- Find out if existing D&O policies have “final adjudication” language in their “conduct” exclusions—exclusions for dishonesty, fraud, improper profit or advantage and the like. Final adjudication clauses prevent the insurer from withholding defense costs from insureds until the very end of the investigation and then only when there has been a final adjudication of culpability within the terms of the exclusion.
- Not all final adjudication language is the same. Be sure the final adjudication language excludes declaratory judgment or other actions brought by the D&O insurer and instead require that any such final adjudication be in the underlying proceeding in which the individual is a party.
- Final adjudication should also mean “final,” that is, not subject to any further review or appeal, not just an agency determination or trial court adjudication.
- Side A coverage, for loss that the corporation does not pay on behalf of the insured, should apply not only when the loss is non-indemnifiable under the by-laws or applicable law (e.g., in derivative actions alleging breach of fiduciary duty) but also when the corporation fails or refuses to indemnify the individual. Individuals should not have to wage a fight against their own corporation to be able to fund their defense.
- Consider adding a Side A/Difference in Conditions (DIC) tower of coverage, i.e., coverage that is available only to individuals, not the corporation. Side A/DIC coverage is particularly important to directors and officers because the corporation’s defense costs alone may completely erode the available limits. Because most D&O liabilities are indemnifiable by the corporation, however, whether to add significant amounts of separate Side A/DIC coverage involves a careful weighing of the cost and potential benefit.
- Determine if investigative costs are covered if a suit is not filed. Under some policies, a “claim” that triggers coverage is limited to the filing of a suit or a demand for monetary or other relief. Some insurers have taken the position that a subpoena or civil investigative demand does not fall within this definition. But as experience has taught, the cost of complying with these pre-suit investigations can result in defense costs on the scale of defense costs in a lawsuit.
- If reasonably available, consider increasing limits of the Side A/DIC tower. Typically excess layers of coverage are available at a lower cost per dollar of coverage. Whether significant limits will still be available at a modest premium compared to primary coverage remains to be seen.
- Consider unbundling the D&O policy so that it only covers typical D&O exposures. In recent years, D&O insurers have offered products that include employment practices liability, fiduciary liability (ERISA), and other types of coverage. As noted above, some D&O policies now cover even rank and file employees. If there is an unfortunate coincidence of claims that fall under more than one coverage type, or a wide variety of claims are made, limits will erode even faster. When it comes to D&O policies, because such policies are eroded as defense costs mount, sometimes less is more for the individual insured officers and directors.
- Determine if there are coverage gaps. Recent experience has exposed that some D&O policies include professional services exclusions, for example, that the insurer interprets broadly to exclude any potential coverage. Attention should also be paid to the exclusions for pollution, bodily injury, and other exposures to be sure there are carve outs for claims that may be made against individual insureds.
- Find out how allocations of coverage are determined if there are both covered and non-covered claims asserted against the insureds. Allocation disputes with the carriers remain one of the most frequent sources of frustration and tension between insurers and insureds. A pre-determined allocation can often reduce these problems without a great deal of stress.
- If a policy requires use of “panel” counsel for defense of claims, make sure that the firms that would be chosen if the company’s or the individual’s future was at stake are included on the panel.
Companies and their directors and officers should not assume that their D&O coverage is standard. In fact, there are substantial and often nuanced differences among the policies offered by the carriers. Carriers also differ in their claims handling practices, their preference for certain defense counsel, and other practices. Policies are frequently customized with pages of endorsements that enhance (or sometimes retract) coverage. Experienced counsel and insurance brokers can counsel on what is available in the market and what the pitfalls are among the options. For companies who do not have D&O policies, it would behoove them to look into adding D&O insurance coverage to their risk management portfolio. Directors and officers should periodically review the coverage the company has in place.
|Walter C. Carlson
|Brian J. Fahrney
|Daniel J. Neppl
Eugene A. Schoon
Hille R. Sheppard
Corporate Governance and Executive Compensation
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