What is a "severability clause" in a D&O Insurance policy?

A "severability clause" is a provision commonly found in Director and Officer Liability Insurance (D&O Insurance) policies. This clause is included to protect innocent directors and officers if one or more individuals covered by the policy engage in misconduct or wrongful acts.

The severability clause essentially ensures that the wrongdoing of one insured party does not automatically taint the coverage of other insured parties under the same policy. In other words, the clause "severs" the individual liability and coverage of one insured from the rest.

Key points to understand about the severability clause in a D&O Insurance policy:

Protection for Innocent Parties:

The primary purpose of the severability clause is to protect the directors and officers who did not engage in the wrongful act from the consequences of that act.

Misconduct of One Does Not Void Coverage for All:

Without a severability clause, the misconduct of one insured individual could potentially result in the denial of coverage for all other insured individuals under the same policy. This would be an unfair outcome for those who were not involved in any wrongful act.

Claims Allocation:

When a wrongful act occurs, and a claim is made against the insured parties, the severability clause allows the insurer to allocate the claim separately among the parties involved. This means that the insurer can distinguish between the liability of the wrongdoer and the innocent parties.

Exceptions:

While the severability clause is intended to protect innocent parties, it may not apply in cases where there is collusion, fraud or conspiracy among the insured individuals. In such situations, coverage may be denied for all parties involved.

Typical Language:

The specific wording and language of severability clauses can vary among insurance policies and insurers. It's important for policyholders to carefully review the terms and conditions of their D&O Insurance policy to understand how the severability clause is structured and what exceptions or limitations may apply.