Understanding Outside Directorship Liability (ODL) in D&O Insurance

Understanding Outside Directorship Liability (ODL) in D&O Insurance

Most Directors and Officers Liability (D&O) policies include an important clause called Outside Directorship Liability (ODL). This crucial but often overlooked component of D&O insurance provides cover for senior leaders serving on the board of an external organisation.

While the risk may seem relatively low, including ODL in any D&O insurance policy offers a valuable layer of protection and peace of mind for senior leaders and executives.

Requirements for Outside Directorship Liability (ODL)

The primary requirement for cover under any ODL clause is that the activity must be in the ‘insured capacity’ of an insured person.

Other requirements may include:

Consent & Knowledge. The appointment to the external board must be made with the consent and knowledge of the organization providing the insured person and holding the D&O policy.

External Organisation’s D&O Insurance. The external entity should have its insurance policy covering the director or officer. ODL will act on excess coverage if the policy is insufficient.

Indemnification. The external entity’s by-laws or articles of association should provide indemnification to the director or officer. ODL will provide additional backup if these provisions are insufficient.

Compliance with Policy Terms. All appointments and actions taken by the director or officer must comply with the terms and conditions of the primary D&O policy.

Written Request or Shareholder Percentage. Modern policies have largely removed strict requirements like a written request or held shareholder percentage, making ODL coverage more accessible. However, these criteria still exist in some policy wordings.

What does Outside Directorship Liability (ODL) cover?

Companies typically indemnify directors and officers to cover expenses or liabilities incurred while performing their official duties. This includes acting as a director or executive of an outside entity at the company’s request.

Indemnification is often included in the company’s by-laws, articles of association, employment agreements, or deeds of indemnity. Before joining an outside board, directors and officers should understand the extent of this indemnification.

Standard indemnity extends to outside appointments, but ODL coverage operates differently from regular D&O claims, usually on a “double excess” basis.

This means:

The outside entity’s indemnification and D&O insurance policy are used first.

If those are exhausted, the company’s ODL coverage kicks in.

In some cases, there is a “triple excess” basis:

The outside entity’s indemnification and D&O insurance policy are used first.

Then, the company’s own indemnification.

Finally, if all these are exhausted, the company’s ODL coverage applies.

Example of ODL loss

Imagine John is a senior executive at Company A. At Company A’s request, he also serves on the board of Company B, an external organization. During his time on Company B’s board, a financial scandal occurs, and John and other board members face a lawsuit for breach of fiduciary duty. As a result, John faces substantial legal defense costs, potential settlements, and other liabilities related to the lawsuit.

Here’s how ODL coverage would work in this scenario:

Primary Coverage: Company B’s own D&O insurance policy would be the first line of defence, covering John’s legal expenses and liabilities up to its policy limits.

Second Excess: If Company B’s D&O insurance is insufficient, Company B’s own indemnification provisions would provide additional coverage.

ODL Coverage: If Company B’s D&O insurance and indemnification are exhausted or unavailable, Company A’s ODL coverage would cover John’s remaining expenses and liabilities.

Although the risks associated with ODL are low compared to the day-to-day exposures organisations face, including ODL in D&O policies provides a safety net for directors taking on additional responsibilities.

By understanding and navigating the complexities of these policies, organisations can ensure comprehensive coverage for their leadership and mitigate potential liabilities. ODL can provide peace of mind and financial protection for directors and officers, making it a valuable addition to any policy.

L Wood Insurance Brokers are here to help you understand the complexities of D&O insurance and guide you in making informed decisions for your organization’s risk management. For more information on how ODL can benefit you and your company, speak to us by calling 1888 903 7340 or emailing mail@lwood.co.uk.