Allocation Clause
The allocation clause governs how defence costs and settlement or judgment payments are to be apportioned where a D&O claim involves both covered and uncovered elements, parties, or causes of action.
- Clause type
- Condition
- Origin/Market
- International programme
- Favours
- Insurer
- Negotiability
- Negotiable
Purpose
D&O cover generally does not extend to every party involved or to every cause of action asserted: where, for instance, the company itself is sued alongside its directors and officers, or where a claim combines covered wrongful acts with excluded intentional misconduct, the overall loss must be split between the covered and uncovered portions. The allocation clause sets out the standard by which this split is made.
Effect and limits
Common market wordings refer to the parties’ “relative legal and financial exposures”, or oblige insurer and insured to use “best efforts” to agree an appropriate split. More problematic are wordings that subject defence costs themselves to allocation: unlike the general principle requiring the insurer to advance defence costs, such clauses effectively shift the burden of proof and allow the insurer to advance only the share it “believes to be covered” — in practice often well below 100%.
Negotiation and practice
Insureds should, particularly under wordings that allocate defence costs, insist on a high provisional advancement percentage (for example 90/10 in the insured’s favour) and on a true-up obligation requiring the insurer to reimburse any shortfall once final allocation is more favourable to the insured. Full entity cover (Side C) for securities claims materially narrows the practical scope of the clause, since fewer uninsured parties then feature in the same proceeding.