One of the primary functions of an executive risk liability policy, such as a directors and officers (“D&O”) liability policy, is to protect companies from the risk of covering costs incurred in the defense of its corporate officers and directors pursuant to indemnification agreements. However, most D&O policies only provide coverage for claims against officers and directors resulting from conduct undertaken in their “capacity” as an officer or director of the company, and do not cover claims resulting from conduct undertaken in their “personal” capacity or in their capacity as an officer or director of an unaffiliated company. In other words, a corporate D&O policy is not a personal umbrella liability policy that officers and directors can tap into whenever they get sued.

In cases where there is a clear delineation between when the officer or director is acting in his or her “corporate” or “insured” capacity versus his or her “personal” or “uninsured” capacity, this is a non-issue because the corporate bylaws will not require the company to pay for the defense of liabilities unrelated to the company—e.g., a personal civil dispute or a dispute arising out of the director’s role in an unaffiliated company. But the line between indemnifiable and non-indemnifiable conduct is not always so clear, especially in situations where an individual serves as a director or officer at multiple affiliated companies controlled by the same corporate parent. To complicate matters further, companies increasingly guarantee broad indemnification rights to their officers and directors and provide indemnification “to the fullest extent permitted by law.” Thus, companies tend to err on the side of caution, and in favor of indemnification, when this line is blurry.