2006 Director's Guide to D & O Insurance: a panel of D & O experts weighs in on critical coverage issues for board members to consider.

AuthorShaw, David
PositionREPORT ON D & O INSURANCE

FOR THIS YEAR'S "Directors Guide to D & O Insurance," DIRECTORS & BOARDS asked experts from the legal, brokerage, and insurance communities to provide their analysis of important D & O trends that may affect board members and their companies in the year ahead.

Five key questions to enhance D & O insurance coverage

BEFORE Enron and other corporate scandals, management assumed that their directors and officers liability insurance would cover all claims. Today, companies cannot afford to be ambivalent. Boards and senior officials must ask questions and negotiate proactively for coverage.

  1. Is Our Policy Rescission-Proof? Rescission is an equitable remedy that voids a policy. In some states, an insurer must prove material misrepresentation and the intent to deceive. In most states, however, an insurer may rescind by showing reliance on an inadvertent failure to disclose a material fact, even in good faith. Insureds must make sure that applications and supporting documents are accurate. Consider non-rescindable policies for individuals, and language limiting the insurer's ability to rescind.

  2. Does Our Policy Afford Severability? Severability provisions ensure that the wrongful acts and knowledge of a bad actor are not "imputed" to innocent insureds to eliminate coverage. Confirm that wrongful acts and knowledge will not be imputed to others, and beware of language that suggests everyone will be deemed to know of errors or misstatements.

  3. What Happens with a Bankruptcy? When a corporation files for bankruptcy, bankruptcy trustees want insurance proceeds to satisfy creditors. However, directors and officers may need those funds for defense and settlements. Check for language that the filing of bankruptcy will not void the policy, and ask for provisions confirming priority for individuals.

  4. Does Our Policy Allow Allocation or Other Limitations? Newer policies contain allocations provisions, allowing insurers to assign defense or settlements to uncovered claims or parties. Insurers are introducing new co-pay provisions, and many policies try to eliminate coverage for disgorgement or restitution, even if they are "damages." Beware of language that cuts into insurer obligations.

  5. Did We Protect Ourselves Through a Policy Audit? Finally, a company must reevaluate any proposed insurance in light of its operations and exposures. D & O policy audits and comparisons of policy terms by seasoned specialists can minimize the chance of uninsured losses for which the company (or an individual) may have to pay. Management should work with coverage counsel to consider the "hot issues" facing the insureds, and competent brokers who will negotiate the most favorable enhancements available.

    Mary Craig Calkins is a partner in the Insurance Recovery Group at Howrey's Los Angeles office (www.howrey.com). In February 2005, she was selected as one of Southern California's "Super Lawyers" in the area of insurance coverage in the second annual list of top lawyers published in Los Angeles magazine. She is a member of the Task Force on Attorney Relations for the Insurance Coverage Litigation Committee of the Section of Litigation, American Bar Association, and has been honored as Outstanding Committee Chair for 2003-2004 and 2004-2005.

    MARY CRAIG CALKINS Partner, Howrey LLP

    D & O policy oversight for first-rate protection

    OVER THE LAST YEAR, the D & O market has become more and more favorable for companies and their directors and officers. Premiums are dropping and coverage is expanding. Insurers are once again competing strongly for business. There is much that directors can do in this market to ensure that they are getting first-rate protection. To do so, however, directors must exercise oversight similar to the oversight that they exercise in other parts of their company's business.

    Directors should focus on three issues:

  6. What is the company trying to accomplish? Since the Enron and WorldCom debacles, many companies are being counseled to purchase "Side A" policies--D & O policies that protect only directors and officers. The problem is that these policies in all likelihood will not have to pay one dime unless the company is insolvent. A better use of the company's money is to make a few--usually cost-free--amendments to their traditional policies. With a few changes, traditional policies can provide every bit as much protection to directors as Side A policies while still protecting a company's balance sheet.

  7. Are processes in place to ensure that the company has maximum negotiation leverage? Many public companies purchase in a manner that gives their insurer the upper hand. The companies do not encourage competition but rather buy from the same insurer year...

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