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Page 1 Recording of this session via any media type is strictly prohibited. Page 1 D&O Coverage – It’s Not Just for Ds&Os…

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Presentation on theme: "Page 1 Recording of this session via any media type is strictly prohibited. Page 1 D&O Coverage – It’s Not Just for Ds&Os…"— Presentation transcript:

1 Page 1 Recording of this session via any media type is strictly prohibited. Page 1 D&O Coverage – It’s Not Just for Ds&Os…

2 Page 2 Recording of this session via any media type is strictly prohibited. Sheryl Myers Director, Risk Management American Standard Brands, Piscataway, NJ Ms. Myers directs all of the company’s risk management needs and also oversees all claims. She was previously Manager, Risk Management for Sony Corp. of America. Brian J. Osias Partner, McCarter & English, LLP, Newark, NJ Mr. Osias is a partner in the firm’s insurance coverage group where he regularly counsels policyholders and represents them in all manner of coverage disputes.

3 Page 3 Recording of this session via any media type is strictly prohibited. What to Expect Practical Risk Management considerations. D&O Insurance in a nutshell – the A, B & Cs… Attendees will learn the basic structure of D&O insurance policies. Identify who and what is (and is not) covered; explore key conditions and exclusions. Attendees will gain an appreciation for some common issues that often arise in claims & coverage disputes.

4 Page 4 Recording of this session via any media type is strictly prohibited. Risk Manager’s Concerns… What would a risk manager want to know? Understanding technical aspects of policy. Broker or counsel can help explain policy coverages/exclusions. Key differences in policies under consideration. Broker should help compare policy provisions. May seek review by outside counsel. Carrier’s willingness to pay claims. Does carrier have a reputation of paying or resisting claims?

5 Page 5 Recording of this session via any media type is strictly prohibited. Risk Manager’s Concerns Do we have enough insurance? Seek a Benchmarking analysis. Peer group comparison of coverage. What do other similar companies have? Only a guide – consider your company’s unique risk profile!

6 Page 6 Recording of this session via any media type is strictly prohibited. D&O Insurance – History 1930s – Lloyds of London Not a big seller. Laws prohibited indemnification of D&Os. 1960s – Increase in M&As Change in laws; indemnification now permitted. 1980s Coverage Sides A & B. 1990s Coverage Side C introduced.

7 Page 7 Recording of this session via any media type is strictly prohibited. D&O Protection Indemnification Corporations will indemnify their officers and directors for certain claims against them arising out of their performance of their duties. Corporations are prohibited from indemnifying for some claims (e.g., public policy). In some circumstances, corporations are unable to indemnify (bankruptcy).

8 Page 8 Recording of this session via any media type is strictly prohibited. D&O Protection D&O Policies generally protect Directors and Officers (“in capacity” as such) against “Claims” for “Wrongful Acts.” D&O Policies also can protect the company against certain claims. Narrow for public companies (often just securities related claims). Broader coverage for private companies. Coverage for Ds&Os and Company can lead to tension.

9 Page 9 Recording of this session via any media type is strictly prohibited. D&O Policy Structure D&O often packaged with other insurance. EPL, Crime/Fiduciary Coverages, etc. Entire policy may have one general set of terms & conditions and definitions. No standardized forms. Can be significant variation.

10 Page 10 Recording of this session via any media type is strictly prohibited. D&O Policy Structure Typical policy components: Declarations Insuring Clauses Definitions Exclusions Terms & Conditions Notice Provisions Interrelated Wrongful Acts Defense/Settlement

11 Page 11 Recording of this session via any media type is strictly prohibited. “Claims Made” Coverage “Claims Made” or “Claims Made & Reported?” “Claims Made” requires only that claim be made during the policy period or extended reporting period. “Claims Made & Reported” requires that claim be both made and reported during the policy period or extended reporting period. Claims Made & Reported is more restrictive. Not always obvious; read the policy carefully!

12 Page 12 Recording of this session via any media type is strictly prohibited. Claims Made or Claims Made & Reported?

13 Page 13 Recording of this session via any media type is strictly prohibited. Claims Made or Claims Made & Reported?

14 Page 14 Recording of this session via any media type is strictly prohibited. Declarations – The Basics Next page

15 Page 15 Recording of this session via any media type is strictly prohibited. Declarations – Limits & Retentions (from previous page)

16 Page 16 Recording of this session via any media type is strictly prohibited. Declarations – Key Dates Retroactive Date Bars claims for wrongful acts committed before the “retro” date. Continuity Date Bars claims related to prior litigation that arose prior to the continuity date. Discovery or Extended Reporting Period (“Tail”) Extends time to report claims made during the discovery period but only for wrongful acts committed before the end of the policy period.

17 Page 17 Recording of this session via any media type is strictly prohibited. Declarations – Key Dates Discovery or Extended Reporting Period (“Tail”) Not an extension! Typically available only when insurer cancels or renews. Usually can purchase for a percentage of the premium. Run-Off Coverage Works similar to Discovery Period. But right to purchase only occurs upon corporate change (e.g., takeover).

18 Page 18 Recording of this session via any media type is strictly prohibited. Terms & Conditions – “Discovery Period”

19 Page 19 Recording of this session via any media type is strictly prohibited. Who is an Insured? Definition of Directors & Officers is typically broad. Usually includes not only the directors and officers and high level executives but any employees – full-time, part-time, etc. Includes current, past and future employees. May include foreign equivalents of D&Os for foreign companies.

20 Page 20 Recording of this session via any media type is strictly prohibited. Who is an Insured? May Include “Outside Entity” coverage. Coverage for insured persons acting as D or O or other high ranking position with an “Outside Entity” (i.e., not the Company). Outside Entity is often confined to a non-profit or charitable entity. Must be serving in said capacity with knowledge & consent of the Company.

21 Page 21 Recording of this session via any media type is strictly prohibited. Definitions – “Directors and Officers”

22 Page 22 Recording of this session via any media type is strictly prohibited. Three “Sides” to Coverage Side A Coverage Individual Directors and Officers liability. Side B Coverage Reimbursement of Corporation’s indemnification of individual Directors and Officers. Side C Coverage Entity liability.

23 Page 23 Recording of this session via any media type is strictly prohibited. Insuring Agreements 1. The Insurer shall pay the Loss of the Directors and Officers for which the Directors and Officers are not indemnified by the Company and which the Directors and Officers have become legally obligated to pay by reason of a Claim first made against the Directors and Officers during the Policy Period or, if elected, the Extended Period, and reported to the Insurer pursuant to subsection E.1. herein, for any Wrongful Act taking place prior to the end of the Policy Period. 2. The Insurer shall pay the Loss of the Company for which the Company has indemnified the Directors and Officers and which the Directors and Officers have become legally obligated to pay by reason of a Claim first made against the Directors and Officers during the Policy Period or, if elected, the Extended Period, and reported to the Insurer pursuant to subsection E.1. herein, for any Wrongful Act taking place prior to the end of the Policy Period. 3. The Insurer shall pay the Loss of the Company which the Company becomes legally obligated to pay by reason of a Claim first made against the Company during the Policy Period or, if applicable, the Extended Period, and reported to the Insurer pursuant to subsection E.1. herein, for any Wrongful Act taking place prior to the end of the Policy Period.

24 Page 24 Recording of this session via any media type is strictly prohibited. Insuring Agreements – Sides A, B & C

25 Page 25 Recording of this session via any media type is strictly prohibited. Other Coverages Policy may provide other coverages. Can be for the Company or individuals. May be subject to sublimits. Often added by endorsement. Derivative Investigation Coverage. For the Company. Pays for costs and fees incurred by the Company in investigating/evaluating a shareholder derivative demand.

26 Page 26 Recording of this session via any media type is strictly prohibited. Other Coverages Preliminary Investigation Coverage. For individuals. Pays for costs and fees incurred in preparing for and responding to a preliminary investigation (e.g., interview; deposition; document request) by a state or federal government entity/agency (e.g., DOJ; SEC) involving the Company or the person’s work for the Company. o May not require the allegation of a “Wrongful Act.”

27 Page 27 Recording of this session via any media type is strictly prohibited. Other Coverages Crisis Coverage. For the Company. In the event of a crisis event (defined), it will pay for professionals (e.g., crisis management/public relations firm) to manage a crisis or potential crisis. o Bankruptcy announcement; death or incapacity of key personnel; alleged scandal, etc.

28 Page 28 Recording of this session via any media type is strictly prohibited. Other Coverages Employed Lawyers Professional Coverage. For in-house counsel only. Must be acting for Company in capacity as a lawyer. Insures against acts, errors, omissions of an employed lawyer in rendering legal services for the Company. May be excess to other coverage (e.g., malpractice/professional liability; E&O).

29 Page 29 Recording of this session via any media type is strictly prohibited. Terms & Conditions - ADR

30 Page 30 Recording of this session via any media type is strictly prohibited. Definitions – “Claim”

31 Page 31 Recording of this session via any media type is strictly prohibited. Subpoena = Claim? Syracuse University v. National Union Fire Ins. Co. of Pittsburgh, Pa., 976 N.Y.S.2d 921 (App. Div. 2013). State and federal subpoenas related to the investigation of abuse allegations involving Syracuse basketball coach. Affirming trial court’s opinion that a subpoena is a Claim. Broad reading of the policy’s definition of claim to include the subpoenas and grand jury investigations as “written demand[s] for non-monetary relief” and the investigations as “‘criminal proceedings for monetary or non-monetary relief which [are] commenced by:... (ii) return of an indictment, information or similar document (in the case of a criminal proceeding).’”

32 Page 32 Recording of this session via any media type is strictly prohibited. Definitions – “Loss”

33 Page 33 Recording of this session via any media type is strictly prohibited. Definitions – Costs, Charges and Expenses

34 Page 34 Recording of this session via any media type is strictly prohibited. Definitions – “Wrongful Act” 9. Wrongful Act means any actual or alleged error, omission, misleading statement, misstatement, neglect, breach of duty or act allegedly committed or attempted by: a.any of the Directors and Officers, while acting in their capacity as such, or any matter claimed against any Director and Officer solely by reason of his or her serving in such capacity; b.any of the Directors and Officers, while acting in their capacity as a director, officer, trustee, governor, executive director or similar position of any Outside Entity where such service is with the knowledge and consent of the Company; and c.the Company, but only with respect to Insuring Clause 3. of this Coverage Section.

35 Page 35 Recording of this session via any media type is strictly prohibited. Definitions – “Interrelated Wrongful Acts”

36 Page 36 Recording of this session via any media type is strictly prohibited. Exclusions – “All Claims = Single Claim”

37 Page 37 Recording of this session via any media type is strictly prohibited. Exclusions – “Bodily Injury / Property Damage”; “Prior Wrongful Acts”

38 Page 38 Recording of this session via any media type is strictly prohibited. Exclusions – “Insured vs. Insured”

39 Page 39 Recording of this session via any media type is strictly prohibited. Exclusions – “Illegal Profit or Gain”

40 Page 40 Recording of this session via any media type is strictly prohibited. Exclusions – “Prior or Pending Litigation or Facts & Circumstances” “Prior Knowledge” “Employment Related Matters” k. alleging, based upon, arising out of, attributable to, directly or indirectly resulting from, in consequence of, or in any way involving: i. any prior or pending litigation or administrative or regulatory proceeding, demand letter or formal or informal governmental Investigation or inquiry filed or pending on or before the Continuity Date; or ii. any fact, circumstance, situation, transaction or event underlying or alleged in such litigation or administrative or regulatory proceeding, demand letter or formal or informal governmental investigation or inquiry;

41 Page 41 Recording of this session via any media type is strictly prohibited. Terms & Conditions – “Notice of Claim”/“Notice of Circumstances”

42 Page 42 Recording of this session via any media type is strictly prohibited. Terms & Conditions – “Settlement & Defense”

43 Page 43 Recording of this session via any media type is strictly prohibited. Duty to Defend or to Advance Defense? Duty to defend? To associate in defense? Defense of advancement? Defense costs usually waste limits. Insured may be required to select counsel from panel counsel list. Allocation of defense costs between covered/uncovered claims? Policy may require repayment of defense costs!

44 Page 44 Recording of this session via any media type is strictly prohibited. Consent to Settle Requires policyholder consent to settle a claim. Consent shall not be unreasonably withheld. “Hammer” clauses: If insured refuses to consent to a settlement agreeable to both the carrier and claimant then carrier’s continued defense and potential future indemnity obligations may be capped or reduced by some %.

45 Page 45 Recording of this session via any media type is strictly prohibited. Settlement Concerns Qualcomm Inc. v. Certain Underwriters at Lloyd’s London, 161 Cal. App. 4th 184 (2008). California Court of Appeal held primary insurer must actually pay limits before excess coverage is implicated. Policyholder cannot agree to “fill the gap” between what primary insurer is willing to pay and limits. Strict reading of the policy language. Practical tip: try to get excess insurer to change triggering language. Excess cover is implicated if primary insurer or policyholder pays complete primary limits.

46 Page 46 Recording of this session via any media type is strictly prohibited. Settlement Concerns Vigilant Ins. Co. v. The Bear Stearns Cos., Inc., 10 N.Y.3d 170 (2008). New York Court of Appeals held that Bear Stearns could not recover from its insurers its $80 million settlement payment with the SEC, NASD and NYSE where insured failed to get insurer’s consent to settle. Bear Sterns was a “sophisticated business entity” and acted in direct contradiction to its policies when it agreed to the settlement. Policies required insurer consent for settlements in excess of $5 million.

47 Page 47 Recording of this session via any media type is strictly prohibited. Severability Two distinct concepts: Severability of exclusions: Protects coverage for innocent insureds despite malfeasance of other insureds. Severability of application: Protects insureds for misrepresentations in the application process. Application is usually made a part of the policy. Full severability: Only those who are at fault (committed the bad acts or made/knew about application misreps.) lose coverage.

48 Page 48 Recording of this session via any media type is strictly prohibited. Severability (cont.) Limited severability: All insureds lose coverage if bad acts/misreps. by key executives (e.g., CEO, CFO, GC…). Non-rescindable coverage: Prohibits insurer from seeking to rescind the policy. Provides insureds with more protection than severability clause. Not the norm / not easy to get.

49 Page 49 Recording of this session via any media type is strictly prohibited. Shared Limits Shared limits can lead to tension. Competing claims by Ds&Os & Company. How to mitigate this concern? Stand alone Side A coverage. Non-rescindable Side A coverage. Priority of Payments provision. Dictates order of payment. Individuals first/company last. Does not completely alleviate concern Company claims may reduce limits before other claims surface.

50 Page 50 Recording of this session via any media type is strictly prohibited. Takeaways… Read your policy – all D&O insurance is not the same. Coverage is often broader than just the Ds&Os – employees, the Company itself. Definition of Claim – not necessarily just lawsuits. Understand notice requirements. Timely notice is key to coverage! Are limits adequate? Competing interests.

51 Page 51 Recording of this session via any media type is strictly prohibited. Questions, Final Comments and Contact Information Sheryl Myers Director, Risk Management American Standard Brands, Piscataway, NJ 732.980.3042 // myerss@AmericanStandard.commyerss@AmericanStandard.com Brian J. Osias Partner McCarter & English, LLP, Newark, NJ 973.639.6956 // bosias@mccarter.com


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