DIRECTORS AND OFFICERS LIABILITY

RELM offers specialist D&O products tailored to the specific needs of the digital asset marketplace – which is underserved by existing market solutions. Our comprehensive cover ensures that the sector can continue to attract the high-quality senior leadership it needs in both private and public held entities.

D&O Liability insurance provides coverage for defense costs and damages (awards and settlements) arising out of wrongful act allegations and lawsuits brought against an organization’s board of directors and/or officers as well as the entity itself. Common examples of wrongful acts that could be covered under a D&O policy include the following:

– Non-compliance with laws, regulations, and governing bodies
– Negligence on the part of the directors to detect misconduct by the organization
– Breach of trust/fiduciary duty, i.e. allegations of failure to uphold a duty of loyalty to the company resulting in a financial loss
– Securities actions, e.g. federal class action shareholder lawsuits
– Inadequate disclosure of company’s financial position
– Misrepresentation to regulators, customers, lenders
– Competitors claims of theft of intellectual property or anti-competitive behavior
– Accusations of violating NDA agreements

Coverage is typically issued via three insuring agreements: Side A, Side B, and Side C:

Coverage Description Who is the Insured? What is at risk?
Side A Protects assets of individual directors and officers for claims where the company is not legally or financially able to fund indemnification Individual directors and officers His/her personal assets
Side B Reimburses the public or private company to the extent it grants indemnification and advances legal fees on behalf of directors and officers Company Company assets
Side C Extends coverage for wrongful acts (or solely securities claims if public company) against the company Company Company Assets

In light of the general information above, it’s important to distinguish the two types of D&O coverage that exist within the standard D&O insurance marketplace. Public Company D&O Liability insurance is geared specifically towards companies that issue their equity and/or debt securities and therefore primarily provides protection against class actions shareholder lawsuits. Private Company D&O Liability insurance is geared toward companies that are not participating in any sort of securities offering, but still seek protection for the owners, board members, executives and managers against claims filed by regulators, customers, vendors, competitors, partners or shareholders.

Where does this liability exposure originate?
In the universe of digital asset offerings, the token based method of fundraising has yielded a new dynamic of D&O exposure for which the traditional insurance marketplace is not yet ready to adapt. With more than 2,000 initial coin offerings (ICOs) and security token offerings (STOs) in 2018, accounting for a total capital raise in excess of USD 20 billion, this non-traditional means of raising funds has caught the attention of investors, regulators and plaintiffs’ attorneys alike. In February 2018, the SEC reportedly issued subpoenas to as many as 80 entities and individuals involved in ICO offerings. While exposure mounts, these companies have been largely defenseless when it comes to protecting their directors and officers and the company from claims of this nature. Simply put, combined with myriad lingering regulatory variables, the insurance marketplace does not sufficiently understand the risk to dedicate capacity to protect these businesses and their decision makers.

Increasing compliance requirements and rapidly changing risks means the leaders of digital asset companies, both small and large, are under more scrutiny than ever for alleged wrongful acts. Narrowing regulations, new and emerging technologies, increasing shareholder activism, a glut of class action litigation activity and securities actions are just some of the many exposures facing a company’s Directors and Officers. With this rise in litigious activity, there is a growing trend towards plaintiffs seeking punitive and personal legal action against directors and officers for failure to follow regulations and standards, regardless of whether those regulations and standards were developed to include this new and rapidly evolving technology. As such, there have been nearly a dozen securities class action lawsuits filed to date against ICOs. The common grounds these actions include deceptive or false advertising, misrepresentation about the status of the project, breach of contract, non-compliance with Securities laws, and false claims in the white paper.

Moreover, those individuals tasked with making decisions for the company should be aware that these types of claims can arise from both internal and external sources – internally from trustees, subsidiaries, the company itself and whistleblowers; externally from investors, shareholders, coin and token holders, customers, suppliers, competitors, creditors, tax authorities, government regulators or even former employees. Perhaps most importantly, directors and officer need to be mindful that these claims can result in personal liability, subjecting personal assets to potentially significant loss.

What is the Relm Solution?
Historically, D&O underwriting has been binary: you are either offering securities or you are not. If you are not, your coverage is conveyed to you via a private company D&O policy which provides a broad scope of protection but excludes coverage for securities claims. If you are offering securities, your coverage is conveyed to you via a public company D&O policy which significantly restricts the scope of protection, but does provide coverage for securities claims (or does it? – see below)

However, innovative entrepreneurs operating in the coin/token offering landscape are in a Catch 22 – they need to protect their personal assets while at the same time attract experienced directors, seasoned advisors and willing guarantors – but are challenged to do so in the absence of meaningful D&O coverage. Meanwhile, the private company D&O form with its securities exclusion renders its coverage virtually meaningless. And the few insurers that are issuing D&O coverage to digital offerings on a public company form typically include a restriction on the definition of securities to exclude coin or token offerings. Combined with a regulatory claim exclusion and bankruptcy exclusions, this too renders D&O coverage via public company form virtually meaningless.

To address these problems, we have developed a proprietary policy wording that combines characteristics of both a private company and public company D&O policy so that you can obtain meaningful protection for the individual directors and officers as well as protection for the company against exposures arising from the offering of traditional securities, ICO, STOs, and other token based means of fundraising.

Who is covered?
Past, present, and future directors
Non-executive directors
Employees in a managerial or supervisory capacity; potential for expansion to include all employees

What is covered?
Claims alleging wrongful acts committed by the individuals in their capacity as a Director of Officer
Claims arising from the actual or attempted purchase or sale, offer or solicitation of any publicly traded securities including initial coin offerings
Defense and investigation costs incurred to respond to a claim
Damages/awards where the insured is found liable
Costs incurred to respond to administrative or regulatory proceedings
Pre-claim coverage for regulatory inquiries and/or requests for production of documentation
Punitive or exemplary damages where insurable by law.

What is excluded? (examples of exclusions – not meant to be exhaustive)

Claims arising from willful or intentional wrongdoing by a company’s directors and officers
Claims arising from dishonest, criminal or fraudulent conduct
Claims relating to personal profit or advantage to which the insured was not legal entitled
Claims for voluntarily undertaken liabilities
Claims related to legal action already taken when the policy begins
Claims related to bodily injury or property damage
Claims related to the rendering of failure to render professional services (narrowly worded)

Directors and Officers Liability – Private Company D&O, i.e. D&O coverage for companies that are not engaged in, or do not contemplate, a securities, coin or token offering.

With respect to companies that are not engaged in a security/coin/token offering, we will write D&O coverage on a Private Company form. While our Private Company D&O policy also provides Side A, B, and C coverage options, the biggest distinction between Private Company D&O coverage and Public Company D&O coverage is that Private Company D&O excludes coverage for any claims arising from a securities offering. Therefore, the ability to offer D&O coverage without a concern for securities class action lawsuits results in a lower premium to obtain this type of protection. Once secured, the company can better protect itself against a broad scope of potential claims made by third parties alleging acts, errors, omissions, and misleading statements by board members, corporate officers, and managers. Coverage can include indemnification for both awards and settlements with third parties, as well as defense costs, and costs to respond to regulatory inquiries and other pre-claim expenses.

Who is covered?
Past, present, and future directors
Non-executive directors
Employees in a managerial or supervisory capacity; potential for expansion to include all employees

What is covered?
Claims alleging wrongful acts committed by the individuals in their capacity as a Director of Officer
Defense and investigation costs incurred to respond to a claim
Damages/awards where the insured is found liable
Costs incurred to respond to administrative or regulatory proceedings
Pre-claim coverage for regulatory inquiries and/or requests for production of documentation
Punitive or exemplary damages where insurable by law

What is excluded?
Claims arising from the actual or attempted purchase or sale, offer or solicitation of any publicly traded securities
Claims arising from willful or intentional wrongdoing by a company’s directors and officers
Claims arising from dishonest, criminal or fraudulent conduct
Claims relating to personal profit or advantage to which the insured was not legal entitled
Claims for voluntarily undertaken liabilities
Claims related to legal action already taken when the policy begins
Claims related to bodily injury or property damage
Claims related to the rendering of failure to render professional services (narrowly worded)