Contesting coverage limitations asserted by your insurer may require some skillful and tenacious footwork.
YOU NEED WORLD-CLASS stamina, tenacity, technical proficiency and oxygen canisters to reach the breathtaking 20,028-foot summit of Mt. Everest. With the obvious exception of the oxygen canisters, all of these things may also be needed to get the indemnification to which you are entitled under your D&O policy. The obstacles to obtaining your due from your D&O insurer fall into two broad categories. The first arises out of pro-insurer interpretations of policy exclusions, definitions and conditions. The second arises when policyholders fail to comply with the policy's coverage conditions. This column discusses the first type of coverage obstacle -- policy interpretations.
When a company notifies its insurer that it has been sued, the insurance company typically responds with a "reservation of rights" (ROR) letter. This letter sets forth the insurance company's preliminary view of what it will and will not cover, while reserving its rights to deny coverage after it gathers more information regarding the claim and the insured's conduct. ROR letters tend to be frightening documents. Insurers have a great incentive to spell out in intimidating detail all of their potential "coverage defenses" -- that is, reasons they might deny coverage. Otherwise, the insurer may waive its right to assert these defenses. Add to this incentive the fact that an ROR letter frequently has to respond to a complaint that is overreaching in its allegations, and you get an ROR letter with a very long list of potential coverage defenses. Indeed, many a policyholder reading his or her first ROR letter despairs of obtaining any recovery from the insurance company.
The Dishonesty Exclusion. The so-called "dishonesty exclusion" appears in every D&O policy. Typically, it says: "The Insurer shall not be liable to make any payment for Loss arising out of a Claim made against an Insured based on the committing in fact of any deliberately dishonest, fraudulent or criminal act by the Insured" (emphasis added). This is a perfectly legitimate exclusion. Insurance companies should not be required to cover fraudulent or criminal acts. However, insurance companies are often too quick to assert this exclusion.
Recently, we were brought into a case that involved allegations of fraud. Our client had received an ROR letter flatly asserting that the dishonesty exclusion applied. The...