D&O Coverage - Potentials & Pitfalls

Transcription

1 D&O Coverage - Potentials & Pitfalls Presented by: William Michael, Jr. and James W. Reuter Lindquist & Vennum, PLLP Association of Corporate Counsel June 28,

2 D&O Coverage - Potentials & Pitfalls William Michael, Jr. White Collar and Regulatory Defense Practice Group wmichael@lindquist.com James W. Reuter Chair, Insurance Coverage Practice Group jreuter@lindquist.com 2

3 The Need for D&O Coverage Protect assets of the company Protect assets of individuals Share the Pain 3

4 Protection of Assets Government Investigations, whistleblower (qui tam) lawsuits, and shareholder litigation are very costly to defend. Additionally, many state statutes or company by-laws require indemnification of employees. Accordingly, regardless of the merit of the investigation or suit, the financial cost to the company will likely be high. 4

5 Types of Costs Attorneys fees Experts Electronic costs Jury Consultants Travel and logistical costs 5

6 The Application Here the Insurer s later rescission efforts are born Who does it bind? Make it severable (not imputable to innocent D&O s) Total severability is ideal, but today insurers often limit severability (but not so vigorously for Side A coverage) 6

7 The Application (cont.) A common form of limited severability grants severability except for knowledge of the application signers or certain officers whose knowledge is imputed to all. You may be able to do better with some negotiation Limit application misrepresentation to actual and knowing fraud Conduct due diligence investigation 7

8 The Application (cont.) Respond carefully: State basis for response Explain limits of knowledge Incorporation of documents Distinguish opinions from facts Invite further investigation Do not warrant information Do not stipulate to reliance Insurers have access to much information 8

9 What to look for in a D&O policy Avoid combination policies (e.g. D&O with Employment Practices Liability, Fiduciary Liability) Dilutes coverage Who is covered? Traditional coverage covers only D&O s, not the business Traditional coverage is fertile ground for allocation disputes 9

10 What to look for in a D&O policy (cont.) Who is covered? (cont.) Entity Coverage tends to avoid allocation disputes but dilutes coverage available to D&O s Side A Coverage policy covers only D&O s Get coverage for all subs, joint ventures, etc. Retro Date (also known as Continuity Date ) Most D&O polices claims made 10

11 What to look for in a D&O policy (cont.) Retro Date (cont.) Cover only claims that: Arise after retro date and Are made and reported to insurer during policy period Get a retro date at least as far back as statutes of limitation Beware of switching carriers, especially if claims may be coming 11

12 What to look for in a D&O policy (cont.) Securities coverage Usually excluded unless covered by special form or endorsement Get broad definition of Claim to include administrative proceedings, regulatory proceedings, suits, investigations, subpoenas, demands for non-monetary relief, etc. Discovery of claims or occurrences limit to high officer or insurance department 12

13 What to look for in a D&O policy (cont.) Order of payment provision Pays individual D&O s first if limits exhausted Right to Buy Discovery Period Endorsement (Tail) Tail becomes crucial especially when trouble brewing And can t get renewed or only at inferior terms Want right even where renewal offered but on inferior terms Note length compared to Statute of Limitations 13

14 What to look for in a D&O policy (cont.) Right to Buy Discovery Period Endorsement (cont.) Note costs Clause for Notice of Circumstances that may result in claim Consider giving when reduced or no coverage expected going forward 14

15 What to look for in a D&O policy (cont.) Exclusions Something fundamentally flawed with D&O policies? What can be done? Exclusions that are based on conduct should provide that their applicability is determined by final adjudication or in fact 15

16 What to look for in a D&O policy (cont.) Exclusions (cont.) What is insured v. insured exclusion? It essentially excludes coverage for claims brought by the Company or one D&O or employee, on one hand, against the Company or another D&O or employee, on the other hand 16

17 What to look for in a D&O policy (cont.) Exclusions (cont.) The insured v. insured exclusion also usually excludes claims brought by shareholders of the Company unless the claim is instigated and continued totally independent of, and totally without the solicitation of, or assistance of, or active participation of, or intervention of, any Executive or D&O of the Company. 17

18 What to look for in a D&O policy (cont.) Exclusions (cont.) There are some other exceptions to the insured v. insured exclusion called carvebacks. Most of the exceptions apply in rather unusual situations. The most common exception is for claims brought by a past Executive of the Company who was not a D&O, member of management board or committee, General Counsel or Risk Manager or equivalent position. Make certain you get all of the carvebacks available (usually about five) 18

19 What to look for in a D&O policy (cont.) Exclusions (cont.) Other common exclusions at issue in white collar crime matters Dishonest, fraudulent and criminal acts (conduct exclusions) Personal profit or advantage (conduct exclusions) Securities exclusion (coverage can be purchased at least in part by endorsement) Takeover exclusion Bribes, political payments and gratuities exclusion (can be ameliorated by endorsement) 19

20 What to look for in a D&O policy (cont.) Exclusions (cont.) Severability clause as to exclusions (its different than application severability) So bad acts not imputed to innocent insureds Example: It is agreed that any fact pertaining to an Insured shall not be imputed to any other Insured for the purpose of determining the application of the Exclusions. 20

21 What to look for in a D&O policy (cont.) Exclusions (cont.) Definition of Loss Also acts as exclusion in terms of practical result Restitution may not be covered No coverage for: fines, penalties, taxes, some punitive damages, multiplied damages, and inadequate consideration paid for acquisition type claims 21

22 What to look for in a D&O policy (cont.) Exclusions (cont.) Definition of Loss (cont.) Try for most favorable venue endorsement regarding punitive damages so insurability of punitive damages will be determined by the most favorable internal law of state with a connection to the insured or the cause of action Most D&O policies are wasting policies, that is, defense costs erode limits, so get endorsement to select defense counsel you are paying for it in effect 22

23 After the Claim Defense Counsel Who has right to select? Many factors used by courts, vary state by state Know what the factors are, be aggressive, negotiate Consider denying any right to recoupment Insist and check on quality of defense counsel selected by insurer 23

24 After the Claim Defense Counsel (cont.) Identify and object to any conflict Instruct and monitor defense counsel: Do not prejudice coverage Strengthen case for coverage Do not defeat coverage by allocation via a settlement agreement or jury verdict form 24

25 Rescission Review of recent rescission cases Insurer cannot unilaterally rescind (unless policy so provides?) Either as to duty to defend or duty to advance defense costs policy Perhaps even if fraud in application, may still be coverage for innocent D&O s 25

26 After the Claim Notice and tender Courts becoming more strict about timely notice Where there is condition precedent language in policy, insurer may not have to demonstrate prejudice from late notice For that reason tender early And also because pre-tender defense fees may not be recoverable 26

27 After the Claim Notice and tender (cont.) Conduct periodic examinations and educate employees about pitfalls of late notice Can t find policy notify anyway Not just to broker Does policy require notice to particular address? Notice can be simple, no special form required But may want to mimic policy language 27

28 After the Claim Notice and tender (cont.) Say what you are doing/what you want Notice or tender or advance defense costs? Advise insurer of selection of defense counsel? Ask for acknowledgement at least Include copy of claim, complaint, etc Delivery by provable means 28

29 After the Claim Notice and tender (cont.) Tell them who else you have notified Other carriers Umbrella/excess carriers Make certain all potentially liable insurers are notified If in doubt, notify Don t forget: probably will have to give notice before an actual claim, e.g., notice of occurrence that may give rise to a claim educate employees about this 29

30 After the Claim Notice and tender (cont.) Denial Don t take no for an answer from insurer Keep submitting Tender early, tender often DJ action Competent coverage counsel or knowledgeable, experienced insurance broker should be involved where: A major claim or circumstances that may give rise to one 30

31 After the Claim Notice and tender (cont.) Denial (cont.) Competent coverage counsel or knowledgeable, experienced insurance broker should be involved where: A denial of a major claim Cancellation or rescission by the insurer Insurer refuses to renew or is willing to renew only on substantially inferior terms and you can t get equivalent coverage 31

32 After the Claim Notice and tender (cont.) Denial (cont.) Competent coverage counsel or knowledgeable, experienced insurance broker should be involved where: Switching carriers where there is a likelihood of future claims When there is an issue about selection of defense counsel 32

33 Contact Information William Michael, Jr. Office: (612) Cell: (612) James W. Reuter Office: (612)