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Reader
Profile
Editor's note: Each month, we ask a Directors & Boards reader to comment on critical issues facing directors today. If you'd like to participate in this section in the future, please email Scott Chase. TAPPING THE EXPERTISE OF D&O INSURANCE BROKERS The legal issues surrounding the liability of directors and officers of publicly traded companies have never been more intricate. The current climate is a culmination of many factors, including the recent financial crisis and persistent global economic recession. Directors and officers confront increased scrutiny from shareholders and media, the task of navigating numerous, complex laws and regulations, and operating in the glare of intensifying regulatory oversight. These factors have fostered a multifaceted and high stakes claims environment for directors and officers. Securities class action litigation, certainly bad news in and of itself, often is accompanied today by an ERISA tagalong lawsuit, a state law derivative claim, opt-out claims, and actions taken by regulators. With regard to the latter, a regulatory investigation into a perceived issue at a single company may then generate investigations of entire industries. In this difficult environment, directors and officers confront enormous challenges bringing closure to litigation involving overlapping issues, and face the potential of much higher total settlement values. Accordingly, a global understanding of these emerging exposures and how they can best be addressed in the D&O policy is crucial. While superior corporate governance and savvy legal counsel are often perceived as the best means of tackling the risk of D&O liability and the resulting fallout in the event of litigation, vital assistance is also available through an oft-overlooked service provider—the D&O broker. The value a broker brings to the D&O claims process—in negotiating broad policy terms and conditions and then helping to maximize recovery after a claim is filed—can prove an invaluable asset to directors and officers navigating these turbulent waters. We asked two D&O experts at insurance broker Marsh to answer some questions about the benefits a D&O broker can provide in the current environment. How would you describe the current legal climate for directors and officers of publicly traded companies? Kate: There is no denying that the current environment is a challenging one, and one in which directors and officers tend to feel more vulnerable about their potential exposure to liability. We find that directors are increasingly focused on the types of exposures they confront, as well as the quality and scope of the insurance coverage in place to cover these exposures. While concern in the past typically was limited to securities claims, directors and officers today are increasingly uneasy about complex claims arising from a wide variety of exposures. An enhanced interest in insurance coverage seems to be a natural outgrowth of these concerns. Damian: There is likewise intense media scrutiny of company actions, putting even more pressure on directors and officers. In addition, the current legal landscape is such that directors and officers must comply with a seemingly endless series of complex regulations on a variety of fronts. Public companies are under a microscope, and pending financial reforms may further add to this difficult situation. As claims become ever more complex, the defense costs, which already are substantial, are likely to increase exponentially. In the wake of the Bernie Madoff debacle and other scandals now wending their way through the courts, we’re seeing the SEC (Securities and Exchange Commission) taking more of an aggressive role, investigating both companies and individual directors and officers. Finally, the rise in bankruptcy filings and bank failures from 2007 to 2009 has further contributed to the current climate in which directors and officers must serve. How can an insurance broker assist publicly traded companies and their directors and officers to confront the greater personal risks posed by the more arduous legal environment? Kate: As claims advocates, we perceive the claims process as starting well before a claim is ever filed. For us, the process begins with structuring the coverage and negotiating the D&O policy’s terms and conditions in such a way that it specifically addresses the client’s unique exposures. This helps ensure that if a claim does arise, the client has the right contractual language in place to facilitate the handling of that claim and maximize the financial recovery. Damian: D&O insurance is a sophisticated product that does not lend itself to a “one size fits all” approach. We stay abreast of current business and legal trends and use this information and other tools we have developed to help clients analyze their risk exposures in the current environment. Kate: We also stay informed about legal and insurer decisions interpreting policy language, as well as changes in the marketplace concerning available policy terms and conditions. This knowledge provides certainty to clients that they are purchasing coverage that is state-of-the-art, in terms of what is currently available in the marketplace. If an incumbent carrier on the D&O program does not offer the right coverage in light of new business or legal developments, and another one does, we make sure the client is aware of the difference. For example, we’ve seen significant changes in the way insurers are addressing various issues surrounding derivative claims brought on behalf of a company by shareholders, and this is an issue that has generated a lot of discussion with our clients. In what ways can a broker mitigate these challenges? Damian: For one thing, we always try to match the right insurance markets with each client’s particular risk profile, but this is not a “once and done” process since the risks and the markets are constantly evolving. As Kate notes, the claims process begins with the coverage. To give you a real world example of this, during the time a claim is underway the advancement or reimbursement of defense costs can be a major issue for the insureds. When directors become defendants in lawsuits or the targets of investigations, they obviously want to retain counsel right away, and this means incurring defense costs. In a typical scenario, the company will advance such costs to the director on an ongoing basis and then seek recovery from the D&O insurer. Where the company is insolvent, however, directors will need to look directly to the insurer to pay these costs. We have succeeded in negotiating policy language requiring the insurer to respond immediately if the company does not pay defense bills within 30 days of a request by the director for the reimbursement of those costs. This language has helped to eliminate potential disputes with the carrier that might arise over the advancement issue under the carrier’s standard policy language. Kate: It is critical from our perspective that we deliver the right resources to clients. This includes our traditional risk advisory services, as well as our in-depth knowledge of the insurance markets. As a claims advocate, I see myself as a crucial member of the service team for our clients, whether or not they have claims. What about when a claim is filed? What services can clients expect from their insurance broker? Damian: If a claim is filed, the broker should play a proactive role in managing the claims process. This involves making sure that the right insurers are put on notice, the appropriate lines of communication are opened, and the relationship with the carrier is managed from the outset, since the decisions made at the earliest stages of a claim will affect its handling going forward. This is critical since a typical D&O claim takes from three to eight years to resolve. A broker is in a prime position to guide insureds throughout the life of the claim, advising on the selection of counsel, reimbursement of defense costs, approval of trial experts, and consent to settle, which will need to be discussed and resolved with the insurers. A broker is also an invaluable resource insofar as understanding coverage issues should they arise, in addition to being a strong advocate when it comes to resolving coverage disputes. Marsh, for instance, has extensive experience, gleaned from working with an extremely broad base of clients, in gauging how different insurers will likely respond to and handle D&O claims. There are many variances in the ways in which different carriers will look at the same issue; we know who to work with at individual carriers and their respective claims philosophies, including what they expect from insureds during the claims process. At the end of the day, our goal is to get the claim paid fairly, fully and expeditiously. Knowing the players involved and how they operate can be crucial in getting this done. Kate: Damian is absolutely correct in that our knowledge and experience with various insurers and their differing claims perspectives can be a tremendous resource. It helps us guide our clients through the claims process, hopefully making an extremely stressful time a little less stressful. Damian: Insurers expend considerable resources to monitor claims and develop coverage positions. A broker should ensure that its clients have access to comparable resources to lead them through the claims process. At Marsh, we consider claims a crucial area of support for D&O clients—not just on the recovery side, but also in terms of structuring policy terms and conditions with carriers to ensure optimum coverage. How has the D&O claims process changed in recent years, and how have insurance brokers evolved to meet these changes? Damian: Claims today typically involve multiple layers. A single scenario may give rise to claims under many different lines of coverage, such as securities claims, derivative actions, regulatory investigations and ERISA tagalong suits. The resolution of these matters often involves negotiations with multiple players. We are also seeing new methods for resolving claims, like mediation. Kate: The days when claims resolution involved dealing with a single carrier are long gone. In today’s environment, brokers have had to become more sophisticated. They need to have an in-depth understanding not just of the D&O policy, but of related lines and how different policies might interact in the event of a claim. Brokers have had to develop a wider understanding of the various types of coverage out there in the marketplace, and greater cognizance of legal, regulatory and insurance market trends. They then need to leverage this knowledge in drafting appropriate D&O liability coverage and strategizing with clients in the handling of specific claims. What advice would you give someone considering serving the board of directors at a large public company, given the complex legal landscape and growing personal liability? Damian: The first thing I would ask is, “What kind of D&O insurance does the company have in place?” This is the critical question. Additionally, I would inquire if the company has outstanding claims or prior claims. It is prudent to obtain the company’s claims history, which should be readily available to anyone thinking about joining a board. I’d also ask the company about its philosophy with regard to D&O insurance—how much time did the risk manager, CFO and others put into developing the policy and manuscripting the endorsements? Do they have a fairly standard policy or one that addresses their unique risk profile? Has the policy been updated each year to address changing exposures? Does it ensure state-of-the-art coverage or has it been renewed year-to-year with no changes? If my personal assets were at stake after the company’s indemnification in the insurance program, I’d want to be absolutely certain the D&O policy stacks up with the best programs. Kate: I would also consider the choice of D&O broker. Not only will the broker have an impact on the quality of the insurance coverage, but these are the individuals who will be in the trenches with the officers and directors in the event they are sued. Obviously, it is important to make sure you are dealing with an organization that has experience and a good track record when it comes to managing and resolving claims. When it is your turn in the hot seat, you want to be dealing with someone you have confidence in. How can a company or its directors and officers determine whether or not the D&O broker is performing well? Are there ways to ascertain this? Kate: Ongoing communication is critical since the legal and regulatory landscape is always shifting. A client should feel comfortable if the broker is periodically evaluating its exposures and coverage, given ongoing legal and regulatory trends affecting director and officer liability, and evolving insurance market developments. In the event of a claim, the broker should be guiding the process; the insured then knows they are partnering with the insurer toward a successful resolution of the issues involved. Damian: Kate is completely on point here. If you find that you’re not hearing from your broker about evolving exposures, coverage, and business and legal trends, and how these are likely to play out in terms of their ramifications for your company, then they’re not doing their jobs. The same applies to changes in the insurance market or even issues arising over a particular carrier’s financial condition. The bottom line is that you want to be sure in the event of a claim that the D&O policy will respond. You want to be absolutely confident if and when a claim is filed that your current D&O insurance program will respond “with no surprises,” and that your broker will be there as your guide and advocate through every step of the claims process. |
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| Damian
Brew is a managing director and the national claims advocacy practice
leader in Marsh's FINPRO unit, specializing in D&O liability
and other professional and employment liability issues. Kate Golden is
a managing director in Marsh's claims advocacy group, where she
specializes
in D&O coverage and claims issues, working with clients to
manuscript state-of-the-art policy language for D&O and other lines
of professional liability insurance. Copyright © 2010 Directors & Boards, P.O. Box 41966 Philadelphia, PA 19101-1966. All rights reserved. Contact the webmaster. < Privacy Notice > |
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