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Brook Lane
5 years ago
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1 This Webcast Will Begin Shortly If you have any technical problems with the Webcast or the streaming audio, please contact us via at: Thank You! 1

2 What Do You Mean We re Not Covered? Avoiding the Latest D&O Insurance Issues April 22,

3 Panelists Bruce McPheeters, Lawson Software, Senior VP - Administration & General Counsel Dan Hanson, RJF Agencies, Director of Management Liability Group Tom Mielenhausen, Lindquist & Vennum, Senior Partner and Chair of Insurance Recovery Group 3

4 Overview I. Introduction II. D&O Insurance The Basics III. D&O Insurers Response to the Great Recession- Coverage Defenses Du Jour IV. How to Avoid the Insurers Coverage Defenses V. Questions? 4

5 I. Introduction The economic crisis has generated a host of claims against directors and officers, as well as increased regulatory activity. D&O insurers have responded with a host of creative coverage defenses. 5

6 I. Introduction (cont.) Many defenses can be avoided by making sure your company: Has D&O policies that contain the most protective wording available in the market; Adheres to proper procedures when it: applies for D&O insurance; becomes aware of potential D&O claims. 6

7 II. D&O Insurance The Basics Three coverages: Side A: Non-indemnifiable loss Side B: Indemnifiable loss Side C: Entity coverage 7

8 II. D&O Insurance The Basics (cont.) Insuring agreement: Wrongful act + claim + loss Duty to defend / duty to reimburse defense costs Duty to indemnify 8

9 II. D&O Insurance The Basics (cont.) Core definitions: Wrongful act Claim Securities claim Loss 9

10 II. D&O Insurance The Basics (cont.) Core exclusions: Personal gain (profit, remuneration) Fraud/knowing violation of law Prior acts / prior knowledge / misrepresentation in application Insured v. insured Punitive damages / fines & penalties 10

11 II. D&O Insurance The Basics (cont.) Other provisions/conditions: Notice of claim / notice of circumstances Related claims Severability Other insurance Limits / exhaustion 11

12 III. D&O Insurers Response to the Great Recession Coverage Defenses Du Jour No Loss. Restitution of ill-gotten gains / disgorgement of profits Quantifying the loss Best policy language: Broad definition of loss 12

13 III. Insurer s Coverage Defenses Du Jour (cont.) No Claim. Governmental investigations Notice of circumstances Best policy language: Broad definition of claim Notice = notice to specific person 13

14 III. Insurer s Coverage Defenses Du Jour (cont.) It s Your Other Insurer s Problem. E&O Liability / Professional Liability / Employment Practices Liability / Fiduciary Liability / Employee Benefit Plans Administration Liability Defense / Deductibles / Self-Insured Retentions Best policy language: Specificity in other insurance clause 14

15 III. Insurer s Coverage Defenses Du Jour (cont.) Too Bad You Settled with Your Primary/Other Insurer - You ll Never Reach Our Excess Layer. Qualcomm / Comerica Follow form doesn t really mean follow form Best policy language: Specificity in exhaustion language Difference in conditions and drop-down clauses True follow form / no inconsistencies 15

16 III. Insurer s Coverage Defenses Du Jour (cont.) You Lied in Your Insurance Application, So Our Policy Never Happened. Rescission -- retroactive underwriting Application Best policy language: - Non-rescindable policy - Narrow definition of application - Severability - Broad prior acts coverage - Notice = notice to specific person 16

17 III. Insurer s Coverage Defenses Du Jour (cont.) We re Giving You the Cheapest Defense Money Can Buy! Selection of counsel / control of defense Conflicts of interest who is the client? Best policy language: - Selection of counsel - Control of defense 17

18 III. Insurer s Coverage Defenses Du Jour (cont.)... And Then We ll Try to Recoup Any Defense Costs We Pay. Defense-costs recoupment Reservation of rights / acquiescence Best policy language: - No recoupment - Final adjudication on subrogation 18

19 III. Insurer s Coverage Defenses Du Jour (cont.) We ve Decided to Prosecute the Plaintiff s Fraud Case Against You. Conduct exclusions Final determination of the misconduct Imputation rule Best policy language: - Final adjudication in underlying proceeding - Full severability / Side A DIC 19

20 III. Insurer s Coverage Defenses Du Jour (cont.) If You Don t Contribute to the Settlement, We ll Sue You. Allocation of non-covered damages to policyholder Terms of the settlement Leverage (Side A DIC) Best policy language: - Final adjudication in underlying proceeding - Full severability / separate limits - Punitive damages most favorable jurisdiction/english law 20

21 IV. How to Avoid the Insurer s Coverage Defenses A. Work with your board, officers, managers & employees. B. Work with your broker & insurer. C. Don t go on autopilot. 21

22 IV. How to Avoid the Insurer s Coverage Defenses Work with Board, Officers, Managers & Employees Educate your directors/officers about the scope of their D&O insurance protection. Provide a notebook of pertinent materials. Meet to elicit questions and concerns emphasize the duty to promptly report potential or actual claims. Be sure you re meeting their expectations. 22

23 IV. How to Avoid the Insurer s Coverage Defenses Work with Board, Officers, Managers & Employees (cont.) Adhere to proactive practices affecting the insurance application/renewal. Avoid the application/renewal crunch maintain thorough procedures and checklists to elicit full disclosure throughout the policy period. Keep your finger on the pulse meet and confer regularly with directors, officers & business unit heads regarding issues affecting D&O insurance. 23

24 IV. How to Avoid the Insurer s Coverage Defenses - Work with Board, Officers, Managers & Employees (cont.) Adhere to best practices affecting prompt reporting of potential or actual D&O claims. Environment of candor, full disclosure, routine reporting, & follow-up. Train employees on warning signs of potential fraud, misconduct, inaccurate disclosure, or questionable practices by others. 24

25 IV. How to Avoid the Insurer s Coverage Defenses - Work with Board, Officers, Managers & Employees (cont.) Adhere to best practices affecting prompt reporting of potential or actual D&O claims. (cont.) Whistleblower protections. Ensure thorough audits and risk assessments (both internal and independent). Intertwine checks and balances to help prevent selfinterested failures to disclose or report. 25

26 IV. How to Avoid the Insurer s Coverage Defenses Work with Broker & Insurer Build a relationship of mutual trust with the insurer. Goal: obtain favorable premium pricing, policy language concessions, and claims handling. Application/renewal process = opportunity to sell your corporate culture & adherence to proper practices. 26

27 IV. How to Avoid the Insurer s Coverage Defenses Work with Broker & Insurer (cont.) Build a relationship of mutual trust with the insurer. (cont.) CEO and CFO participation in application/renewal meetings with insurer let them know it s sell time. D&O insurer meeting with board give first-hand, favorable sense of what s important to the board (e.g., openess, community, family). 27

28 IV. How to Avoid the Insurer s Coverage Defenses Work with Broker & Insurer (cont.) Make sure your company has the best D&O policy language for its circumstances. In addition to language above, consider best language for subsidiaries and for coverage in other countries. Ask new directors and officers about the coverage purchased by other corporations they have served. 28

29 IV. How to Avoid the Insurer s Coverage Defenses Work with Broker & Insurer (cont.) Monitor and prepare for the risk of insurer insolvency/instability. Don t rely solely on rating agencies -- ensure your broker/risk manager are continually monitoring financial news. Diversify structure of your D&O insurance program don t rely on one insurer. Consider a favorable policy termination clause in event rating drops below specified level. 29

30 IV. How to Avoid the Insurer s Coverage Defenses Don t Go on Autopilot Remember that D&O coverage, the law, and circumstances continually change. This isn t like car insurance -- view D&O insurance issues and tasks as constantly evolving process. Use reminder checklists throughout the year to make sure nothing slips through the cracks. Review pertinent resources on a continuing basis, for example... 30

31 IV. How to Avoid the Insurer s Coverage Defenses Don t Go on Autopilot (cont.) The Betterley Report, Side A D&O (published biennially by Betterley Risk Consultants ( ACE Bermuda s D&O Newsletter ( +Centre/D+and+O+Newsletter) Chubb s D&O Loss Prevention Handbook ( 31

32 IV. How to Avoid the Insurer s Coverage Defenses Don t Go on Autopilot Remember that D&O coverage, the law, and circumstances continually change. (cont.) Litmus test: What if directors or officers ask you about new issues they ve heard through the grapevine? Will you be prepared to answer their questions? Keep in mind D&O coverage issues are personal to directors and officers their personal assets are at stake. This fundamentally changes the dynamic for in-house counsel 32

33 V. QUESTIONS? 33

34 Thank you for attending another presentation from ACC s Desktop Learning Webcasts Please be sure to complete the evaluation form for this program as your comments and ideas are helpful in planning future programs. If you have questions about this or future webcasts, please contact ACC at accwebcasts@acc.com This and other ACC webcasts have been recorded and are available, for one year after the presentation date, as archived webcasts at You can also find transcripts of these programs in ACC s Virtual Library at 34

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This Webcast Will Begin Shortly If you have any technical problems with the Webcast or the streaming audio, please contact us via email at: webcast@acc.com Thank You! D&O Insurance: Beyond the Basics Specific