limited severability provision

A limited severability provision in an application for directors and officers (D&O) liability insurance states that knowledge possessed by any insured persons, other than the signer of the application or certain executive officers (usually the CEO, COO, and CFO), will not be imputed to other insureds in a claim situation.

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For example, if an insured were aware that a coverage application contained false financial data, this knowledge—which would ordinarily bar coverage in a claim situation—will not be attributed to any other insureds who did not know that the financial statements were false. As a result, these so-called innocent insureds will have coverage under the policy. However, if either the signer of the application or one of the three executive officers had knowledge of the false data, their knowledge would be attributed to the innocent insureds, and coverage would be barred for the "innocent insureds" as well. A limited severability provision is much less favorable for insureds, compared to a full severability provision. However, only a minority of insurers' application forms contain limited severability provisions.