Tips For Negotiating D&O Liability Insurance

Abstracted from: Negotiating D&O Policies: Key Terms And Conditions

By: Carolyn Rosenberg, Duane Sigelko, Kit Chaskin, Neil Posner, and Venus McGhee Sachnoff & Weaver, Chicago, IL
Review of Securities & Commodities Regulation - Vol. 37, No. 4, Pgs. 31-43

Overview: Dissects typical major provisions of D&O liability insurance, including persons covered, claims covered, claim reporting, defense costs, exclusions, cost allocation between covered and uncovered matters, coverage for administrative investigations, and special issues arising in bankruptcy. Cites specific policy language, and advises when and how companies can negotiate more favorable provisions.

Watch out for overly broad exclusions. In this age of increased securities litigation and growing insurance premiums, negotiating the best terms for directors’ and officers’ liability coverage is a critical skill. It requires an understanding of the typical provisions and an awareness of the negotiable areas, explain attorneys Carolyn Rosenberg, Duane Sigelko, Kit Chaskin, Neil Posner, and Venus McGhee. D&O insurance is usually either Side A last-resort coverage (which directly covers an insured individual when the corporation cannot indemnify because of insolvency or charter prohibitions); or reimbursement coverage known as Side B (which, subject to sometimes hefty deductibles, reimburses the indemnifying corporation). A recent creation is limited entity coverage; sometimes called Side C, it applies when the claim does not involve individual officers and directors. Insurers generally define "claims" as written or oral demands for relief, with or without money damages; the authors remind negotiators to include administrative proceedings and investigations, thereby encompassing SEC proceedings. In addition to the standard exclusions for deliberate fraud and dishonesty, many policies exclude IPO claims, insider trading, and insured vs. insured claims. Policyholders can tighten the breadth of these restrictions, especially the latter in the event of employment issues and cross-claims. Based on applicable state law, insurers might declare some losses uninsurable, such as settlements or punitive damages; adding a most-favorable-law clause would avoid defeating coverage.
Who is covered, and when. While D&O coverage naturally extends to persons serving as directors and officers of the company, the authors advise companies to have coverage not cease if these persons are liable in multiple capacities and to obtain coverage for non-officer employees in appropriate circumstances. Most D&O policies are based on claims made, so counsel should clarify whether the policy will cover later claims relating to an earlier claim or, correspondingly, exclude those claims that relate to an earlier policy. When claims arise against both individuals and the entity, conflicts often result from allocating policy limits and defense costs between covered and uninsured persons and claims, and sometimes between securities and nonsecurities claims. Case law in most jurisdictions favors the insured on equitable allocations when the policy is silent. The Private Securities Litigation Reform Act of 1995, which eliminated joint-and-several liability in most Rule 10b-5 and 1933 Act Section 11 cases, could also assist in resolving allocation disputes.

Defense costs always an issue. Since D&O policies typically do not contain a duty-to-defend clause, legal fees and other defense costs deplete the policy limits. While insured parties may usually choose their own counsel, they must get the insurer’s consent. Some policies bar reimbursement of defense costs before such consent, a provision that the authors advise expunging. Another negotiable provision is one that requires the insured to pick lawyers only from a fixed panel. Be wary of policies that will not advance defense costs if the company is indemnifying the individual defendants. Another concern related to defense costs is how to characterize the company’s special-committee costs involved in responding to a derivative suit claim. Push to have the word "investigate" appear in the description of defense costs covered by the policy, to strengthen the case for expenses arising from a special committee’s review. Some insurers will sell separate coverage for these investigations.

Belly-up is an awkward spot. Bankruptcy courts in some jurisdictions have injected uncertainty into D&O coverage by proclaiming it an asset of the bankruptcy estate, thereby subordinating directors’ and officers’ claims to those of other creditors. One avoidance technique the authors suggest is to have separate policy limits for the individuals; similarly, the company could carry separate Side A coverage for them. Another possibility is to negotiate a clause in the policy requiring the insurer to pay the individuals first for unindemnified claims; they caution, however, that no court has yet ruled on the validity or efficacy of these techniques.

Abstracted from Review of Securities & Commodities Regulation, published by Standard & Poor’s, 55 Water Street, New York, NY 10041.

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