How to obtain the best coverage.

• Author: Weiss, Stephen J.
• Position: Procurement of directors and officers liability insurance

When procuring a D&O policy, consider switching from the traditional-team to the expanded-team approach.

ALL D&O LIABILITY insurance policies in the marketplace today have coverage shortfalls. Why are these shortfalls so prevalent?

First, many are hard to identify and thus do not become the subject of negotiation. Second, purchasers do not fully appreciate the extent to which D&O insurance policies are negotiable. Third, there is usually a mismatch between the professional training of the people who negotiate D&O policies on your behalf and that of the insurance company representatives.

Identifying Coverage Shortfalls: This is tricky business. For example, exclusions can appear in the definitions section of the policy -- not just in the exclusions section. Further, until you have been through the complete cycle of working with an insurance company -- from negotiating policy terms to arguing over the scope of coverage after a claim has been filed -- it is impossible to foresee many issues that can result in limitations on or a denial of coverage under a policy.

Tyranny of the Printed Form: Forms tend to convey a set-in-stone legitimacy that discourages many buyers from even attempting to negotiate more favorable terms. But keep in mind that you can fight the tyranny of the printed form with precedents -- concrete examples of what other insurance companies in the marketplace have done. Experienced insurance professionals can draw upon an extensive file of precedents to effectively support their clients' request for specific policy enhancements.

Experience Mismatch: Most companies do not treat a D&O policy as the multi million-dollar negotiable contract that it is. In a 1998 article in the National Underwriter, the chief underwriting officer of the world's largest D&O insurer conceded that "Each D&O policy is more akin to a negotiated commercial contract than an 'off the shelf' insurance product." But, as in any field, successful negotiations require expertise. Would you send a recent law school graduate to negotiate a merger agreement with an experienced M&A veteran from Skadden Arps? If you wouldn't do that, why would you assign a risk manager who is not a lawyer to negotiate a D&O policy -- a highly technical legal document that was written by a team of top insurance law experts employed by the insurance company? Unless you understand the underlying laws sought to be addressed by the policy, you can't properly assess whether the policy is...