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2 D&O Insurance: Beyond the Basics Specific Provisions to Address at Renewal May 12, p.m. EST Presented By: A. Peter Prinsen, Vice President and General Counsel, The Graham Company Christopher Moore, Managing Director, Marsh FINPRO Mary E. McCutcheon, Partner, Farella Braun + Martel LLP 2

3 Agenda Introductions Structure of a D&O Program Update on D&O Market Conditions Key Provisions to Negotiate at Renewal Severability Conduct Exclusions (Triggers) Definition of Claim Insured v. Insured Exclusion Definition of Loss Advancement of Defense Costs 3

4 Agenda (cont.) Prior Notice Exclusion Foreign Exposures Pollution and BI/PD Exclusions Provisions Unique to Private Companies Excess Policies Side A Issues Questions? 4

5 Structure of a D&O Program Covered Claim Against Directors and Officers Indemnification? Covered Claim Against Corporate Entity* No Side A Directors and Officers Protects Personal Assets Yes Side B Insured - Company Protects Corporate Assets Side C Insured- Corporate Entity Protects Corporate Assets Personal Assets Protections Corporate Risk Transfer Corporate Liability 5

6 Structure of a D&O Program Coverage is for Claims made during policy period. Claim must be based on Wrongful Act. Wrongful Act broad in scope for individuals. Wrongful Act for public companies limited to securities claims. Wrongful Act broader for private companies. 6

7 Update on D&O Market Conditions There is no standard D&O policy. Policy forms change year by year in response to new exposures and marketplace pressures. Although price is always an issue, coverage terms and conditions are far more important. Policy enhancements may have unintended consequences. 7

8 Update on D&O Market Conditions Market remains soft; abundance of capacity and many coverage provisions negotiable. Great flexibility for coverage extensions in general, but not every insurer will offfer (nor every client receive) enhancements discussed herein. Greater price reductions on excess layers particularly if you are willing to change insurers. Pricing depends on risk profile and past premium history. 8

9 Key Provisions to Negotiate at Renewal Severability Conduct Exclusions (Triggers) Definition of Claim Insured vs. Insured Exclusion Definition of Loss Advancement of Defense Costs Prior Notice Exclusion Dispute Resolution Provisions Foreign Exposures Pollution and BI/PD Exclusions 9

10 Key Provisions to Negotiate at Renewal- Severability Severability in the insurance context means that the contract is severed into separate contracts running directly from the insurance carrier to each individual insured. Thus the knowledge possessed by one D&O is not imputed to other D&Os; knowledge of only key D&Os imputed to company. The contract applies the concept of severability to two important areas of the contract; application and exclusions. 10

11 Severability (cont.) Difference between shall not afford coverage vs. void. Require linkage between misrepresentation in application and subsequent claim (i.e., no loss of coverage for a claim unrelated to misrepresentation). Some carriers willing to provide better severability if the non-rescindability limited to Side A. 11

12 Severability (cont.) Some carriers will waive Applications entirely. If not, limit to current D&O Application no prior applications. Limit to last 12 months of SEC or foreign equivalent filings (not any regulatory filings). Renewal Applications should not contain warranty statements. 12

13 Key Provisions to Negotiate at Renewal: Conduct Exclusions (Triggers) Many carriers now willing to provide final nonappealable adjudication in the underlying proceeding. Risk dilution of limits. Some clients prefer in ANY underlying proceeding. Or,. any proceeding, but carrier waives right to bring declaratory relief action. 13

14 Conduct Exclusions (cont.) Right to subrogate against individual insured should be limited to, and mirror, the Conduct Exclusion trigger. Repayment of funds trigger. Consider protection of individual vs. preservation of limits. 14

15 Key Provisions to Negotiate at Renewal: Definition of Claim New Coverages for Investigation Costs Coverage generally limited to Individuals costs interviews, non-entity document production, etc. Key issue is to make notification flexible, so you don t risk a late notice issue if you fail to report an early inquiry that later blooms into a major claim. 15

16 Definition of Claim (cont.) Chartis Investigation Edge Policy Covers Company, not Individuals. Coverage triggered when securities law investigation commences by regulatory enforcement authority. Coverage ends when regulator files Proceeding, which should trigger D&O coverage. Insureds MUST use Chartis Panel Counsel. Prior knowledge exclusion. More expensive! Others markets beginning to follow. 16

17 Key Provisions to Negotiate at Renewal: Insured vs. Insured Exclusion In some cases (still rare), can get deleted even on an ABC form. More likely exclusion can be limited to Insured Entity vs. Insured Person; eliminates need for many typical carvebacks. Most Side A carriers will delete entirely. 17

18 Key Provisions to Negotiate at Renewal: Definition of Loss Loss typically includes damages, settlements, judgments and defense costs. Avoid ambiguity regarding payment of Plaintiffs fees. Carvebacks for insurable fines/penalties of Individuals under SOX, FCPA & Dodd Frank (typically limited to Side A and sublimit). No limitation regarding multiplied Loss. Most favorable venue for punitive/exemplary damages. 18

19 Definition of Loss (cont.) Carriers are in flux re Dodd Frank. Expect Defense Costs coverage for a bonus clawback claim. Return of bonus probably uninsurable. May be able to obtain coverage for fines and penalties incurred by individuals. 19

20 Key Provisions to Negotiate at Renewal: Advancement of Defense Costs Advancement of Defense Costs in event of failure to indemnify (deletion of Presumptive Indemnification). Once the domain of Side A DIC, now some ABC carriers (see Chartis Edge) do this in ABC form, with same right to subrogate if the Company s refusal to indemnify was wrongful. 20

21 Key Provisions to Negotiate at Renewal: Prior Notice Exclusion Ideally, limit to prior D&O insurance that has paid. Limit to valid and collectible. Limit to D&O, not any other insurance. (Some carriers insist on D&O and EPL.) 21

22 Key Coverage To Negotiate at Renewal: Foreign Exposures Foreign Equivalent Positions cover individuals out of country that do not carry title of D&O but functionally fulfill such role. Evaluate exposures and indemnification and insurance requirements in applicable jurisdictions. Key countries of focus: Brazil, China, Russia and India. Foreign Corrupt Practices Act exposures and coverages. 22

23 Pollution and BI/PD Exclusions Some ABC carriers are willing to delete, but depends on exposures. Try to get: for intro; full Side A carveback; and full Securities Claim carveback. 23

24 Provisions Unique to Private Companies Duty to Defend language Limitation of Contract Exclusion For rather than arising out of Exceptions for liabilities which otherwise would arise in absence of contract Limitations on Hammer clause Securities Exclusion Exception for bond offerings Other Coverages (EPL/Fiduciary) Risk dilution of Limits 24

25 Excess Policies Exhaustion Language State of the Art: Exhausts if Insurer, Insured or Excess Side A DIC Insurer pays all or part of underlying limits. Foreign insurers still may insist on choice of law and arbitration provisions. Risks of disputes in multiple and diverse forums. 25

26 Side A Issues Broad Drop Down Provisions. Narrow conduct exclusions. Should provide defense costs. Exclusion may not apply to independent directors. Limited or no I vs. I exclusion. Many Side A Carriers willing to delete ERISA exclusions. Non-cancelable (by insured or insurer). 26

27 Questions? 27

28 Presenter s Contact Information Peter Prinsen pprinsen@grahamco.com Christopher Moore christopher.moore@marsh.com Mary E. McCutcheon mmccutcheon@fbm.com 28

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