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Stephen J. Weiss, Partner
Shannon A.G. Knotts, Associate
Holland & Knight LLP

Learning a Thing or Two from Rodney Dangerfield

Why you should get a second opinion on your D&O insurance policy.

By Stephen J. Weiss and Shannon A.G. Knotts

In the Winter 2004 column for Directors & Boards titled “The Rodney Dangerfield of D&O Policies,” the advice conveyed was that excess D&O insurance policies “don’t get no respect,” borrowing Dangerfield’s signature line. Dangerfield died a few months later at age 82. In reflecting on his comedy routines, we were struck by how another of his famous quips applies to D&O insurance.

Dangerfield often recounted how when his psychiatrist told him he was crazy, he would respond, “Oh yeah? Well, I want another opinion.” The doctor instantly replied, “Okay -- you’re ugly, too.” The lesson is: When negotiating D&O insurance coverage, you can benefit from a second opinion, particularly if the off-the-shelf D&O policy you are offered is “ugly.”

The first opinion, of course, comes from your insurance broker who recommends a particular policy, policy limits, retentions, and certain enhancements. The second opinion should come from an independent source -- a lawyer experienced at negotiating D&O policies and who represents policyholders only.

Consulting with a D&O lawyer can meaningfully improve your D&O program. For one thing, a D&O insurance lawyer brings to the procurement process legal training and experience that your broker, typically not a practicing lawyer, does not have. Also, an independent insurance expert by definition represents your interests exclusively.

Like Dangerfield, you can find a source for a second opinion by asking the person who provided your first opinion -- your broker. He or she should be able to recommend a D&O lawyer. Or, you can ask your counterparts at other companies. These leads can be supplemented by your own research on the Internet.

A D&O Policy Is a Complex Legal Document
A D&O policy is a labyrinth of arcane legal provisions drafted by veteran insurance company lawyers. It includes provisions dealing with legal subjects and issues, such as the insurability of punitive damages, the effect of bankruptcy on coverage, indemnification, subrogation, and the resolution of coverage disputes between the insureds and insurer. Such provisions must be heavily negotiated if you wish to avoid coverage gaps and achieve maximum value for your premium dollar.

While your broker will be familiar with many D&O policy provisions and can address many issues, he or she typically is not a lawyer familiar with the intricacies and legal consequences of certain policy provisions. For example, you surely do not need a lawyer to negotiate for punitive damage coverage if the standard policy form does not provide it.

But getting an insurer to cover punitive damages is only half the battle. Punitive damages are not insurable in every state; where they are not, such a provision is not enforceable by the policyholder against the insurer. To get the benefit of punitive damages coverage, you must also negotiate for a “most favorable venue” clause, which provides that the insurability of punitive damages shall be governed by the applicable state law that most favors insurability.

One form of a most favorable venue provision reads as follows: “For the purpose of insuring punitive damages under the Policy, the Insurer and the Insureds agree that the law of the jurisdiction most favorable to the insurability of punitive damages shall control, provided such jurisdiction: (a) is where such punitive damages were awarded; (b) is where the Corporation is incorporated or has a place of business; (c) is where the Insurer is incorporated or has its principal place of business; or (d) is where any Wrongful Act occurred for which such punitive damages were awarded.” This provision can, by a factor of five or more, increase the chances of a court holding that punitive damages are insurable under your policy.

Independence
Not just any second opinion will do -- it should come from an independent D&O lawyer. The need for independence has been underscored recently by New York Attorney General Eliot Spitzer’s allegations of improper practices in segments of the insurance brokerage industry. Whether or not these allegations are true, the value of independence in many business contexts is widely recognized.

In the D&O insurance context, two benefits of an independent D&O lawyer are that he or she will have no stake in the amount of D&O insurance you buy and in the insurer selected. An independent D&O lawyer’s only job is to negotiate the best possible policy for his or her client.

Despite the good reasons to retain an independent expert to work with your broker, many insureds do not do so because cost is an overriding issue. This could prove to be false economy. For an amount that is less than 1 percent of a D&O program’s limits of liability, an experienced D&O lawyer can assist in the review and negotiation of your policy. In certain circumstances, that could mean the difference between no coverage and the availability of the full policy limits.

Stephen J. Weiss is a partner in the law firm of Holland & Knight LLP and is one of the nation’s leading authorities on D&O and employment practices liability insurance. He is the author of the “D&O Insurance Update” column in each edition of Directors & Boards. Shannon A.G. Knotts is an associate with the firm specializing in the same practice areas. The authors can be contacted at steve.weiss@hklaw.com and shannon.knotts@hklaw.com.