What is a Major Shareholder Exclusion in a D&O Policy?

Below is an article written by one of our producers, Matt Culkin. This article focuses on an important exclusion in a standard Private Company D&O policy that is often overlooked and misunderstood by agents, their insureds, and even underwriters themselves.

What is a Major Shareholder Exclusion in a D&O Policy?
Written by Matt Culkin

Many Directors and Officers liability insurance policies often include what’s known in the industry as a “Major Shareholder Exclusion” or “Major Securities Holder Exclusion.” It’s a fairly standard exclusion for a D&O policy, but often is misunderstood by both policyholders and their insurance agent or brokers.

The Exclusion: This exclusion is restrictive language common within D&O policies which excludes coverage for claims made against the company coming from individuals who own a large percentage of the insured’s stock. This percentage is determined on a case by case basis by the underwriter’s review of the insured’s capitalization table and/or ownership structure. In general, 5-15% is the percentage of stock ownership owned by an individual(s) or an entity for which they are then deemed a “Major Shareholder.”

Wording Example (Ten Percent (10% Major Shareholder Exclusion):

“It is understood and agreed that Section III. A. of Coverage Part A is amended by the addition of the following:

With respect to all Insuring Agreements, the Insurer shall not be liable to make any payment for Loss in connection with any Claim made against any Insured:

by or on behalf of any shareholder or other individual or entity owning directly or beneficially ten percent (10%) or more of any interest of the Company.”

The Logic: There are a number of reasons behind the inclusion of this language. The principal motive is intended to limit coverage for those individuals who have the most influence on decisions being made on behalf of the company. It also encourages those “Major Shareholders” to take a more proactive approach to the management of the company. Lastly and most importantly, the lack of the exclusion creates a moral hazard as decisions makers (major shareholders) could make improper corporate decisions and have insurance coverage for their actions for which they are the direct beneficiary.

The Misconception: Frequently, policy holders and their insurance agent or broker mistake the exclusion and believe the exclusion is limiting coverage for those individuals who own more than a certain percentage of the company. There is still coverage (subject to the policy terms and conditions) for those individuals if they are named in a lawsuit while working in their capacity as a Director, Officer, Employee etc. of the company. Coverage is only excluded for claims brought by or on behalf of the individuals deemed to be “Major Shareholders” against the company or others.

The Conclusion: Directors and Officers liability insurance policies are an integral part of the management liability program for both public and private companies. The coverage features are complex and require the expertise of an experienced insurance agent or broker. Be sure you are working with someone that has the expertise to appropriately arrange your management liability policy.

For more information on this topic, email or call Matt Culkin: 201-847-9165 ext.116


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