Ways to improve your D & O insurance coverage: you can negotiate enhancements to your policy. One place to start is with the definition of 'claim.'.

• Author: Weiss, Stephen J.
• Position: D & O INSURANCE UPDATE

ALL OFF-THE-SHELF D & O insurance policies contain a very large number of coverage shortcomings. Many of these shortcomings individually could result in millions of dollars of lost coverage. Fortunately, D & O policies are negotiable.

Although we do not have space in this column to describe how to improve all the shortcomings in a typical D & O policy, we can provide three examples of how changes to a single policy definition--that of "claim"--can greatly improve your protection.

"Claim" is a key definition in a D & O policy. Without a claim, there is no coverage. You might expect that so pivotal a term would be standardized. Unfortunately, that is not the case.

Entity Coverage for SEC Investigations. There are dramatic differences among policies as to whether and when an SEC investigation constitutes a claim. Since companies often spend millions of dollars defending an SEC investigation before the SEC ever files a lawsuit, the definition of "claim" in your policy is critical to whether your insurer covers defense costs for an SEC investigation.

For example, some policies define claim to include an "administrative or regulatory proceeding" against the insured company. However, some insurers take the position that an administrative proceeding does not include an SEC investigation. This means that an investigation is not a claim and that the related defense costs are not covered.

Other policies provide broader protection by covering an SEC investigation authorized by a formal order of investigation "but only while [the investigation] is also pending against an Insured Person." The advantage of this definition is that coverage can attach much earlier than under a definition limited to an "administrative proceeding." But this definition still falls short. Since the SEC generally does not name individuals in a formal order of investigation, it may be difficult to establish that the SEC investigation is also pending against an insured person. This could leave the company's defense costs uncovered.

A better alternative is to purchase a policy that defines "claim" to include an SEC investigation commenced by the issuance of a formal investigative order, and does not include a requirement that such investigation also be maintained against an insured person. If your policy does not provide this coverage, it may be possible to negotiate changes.

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