Directors and officers insurance policies are mazes of intricate language that are often difficult to interpret. In order to assist the c-suite and their attorneys perform a proper assessment of their D&O insurance portfolios, we have created a thorough 80 point private company D&O blueprint/checklist (PDF AVAILABLE HERE). For a one page sample, CLICK HERE.
Below we highlight a few of the main takeaways and areas that deserve careful critique. Due to the fact that a high percentage of claims against the c-suite are employment-related claims, a separate EPLI assessment should also be performed. While we are currently developing an EPLI blueprint/checklist as well, the below article and attached pdf only address the directors and officers insurance component of D&O policies.
ASSESSING THE INSURER
When performing a D&O policy review, assessing the insurer is generally a logical starting point. Experience, claims reputation, and financial strength are all important criteria to be considered. However, the importance of each will differ from policyholder to policyholder. As we had discussed in our D&O purchasing guide, often times “standard markets” and lesser known companies may provide broader terms in order to compete with the reputation of the “premier” insurers (such as Chubb, AIG, XL). For companies with international exposures, placing more of an emphasis on the carriers’ expertise, claims reputation and international capabilities may make more sense. While some companies are clearly willing to spend a premium for “premier” insurers (with potentially more restrictive terms), others may place a greater importance on breadth of coverage. Finding the right combination of broad language/terminology and a carrier with a strong claims payment reputation can be a delicate balance.
- Duty To Indemnify Vs Non-Duty: While almost all private policies are written on a duty to defend basis, it’s an important consideration not be overlooked due to the benefits of allocation and burden non-duty policies would place on the policyholder. We have seen a few carriers and antiquated forms still inclusive of “duty to indemnify” language.
- Defense Inside Vs Outside: When able, policies should be endorsed to push defense costs outside the limit, preserving the limit for damages. This is particularly important when lower limits are purchased and shared among multiple officers which can quickly erode defense costs..
- Limits – Blanket Vs Dedicated: Private company D&O policies often include multiple coverage lines, such as EPLI, crime and fiduciary coverage among others. Due to their bundled nature, it is important to assess limit structure. Is the policy being written with a single/blanket limit that applies to all coverages or does it provide dedicated limits for each line? It is also important to make sure the limits set are deemed sufficient – particularly when all coverage components share one limit.
- Side-A & IDL: Finally, when structuring limits/towers, insurance products such as Side A DIC and separate coverage for independent directors should also be explained and explored for their benefits relative to premium.
- Dedicated Limit For Executives: Many policies today include a separate reserved limit for directors/executives. This serves as a nice feature to ensure none of the directors are left without coverage should policy limits be eroded.
- Employed Counsel Coverage: For larger companies with their own counsel, coverage for employed lawyers/GCs is yet another extension. This can however prove more difficult than might otherwise be assumed. Simply having the employed lawyers or in-house counsel included in the definition of “insured individuals” or “employees” alone is often not sufficient. Many companies offer specific endorsements that provide thorough coverage for employed counsel.
- Derivative Investigations: Most companies also offer coverage for costs associated with derivative demand investigations which can quickly become costly.
- Reputation Risk Response: Lastly, reputational coverage is another extension offered by some carriers. With reputation damage difficult to insure against and reputational risk consistently ranking among the c-suites main concerns, this is a nice coverage element that will provide some level of protection. This extension provides reimbursement for costs of hiring a PR firm to mitigate damage and rebuild brand trust following brand damaging PR events. Such reputation risk events typically include: regulatory investigations/proceedings, publicized lawsuits and claims related to bodily injury and workplace violence, and bankruptcy (among others).
- Worldwide Coverage: Does the policy offer true worldwide coverage for wrongful acts and claims asserted in foreign countries? Or does the policy’s language require the suit to be brought in the US?
- Prior Acts: Does the policy provide coverage for all prior (wrongful) acts or only those alleged after policy inception? Or, if coverage is being transferred, is the new carrier properly carrying over the retroactive date (and any prior/pending litigation date)? Is the new carrier requiring completion of a new warranty statement (which can compromise coverage)?
- Non-Rescindable Side A: One matter of considerable debate has been whether non-rescindable side-A coverage actually makes it easier for the insurer to void the policy (due to application misrepresentations). For this reason, when policies do contain non-rescindable Side-A, it is important to check the language to ensure there is no wording that allows the insurer to void the policy back to its inception.
- Notice Of Circumstances: The notice of circumstances (potential claims) should also be assessed carefully; are such notices permissive or mandatory? Does it require that the insured report all incidents/acts that could reasonably give rise to a claim or does it more preferably allow the insured to do so for reporting purposes.
- Choice Of Law/Venues: Some policies also contain hidden choice of law/venue clauses which may dictate that the policy be governed by foreign law or brought in a foreign jurisdiction. These are most often seen in policies secured abroad or written for companies/investment advisors with foreign offices.
- Consent To Settle: Additionally, the hammer (consent to settle) clause is particularly important when reviewing the policy’s EPLI terms. In order to assert their innocence and prevent from becoming a “soft target”, many policyholders may prefer to dispute (to the fullest extent) any charges/allegations of employment wrongful acts. Policies with “hard hammers” prevent insureds from doing so.
- Full Defense Allocation: When a claim includes a combination of both covered and uncovered allegations, full defense allocation assures that the carrier will advance the defense costs of all claims involved (even if just one claim is covered).
- Subsidiaries & Newly Acquired Entities: Does the policy provide automatic coverage for subsidiaries and newly acquired entities? What is the ownership threshold?
- “Claims”: Due to their uncertainty, oral claims can be particularly challenging for insureds, leaving questions as to whether or not a claim has actually been made. For this reason, insureds should ensure that oral claims are omitted from the “claim” definition. Additionally the definition of claim should be inclusive of alternative dispute resolutions.
- “Damages”: Do damages include pre and post judgement interest, punitive damages and non monetary damages?
- “Insured”: While many private company d&o policies include advisory boards and employees within the definition of “insureds”, it is important to understand the interplay with any existing insured vs insured exclusions. Having advisory boards and employees included could actually restrict coverage as opposed to broadening it due to triggering the I vs I exclusion. Its also important to consider the limits being purchased, as the directors/officers may prefer to preserve the limits for themselves, particularly when low.
- “Wrongful act”: Some carriers include within their definition of wrongful act, “media wrongful acts” which includes coverage for claims asserting copyright or trademark infringement and personal injury claims such as libel/slander. While not a replacement for true media PLI (especially for publishers, etc), it serves as a nice enhancement to offer some basic coverage.
- “Regulatory investigation”: While coverage for regulatory investigations and fines can be easier to obtain as a private company, coordinating proper wording can still be challenging. Coverage for investigations solely against the entity and at the informal stage can be the most challenging. This coverage should be discussed with your broker or attorney for a proper assessment.
Most directors and officers policies contain similar carve outs, however the removal of a single exclusion such as the “majority shareholder” or “unfair competition” exclusion can create significant differences/advantages. Most of the nuanced differences are hiding in the details. When reviewing exclusions we generally ask a handful of questions, namely; 1) is the lead in language broad or narrow, 2) is the exclusion itself worded broadly or narrow (can it be narrowed), 3) does the exclusion apply only to loss/damages or does it apply to defense costs as well, 4) does it apply only to claims against the entity or to claims naming individuals? 5) Does it contain the necessary carve-backs? And 6) is it particularly harmful to the policyholder?
- JOBS ACT & Crowdfunding: Does the policy exclude coverage for claims related to crowdfunding or arising from exempt securities (under regulation D).
- Cyber: Is there a cyber-related exclusion? Due to being non-standard in the marketplace at the moment, cyber exclusions should be avoided when possible.
- BI/PD: Does the bodily injury/property damage exclusion contain “invasion of privacy” and “emotional distress” within the definition? Can those be carved back?
- Professional Services: Does the “Professional Services” exclusion contain a broad definition of services?
- Insured Vs Insured: Has the carrier replaced the insured vs insured exclusion with the more modern “entity vs insured” exclusion? Does the exclusion contain necessary carve-backs?
- Majority Shareholders: Is there a majority shareholder exclusion? What is the percentage? How many shareholders qualify under this exclusion? Can it be removed or can the threshold be increased?
- Laser Exclusions: Are there any non-standard “laser” exclusions (exclusions intended to carve out coverage for specific underwriting concerns).