Emerging Issues in Directors' and Officers' Liability Insurance Coverage
| Publication year | 1988 |
| Pages | 1031 |
| Citation | Vol. 17 No. 6 Pg. 1031 |
1988, June, Pg. 1031. Emerging Issues in Directors' and Officers' Liability Insurance Coverage
The growing number of lawsuits against corporate officers and directors has led to an increased volume of claims against the issuers of directors' and officers' liability insurance policies ("D&O polices"). As the bases for liability of officers and directors have broadened, the number of claims against D&O policies has increased. At the same time, costs of settlement and defense continue to rise.(fn1) As a result, carriers of D&O policies are not only increasing premiums and restricting the coverage afforded by D&O policies, but also scrutinizing claims made against the policies more closely. The explosive growth in claims and costs has created fertile ground for litigation between corporate officers and directors and D&O carriers.
D&O policy provisions may determine the strategies available to officer and director defendants in litigation. Unlike many insurance policies, D&O policies usually provide that defense costs are deducted from policy limits. This forces officers and directors into a dilemma. They could defend an action vigorously, only to find that policy limits are too depleted to pay an adverse judgment. Alternatively, they could seek an early settlement, perhaps paying more than a claim is worth or suggesting to their opponents that their case is weak. In some cases, even determining the amount of coverage may be problematical. Finally, in many cases insureds and carriers may face questions about how to allocate defense or settlement costs between covered and uncovered claims, or between covered and uncovered defendants.
For most attorneys, the D&O policy is unfamiliar territory. This article first examines the provisions typically found in such policies. It then discusses three emerging issues in the field of D&O policy coverage: (1) whether the carrier has a duty to reimburse defense costs as they are incurred; (2) how to determine available coverage; and (3) standards used to allocate policy proceeds between covered and noncovered claims or parties.
The widespread use of D&O policies is a relatively recent phenomenon. Consequently, until recently few courts have had an opportunity to interpret the provisions of D&O policies. All this has changed, however, as the growth in claims has spawned a corresponding increase in the number of opinions construing the policies. So far, neither the courts nor commentators has reached a consensus on how D&O policies should be interpreted.(fn2) This is because such agreements, on which so much is at stake, are ambiguously written. One court, analyzing a typical D&O policy, summed up its language by noting that "the large print giveth and the small print taketh away."(fn3)
As with any agreement, an analysis of a D&O policy must begin not with judicial opinions or legal doctrines, but with the language of the policy itself. Insurers continue to modify policy forms to respond to competitive pressures and judicial opinions, resulting in a welter of policy forms and provisions. However, most D&O policies share a common lineage, descending from a policy form introduced by Lloyd's of London.(fn4) Therefore, most policy forms share a similar structure and similar policy provisions.
A typical D&O policy has two sections: one providing for reimbursement of the costs of defense, settlement and judgments to director and officer defendants; the other providing for reimbursement of such costs to corporations which are obligated or permitted to indemnify officer and director defendants. To prevent double recoveries by the insureds, officers and directors may not receive reimbursement from the carrier for costs that have been paid by the corporation.
Usually the provisions of the two sections of the policy are parallel. Both provide that a carrier will pay on behalf of
Generally, a D&O policy defines "loss" to include amounts that the insureds are legally obligated to pay for a claim made against them for wrongful acts, including, among other things, amounts paid in judgment or settlement, and expenses incurred in defense of such claims. Thus, D&O policies usually require that costs of defense be deducted from policy limits.
Typical D&O policies define "wrongful act" to include actual or alleged mis-statements or misleading statements or breaches of duty claimed against the insureds "solely by reason of their being Directors or Officers of the Company." D&O policies typically have a "consent clause," providing that defendant officers and directors may not incur costs, charges or expenses without the insurer's consent, and that such consent shall not be unreasonably withheld.
D&O policies provide coverage "if during the policy period any claim or claims are made" against the officers or directors. Most policies permit this coverage to be extended by providing that the insureds may bind the carrier to cover a claim by notifying the carrier of (1) any occurrence that may subsequently give rise to a claim or (2) any written or oral notice from a third party of that party's intention to hold the insureds responsible for any claimed wrongful act.
Increasingly, D&O policies include two provisions of great concern to defense counsel representing officers or directors of corporations that are either unable or unwilling to indemnify them for claims made in litigation. The first such provision is commonly known as an "option clause." This clause ordinarily provides that an insurer may "at its option and upon request" advance expenses that the directors and officers have incurred in connection with claims made against them. The policy may also provide that if the insurer advances costs and it is ultimately established that the insurer has no liability, the directors and officers must repay all advanced funds.
The second provision is called a "no-action clause." This clause provides that no legal action will be taken against...
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