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Feature

Susanne Murray, Esq.
EVP and Managing Director — D&O
Hilb Rogal & Hobbs

D&O Insurance 2007: Hot Topics, New Twists

There have been changes in D&O coverage terms and in D&O coverage interpretation that warrant a fresh look.

By Susanne Murray

The D&O liability climate and D&O insurance marketplace continue to evolve, and revolve, with new topics being presented and old issues being revisited again.

For individual directors and officers, the tightrope that they walk between focusing on the job at hand and watching their back can be tiring, though many would say that they don’t need to watch their back when “doing the right thing” is part of the job at hand. Protection to directors and officers for the job at hand comes from the companies they serve and from directors and officers liability insurance.

However, there have been changes in D&O coverage terms, and in D&O coverage interpretation, that warrant a second look.

Some new issues involving D&O insurance include whistleblower coverage, non-rescindable policies (non-rescindable for the entire policy rather than just for Side A or non-indemnifiable loss only), excess policy language including language that the coverage is never triggered if any underlying carrier fails or refuses to pay its entire limits, and certain fines and penalties coverage.

In addition to these newer issues, several “old” issues are new again due to slight language modifications or coverage interpretations by insurers. Some examples include those same conduct exclusions, what’s being indemnified, and how some carriers are interpreting covered loss to eliminate coverage for certain securities claims notwithstanding the lack of an actual exclusion.

Whistleblower coverage has become a reality over the last three years after passage of Sarbanes-Oxley and the protections afforded to whistleblowers in that law. D&O coverage has had to catch up as many whistleblowers are officers, so such claims would typically be excluded from coverage. This has been addressed by providing exceptions to the exclusion for claims by one insured (such as an officer) against another insured (such as the company or another officer or director) to provide coverage for whistleblower claims.

Non-rescindable coverage has evolved over the last couple of years from initially being available only for Side A or non-indemnified claims to now being available for all claims. This is not standard in the D&O marketplace, and not all carriers are willing to provide it. Since rescission of the D&O policy means that the policy ceases to exist in its entirety for all insureds and all claims, this is an important protection.

Excess policies are often sold as “follow form” to the primary policy, which means that the excess policy adopts the terms of the primary policy. Most insureds understand this to mean that the excess policy entirely mirrors the primary policy. This is often not the case, as excess policies generally change the notice provisions, add exclusionary language, and include different provisions on when coverage is triggered. As a program grows, excess layers often adopt the most restrictive underlying policy, rather than simply following the primary policy. This is well worth examination.

One of the most recent concerns with excess policies involves gaps in coverage. Historically, if an underlying carrier failed or refused to pay its entire limit of insurance, the excess carrier would say that its coverage was triggered when the total loss equaled the sum of the underlying limits and if there was any gap it was the responsibility of the insured. Some policies now state that if any underlying insurer fails or refuses to pay their entire limits, the excess policy is not triggered. It is important to examine excess policies, even when they say that they are follow form, to determine what the actual differences are, and to determine that the excess policy will provide coverage in the event that an underlying carrier fails or refuses to pay its entire limits when the claim exceeds such limits.

Fines and penalties have historically been excluded from coverage on D&O policies. Since fines or penalties would be imposed after some sort of a finding, most insureds did not anticipate such costs as being covered. In addition, many fines and penalties may be considered as uninsurable under the law or as against public policy. Having said that, there are certain types of fines or penalties that may result from some unintended violation of a statute or for some other slight infraction. Some statutes, such as the Foreign Corrupt Practices Act, include statutory fines for “negligent” violations, and that is an example of the type of fines or penalties that can now be covered. In addition, for some claims brought outside the United States, the only relief that can be sought is categorized as fines or penalties. Accordingly, some D&O carriers have been willing to consider expansions of covered loss to address the above.

Conduct exclusions: In addition to the sampling above of “new” issues, there are “old” issues that are being revisited. One of the most significant issues to be examined anew is the trigger for conduct exclusions. We have previously agonized over what triggered the exclusion, and for most, determined that the strongest language was to require a final adjudication that the wrongful conduct occurred before the exclusion would be triggered. While this continues to be argued for each insured and with each carrier on a case by case basis, it is at least an issue that is familiar. More recently, focus has been given to where the final adjudication has to take place, and specifically, if it has to be adjudicated in the underlying claim or if the insurer can initiate its own proceeding to “prove” that the conduct occurred and therefore that the exclusion applies. Obviously, if there appears to be any ambiguity, then when possible it needs to be spelled out that the final adjudication has to occur in the underlying proceeding.

What’s indemnifiable and what’s indemnified continues to be a moving target. State statutes generally determine when indemnification is mandatory, permissive or prohibited. Individual directors and officers continue to question what is not indemnifiable, as they anticipate protection from their company for indemnifiable claims. What happens when an individual believes a claim to be indemnifiable and yet, he or she is not being indemnified? The traditional D&O policy has historically presumed indemnification and required the retention to be paid before coverage would be triggered.
As a general matter, this continues to be the case but there are non-traditional D&O policies that will step in for indemnifiable claims that are not being indemnified. For many individual directors and officers, this type of non-traditional D&O policy is well worth pursuing. In this regard, it appears that some companies have refused to indemnify even though allowed to do so as a sign of “cooperation” with regulatory, administrative or other agencies in connection with formal or informal investigations.

What’s covered loss continues to be debatable. One of the most serious interpretations of covered loss has recently focused on Section 11 and 12 claims under the Securities Act of 1933, determining that since relief sought under those statutory sections is the equivalent of disgorgement or restitution, the claims themselves are precluded from coverage. Nothing in the policy itself precludes such claims. Nothing in the definition of Loss or the definition of Damages provides that claims seeking other relief are excluded from coverage. This is akin to saying that derivative claims seeking to change certain corporate behaviors are excluded from coverage, even for the defense costs associated with such claims. It is important to note that this is not a position taken by all insurers or in all circumstances, but needs to be considered, discussed and addressed if deemed necessary.

As is evident from the sampling of issues listed above, the D&O coverage provided in the insurance marketplace continues to be shaped by events, evolves over time and, periodically, circles back around again.

Susanne Murray, Esq., is executive vice president and managing director—D&O at Hilb Rogal & Hobbs (http://www.hrh.com), a leading insurance intermediary that helps clients manage their risks in property and casualty, employee benefits, professional liability, and other areas of specialized exposure. In addition, the firm offers a full range of personal and corporate financial products and services. The author can be contacted at Susanne.murray@hrh.com.