Contesting erosion of your D&O coverage.

• Author: WEISS, STEPHEN J.
• Position: Management liability protection - Brief Article

It is not easy to get the full benefits to which you are entitled.

YOUR COMPANY bought a D&O policy that promised the broadest management liability protection available anywhere. So how come, now that a securities class-action lawsuit has been filed, your insurance company is taking coverage positions that make you feel that you have the narrowest protection imaginable?

Purchasing a D&O policy with broad coverage is only the first step in managing your executives' risk. The second step is successfully countering insurers' frequent attempts to limit coverage after a lawsuit has been filed. This column discusses two coverage limitations often asserted by insurers -- and offers several ways to counter them.

Litigation Guidelines. D&O policies contain the insurer's agreement to pay the "reasonable and necessary" costs of your defense. Although the typical D&O policy is silent as to what constitutes "reasonable and necessary," once an insured sends a notice of claim to its insurer, the insurer often will unwrap guidelines that identify the costs and services it considers reasonable and necessary.

Insurance companies' insistence on adherence to such guidelines is, in my view, improper. First, the insurer does not have the right under the typical D&O insurance contract to determine, in its sole discretion, what constitutes reasonable and necessary defense costs and services. Second, some guidelines conflict with counsels' professional obligations to their clients. An opinion handed down by the Supreme Court of Montana in April 2000 forcefully made this point. A unanimous court held that the requirement of prior approval by an insurer of defense counsel's scheduling of depositions, undertaking substantial research and retaining experts "fundamentally interferes with defense counsels' exercise of their independent judgment" as required by Rule 1.8(f) of the American Bar Association's Model Rules of Professional Conduct.

To counter an insurer s insistence on adherence to its litigation guidelines, you should make use of the above arguments. Again, you can assert that there is no basis in the insurance contract for the insurer unilaterally to decide what is reasonable and necessary. And you can also assert that defense counsel must be guided by applicable rules of professional conduct, including rules prohibiting counsel from allowing any person who pays counsel to interfere with the exercise of his or her professional judgment in rendering legal...