The best D&O coverage, revisited.

• Author: Weiss, Stephen J.
• Position: Director' and officers' liability insurance

Here are additional suggestions for enhancing your D&O policy by negotiating broader coverage and narrower exclusions.

Insurers will negotiate the terms of their directors' and officers' liability insurance (D&O) policy forms. This is fortunate because all D&O policies have coverage gaps to varying degrees. An authoritative survey of D&O insurance recently reported that "30% of the [D&O] claims probably could have had better coverage in some fashion.... "Coverage under some D&O policies is so limited in certain respects that it is like having life insurance that pays the beneficiary if the insured dies on a weekday but not on the weekend.

Coverage gaps become more serious with increases in the cost of defending lawsuits against directors and officers. Average defense costs on D&O claims closed in 1995 were about $1.4 million, up 87% since 1993, and payments to plaintiffs in these suits were an average of $4.6 million, up 39%. These startling increases in claim severity underscore the need to negotiate better coverage than that provided by the basic D&O policy.

While the current soft marketplace for D&O insurance affords insureds a favorable climate for negotiating premium levels as well as the scope of coverage, if these goals interfere with each other, far greater potential benefits may be obtained by focusing on expanding coverage. How can one compare a premium reduction of $30,000 with the benefits that may flow from having the policy cover a $3 million claim against the directors and officers that had not been covered by the basic policy form but is covered by the amendatory endorsement that you negotiated?

A Few Obstacles

Negotiating enhanced coverage, though critical for the reasons mentioned, is a formidable challenge for numerous reasons:

* First, there is no standard D&O policy form to master. D&O policy forms vary appreciably from one insurer to the next. There are about 80 different D&O policy forms in the marketplace and that number is increasing as more D&O insurers enter the market, which has been the case each of the last four years.

* Second, insurers periodically change their D&O policy forms. Three of the largest insurers did so in the past several years.

* Third, the meaning of policy language is frequently unclear. The movement for plain-English contracts has not been widely embraced by D&O insurers.

* Fourth, until an insured has been through the complete cycle of working with an insurer - from obtaining coverage through the making a claim and negotiating a coverage dispute - the insured does not have a full appreciation of the many issues that an insurer may raise to limit or eliminate coverage under the policy.

This article is intended to assist insureds in negotiating enhanced coverage - by identifying policy provisions that are frequently deficient from an insured's viewpoint and by discussing ways in which such provisions have been improved. Space constraints limit the following discussion to a small number of policy deficiencies. Additional D&O policy shortcomings relating to such issues as the definitions of "claim" and "insured person" and the advancement of expenses were discussed in my prior article, "Getting the Best D&O Coverage" (DIRECTORS & BOARDS, Summer 1994). Regrettably, that commentary retains much of its relevance.

Mergers and Acquisitions

Merger and acquisition activity is at a very high level. This...