees, regardless of fault, when they suffer work-related injuries or illness. In exchange, the employer is given immunity from common law tort suits brought by the employees for work-related injuries.
Wrongful Act (Directors and Officers) Any actual or alleged act, error, omission, misstatement, misleading statement or breach of duty by an insured person in his or her capacity as a director or officer of the company.
Wrongful Act This definition usually lists the defined perils covered by the policy. Among other things, this definition in most Employment Practices Liability policies includes discrimination, harassment, retaliation, and wrongful termination as those terms are defined under the policies.