Severability Clause
The severability clause treats each insured director or officer as separately insured for purposes of application statements and exclusions, so that one individual's misconduct or knowledge does not automatically jeopardise cover for all other insured persons.
- Clause type
- Condition
- Origin/Market
- International programme
- Favours
- Insured
- Negotiability
- Negotiable
Purpose
Absent a specific agreement, a D&O policy is legally a single contract with the company as policyholder: a misrepresentation in the application by one individual, or an exclusionary ground (such as intentional misconduct), could then jeopardise cover for all co-insured directors and officers. The severability clause addresses this risk by treating the application and the exclusions as if a separate contract existed for each insured person.
Effect and limits
Two variants should be distinguished. Severability of exclusions means that an exclusionary ground (for example fraud) affects only the person who committed it, not uninvolved co-insureds. Severability of the application additionally protects against rescission of the entire contract based on one person’s misrepresentation. The market distinguishes “full” severability (no imputation of knowledge between individuals at all) from “limited” severability, under which the knowledge of certain senior officers (e.g. the CEO or CFO) is imputed to everyone else — the latter is materially less favourable to insureds.
Negotiation and practice
At placement it should be verified whether the policy grants full or limited severability and, under a limited form, which individuals count as knowledge-imputing signatories. Full severability is particularly important for independent, non-executive directors, who routinely have no insight into the application statements made by management.