Free CAIB 3 Practice Questions: Directors and Officers Liability Insurance

Use this page to isolate Directors and Officers Liability Insurance before returning to mixed CAIB 3 practice.

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These are original Finance Prep practice questions aligned to this topic area. They are not official CAIB exam questions, copied live-exam content, or exam dumps. Use them for self-assessment, scope review, and deciding what to drill next.

Question 1

Topic: Directors and Officers Liability Insurance

A private Canadian manufacturer has a claims-made D&O policy with a $2,000,000 aggregate limit. The policy includes Side A, Side B, and entity coverage. Defence costs are included within the limit. A $25,000 retention applies to Side B and entity coverage, but not to Side A. A timely reported lawsuit alleges the company and two directors misrepresented financial results and seeks financial damages. The company is solvent and says it will indemnify the directors where legally permitted.

What is the most appropriate coverage concept for the broker to explain to the client?

• A. The Side B retention means each director must personally pay the retention before defence costs are covered.
• B. The bodily injury and property damage exclusion should bar the claim because financial loss is treated as property damage.
• C. Entity coverage, Side B reimbursement, and defence costs may share and erode the same aggregate limit, reducing what remains for the directors.
• D. Side A should provide the directors with a separate first-dollar limit because the directors are personally named.

Best answer: C

What this tests: Directors and Officers Liability Insurance

Explanation: D&O protection often depends on how the policy parts interact. Side A responds when directors or officers are not indemnified by the organization. Side B reimburses the organization when it indemnifies directors or officers. Entity coverage may protect the organization itself when it is named in a covered management-liability claim. If all parts share one aggregate limit and defence costs are included within that limit, defence spending and payments for the organization can reduce the remaining limit available for individuals. Retentions also matter: they may apply to Side B or entity coverage but not to Side A. Here, the key broker concern is not whether the claim was reported or whether the directors were named; it is how shared limits, defence costs, and the entity’s involvement affect the practical amount of protection available.

• A separate Side A limit is not automatic; Side A usually addresses non-indemnifiable loss and may share the same aggregate unless separate Side A limits are arranged.
• Financial damages from alleged misrepresentation are not the same as bodily injury or property damage.
• A Side B retention applies to reimbursement or entity coverage as stated, not necessarily as a personal payment obligation of each director.

The claim involves both the company and indemnified directors, so shared limits and defence-within-limits wording can reduce the amount available for individual protection.

Question 2

Topic: Directors and Officers Liability Insurance

A private company director receives a demand letter alleging breach of fiduciary duty and threatening an injunction. The director asks the broker, “Should I admit the facts and negotiate directly, or is the letter legally defective?” Which CAIB 3 concept best matches the broker’s role in this situation?

• A. Legal advice referral with insurance notice and D&O policy review
• B. Reinsurance capacity review for a large management-liability limit
• C. Claims settlement authority under the D&O policy
• D. Crime loss investigation for employee dishonesty

Best answer: A

What this tests: Directors and Officers Liability Insurance

Explanation: A broker can help the client protect potential D&O coverage by identifying the matter as a possible claim, reviewing notice requirements, checking relevant policy features such as claims-made reporting, defence, exclusions, retention, and prior acts wording, and submitting notice according to insurer instructions. The broker should not advise whether the demand is legally valid, whether the director should admit liability, or how to negotiate the dispute. Those are legal strategy questions for counsel. In management-liability matters, early notice and careful documentation are important because D&O policies are commonly claims-made and reporting-sensitive.

• Settlement authority is not the broker’s role; claim strategy and settlement require insurer involvement and legal counsel.
• Employee dishonesty belongs to crime coverage, not a board-level fiduciary duty demand.
• Reinsurance capacity may affect market placement, but it does not answer the director’s request for legal strategy and claim handling guidance.

The broker should not give legal advice, but should help with timely notice, review relevant D&O reporting and coverage provisions, and recommend legal counsel.

Question 3

Topic: Directors and Officers Liability Insurance

A broker is reviewing a draft client email prepared by a new colleague for a private manufacturing company. The company has a D&O policy with a $2 million aggregate limit, a retention, and defence costs included within the limit. The client has reported a shareholder demand alleging the directors approved a sale of assets at an unfair price, and the draft email says: “Your D&O policy protects management against all board and management disputes, so there should be no real coverage concern once we send it to the insurer.”

What is the best action for the broker?

• A. Revise the email to explain that D&O may respond to covered management-liability claims, but coverage is subject to reporting, policy terms, retentions, exclusions, and limits, and the insurer must assess the matter.
• B. Send the email as drafted because shareholder demands against directors are always covered by D&O without practical limitation.
• C. Advise the client to wait until a lawsuit is served because D&O reporting is only relevant after formal litigation begins.
• D. Replace the D&O discussion with a CGL notice because disputes involving company decisions are treated as ordinary third-party liability claims.

Best answer: A

What this tests: Directors and Officers Liability Insurance

Explanation: D&O insurance is not unlimited protection for every dispute involving management. It is designed for covered claims alleging wrongful acts by directors, officers, and sometimes the entity, depending on the policy. Even when the allegation appears to fit the management-liability area, the broker should avoid promising coverage or claim payment. Important limitations include the claims-made reporting requirements, the retention, exclusions, allocation issues, and the available aggregate limit. Defence costs may also erode the limit, which can materially affect the amount left for settlement or judgment. The broker’s role is to give an accurate coverage overview, promptly report the matter according to the policy, document the client’s instructions, and let the insurer assess coverage under the wording.

• Treating shareholder demands as automatically covered ignores policy conditions, exclusions, retentions, and limits.
• Moving the matter to CGL misses the management-liability nature of allegations about directors’ decisions.
• Waiting for a lawsuit can prejudice a claims-made D&O policy if the demand already meets the reporting trigger.

This corrects the overbroad statement and reflects that D&O protection is limited by the policy structure and claim facts.

Question 4

Topic: Directors and Officers Liability Insurance

A private technology company receives a written demand from former investors alleging that the board and the company misrepresented revenue projections during a financing round. The current D&O policy is claims-made, includes insured persons, organization reimbursement, and entity securities coverage, and states that defence costs erode the aggregate limit. The wording also shows a retention for entity claims. What is the best advice for the broker to give?

• A. Submit the matter first under the CGL policy, because allegations against the company are entity liability claims.
• B. Wait until a statement of claim is served, because D&O reporting is only required after formal litigation begins.
• C. Advise the directors that defence costs will be paid outside the D&O limit because the demand names individual board members.
• D. Report the demand promptly to the current D&O insurer and review the applicable insured persons, entity coverage, defence-cost treatment, limit impact, and retention.

Best answer: D

What this tests: Directors and Officers Liability Insurance

Explanation: D&O policies are commonly written on a claims-made basis, so prompt reporting of a written demand is critical. The broker should not wait for formal litigation if the policy definition of claim may already be triggered. The facts also require attention to the coverage structure: insured persons may have direct protection, the organization may be reimbursed when it indemnifies directors and officers, and entity coverage may apply to certain claims against the company. Defence costs must be discussed carefully because they may reduce the available aggregate limit. Retentions can also differ by coverage part, such as a retention applying to entity coverage or organization reimbursement while individual non-indemnifiable loss may be treated differently. The broker should document the advice and avoid guaranteeing coverage.

• Waiting for a lawsuit can prejudice claims-made reporting where a written demand may already qualify as a claim.
• CGL coverage is not the primary response for management-liability allegations about investor misrepresentation.
• Assuming defence costs are outside the limit contradicts the stated D&O wording that defence costs erode the aggregate limit.

A written demand may be a claim under a claims-made D&O policy, and the broker should preserve reporting rights while explaining the coverage structure and limit/retention effects.

Question 5

Topic: Directors and Officers Liability Insurance

A nonprofit is moving its D&O coverage to a new insurer. A director asks why the application asks about the expiring policy’s uninterrupted coverage history and prior disclosure of known circumstances. The broker explains that preserving the relevant date can help avoid a gap for management decisions made before the new policy period, provided reporting and disclosure requirements are met. Which D&O policy concept is being described?

• A. Extended reporting period
• B. Continuity date
• C. Defence-cost retention
• D. Late notice condition

Best answer: B

What this tests: Directors and Officers Liability Insurance

Explanation: D&O coverage is commonly written on a claims-made basis, so the timing of the claim and the reporting of that claim are critical. When coverage is renewed or moved to a new insurer, dates such as retroactive dates and continuity dates help determine whether earlier management decisions can still be considered. A continuity date is especially important when there has been continuous D&O coverage and the insurer wants to preserve the treatment of prior acts, subject to the application, known-circumstance disclosure, and policy wording. If the date is changed or continuity is broken, claims arising from older decisions may face restrictions or exclusions. This is why brokers must review claims-made dates carefully when replacing D&O coverage.

• An extended reporting period allows reporting of claims after policy expiry, but it does not itself preserve prior continuous coverage history.
• A late notice condition concerns failure to report a claim or circumstance within the required time.
• A defence-cost retention is the amount the insured must bear before the policy responds; it does not address prior acts timing.

A continuity date helps determine how far back prior management acts may remain eligible for coverage when D&O coverage has been continuously maintained and required disclosures were made.

Question 6

Topic: Directors and Officers Liability Insurance

A private technology company is being purchased by a larger competitor. The current directors will resign at closing, and the buyer’s insurance will not protect the former board for allegations arising from decisions made before the sale. The broker wants to identify the D&O policy feature that would best address future claims reported after closing for pre-sale wrongful acts. Which feature is most relevant?

• A. Severability of exclusions
• B. Defence costs inside the limit
• C. Run-off coverage for prior acts
• D. Entity coverage for securities claims

Best answer: C

What this tests: Directors and Officers Liability Insurance

Explanation: D&O insurance is usually written on a claims-made basis, so timing of both the alleged wrongful act and the claim report matters. A sale, merger, or other change in control often changes the policy’s treatment of future claims. Run-off coverage, sometimes discussed as tail protection, is used to protect former directors and officers against claims made after the transaction that relate to management decisions before closing. This is especially important when the old board resigns and the buyer’s program does not assume responsibility for past acts. The broker should focus on continuity of reporting rights, prior acts protection, and any transaction-related notice requirements rather than assuming the expiring policy or the buyer’s policy will automatically respond.

• Entity coverage addresses claims against the organization itself; it does not solve the former board’s post-closing reporting problem.
• Defence costs inside the limit affects how claim expenses erode available insurance, but it does not extend protection after a transaction.
• Severability can protect innocent insureds from certain knowledge or conduct exclusions, but it is not the main feature for change-in-control protection.

Run-off coverage is designed to preserve D&O protection for claims made after a transaction that allege wrongful acts before the change in control.

Question 7

Topic: Directors and Officers Liability Insurance

A nonprofit client forwards a letter from a provincial regulator requesting records and alleging that several board members may have breached their duties in approving a grant program. The client asks whether its directors and officers liability policy should be involved. Which broker follow-up best matches proper D&O claims handling?

• A. Report the matter promptly to the D&O insurer with the regulator letter and related facts, while advising the client not to admit liability or incur defence costs without claims guidance.
• B. Wait until the regulator files a court action, because D&O policies respond only after a statement of claim has been served.
• C. Submit the matter under the commercial general liability policy first, because board allegations are treated as ordinary bodily injury or property damage claims.
• D. Tell the client to retain counsel and confirm that all legal invoices will be reimbursed once the policy period ends.

Best answer: A

What this tests: Directors and Officers Liability Insurance

Explanation: D&O policies are commonly written on a claims-made basis, so timing and notice handling are critical. A management-liability demand, regulator inquiry, or allegation against directors or officers should be reviewed promptly against the policy’s claim and notice provisions. The broker’s role is to help the client notify the insurer accurately, provide relevant documents, document instructions, and avoid statements that could prejudice coverage. The broker should not promise claim payment, decide legal liability, or authorize defence spending unless the policy and insurer’s claims instructions support that step. In this scenario, the regulator’s letter directly alleges possible board duty breaches, making D&O notice the practical follow-up.

• Waiting for a lawsuit can jeopardize claims-made notice requirements and may miss a reportable regulator inquiry.
• Treating the matter as a CGL claim ignores that board-duty allegations are management-liability exposures, not ordinary bodily injury or property damage claims.
• Confirming reimbursement of legal invoices oversteps the broker’s role and may conflict with consent-to-defence-cost provisions.

A regulator inquiry alleging board duty breaches may be a D&O claim or circumstance, so prompt notice and careful claims handling are essential under claims-made coverage.

Question 8

Topic: Directors and Officers Liability Insurance

A nonprofit society carries D&O liability insurance. After a contested election, the former treasurer files a demand against the current directors alleging they made misleading statements about the society’s finances and damaged the former treasurer’s reputation. The former treasurer was a director during the same policy period and is included in the policy’s definition of an insured person. The broker notes that coverage must be reported promptly, but the first exclusion issue is that the claim is being brought by one insured person against other insured persons. Which D&O concept best matches this issue?

• A. Fraud or personal profit exclusion
• B. Bodily injury and property damage exclusion
• C. Retroactive date limitation
• D. Insured versus insured exclusion

Best answer: D

What this tests: Directors and Officers Liability Insurance

Explanation: D&O policies commonly contain exclusions that shape how board disputes are handled. In this situation, the key clue is not merely that the allegation involves misleading statements; it is that the claimant and the defendants are all insured persons under the D&O wording. That points to the insured versus insured exclusion, which is designed to limit coverage for disputes between insured persons, while still requiring careful review for exceptions such as certain derivative, whistleblower, employment, or regulatory-related claims if the wording provides them. A broker should avoid declaring the claim covered or denied, report it promptly to the insurer, preserve the client’s rights under the claims-made policy, and help gather the relevant board, election, and demand documents for the insurer’s review.

• Bodily injury and property damage exclusions address physical injury or tangible property loss, not a management dispute over financial statements and governance.
• Fraud or personal profit exclusions may be relevant if dishonest conduct is established under the wording, but the immediate issue is who is suing whom.
• A retroactive date limitation focuses on when the alleged wrongful act occurred, not on a claim by one insured person against other insured persons.

A claim brought by one insured person against other insured persons is the core situation addressed by an insured versus insured exclusion, subject to any wording exceptions.

Question 9

Topic: Directors and Officers Liability Insurance

A private manufacturer’s shareholders allege that the board approved an acquisition after failing to disclose known financing problems. The claim seeks damages for loss of share value and defence costs. No bodily injury, property damage, professional service error, employee dispute, theft, or dishonest taking is alleged. Which coverage concept best matches this exposure?

• A. Crime coverage
• B. Directors and officers liability
• C. Commercial general liability
• D. Professional liability

Best answer: B

What this tests: Directors and Officers Liability Insurance

Explanation: D&O liability is designed for claims alleging wrongful acts by directors or officers in their management or governance capacity, such as misstatements, failure to disclose material information, breach of duty, or poor corporate decision-making. In this situation, shareholders are claiming financial loss from a board decision and related disclosure conduct. That points to D&O rather than CGL, professional liability, employment practices liability, or crime. The absence of bodily injury or property damage removes the typical CGL trigger. The absence of a professional service error makes professional liability less suitable. The absence of employee-related allegations or dishonest taking also separates the claim from employment practices liability and crime coverage.

• Commercial general liability is not the match because the claim is for financial loss from governance conduct, not bodily injury or property damage.
• Professional liability is not the match because the alleged error is a board-level acquisition decision, not the rendering of professional services to a client.
• Crime coverage is not the match because no theft, employee dishonesty, forgery, or fraudulent taking is alleged.

The allegation is a management-liability claim against the board for decisions and disclosures made in their governance role.

Question 10

Topic: Directors and Officers Liability Insurance

A private Canadian manufacturer has entered receivership. Former minority shareholders and a creditor group allege that the directors approved misleading financial statements and preferred certain creditors before insolvency. The receiver confirms that the corporation will not indemnify the directors. The demand seeks defence costs and damages from the directors personally, with no allegation of bodily injury or property damage.

Which D&O coverage concept is the closest fit for the broker to discuss first?

• A. Side A coverage for non-indemnifiable loss of individual directors and officers
• B. Side B coverage reimbursing the corporation for indemnifying its directors and officers
• C. Entity coverage for the corporation’s own securities or management-liability claim
• D. Commercial general liability coverage for personal injury or property damage claims

Best answer: A

What this tests: Directors and Officers Liability Insurance

Explanation: D&O coverage structure depends on who is insured and whether the organization can indemnify the individuals. Here, the claim is aimed personally at directors, and the corporation is in receivership and will not indemnify them. That points first to Side A coverage, which addresses non-indemnifiable loss of individual directors and officers, including defence costs where covered by the policy. Side B would apply when the organization indemnifies the directors and then seeks reimbursement from the D&O insurer. Entity coverage focuses on claims made against the organization itself, subject to the policy wording. CGL is not the right fit because the allegations involve management decisions and financial harm, not bodily injury or property damage.

• Side B is tempting because directors are involved, but it requires the corporation to indemnify them first.
• Entity coverage does not fit the stated demand because the claim is against the directors personally, not the corporation.
• CGL is not intended for shareholder or creditor allegations about governance, financial statements, or insolvency decisions.

Side A is designed to protect individual directors and officers when the organization cannot or will not indemnify them.

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