Executive Protection: D&O Insurance Policy Exclusions
In a series of posts, I have been exploring the "nuts and bolts" of D&O insurance. In this post, the sixth in the series, I examine the range of D&O insurance policy exclusions. Though some exclusions are found in most D&O insurance policies, others appear only occasionally , while yet other particular exclusions may only appear in specific policies or specific kinds of policies. For purposes of analysis, I have tried to group the various kinds of exclusions in separate categories below.
As a preliminary matter, it is important to note that while generalizations are possible about the kinds of exclusions that may appear in "most" or "many" policies, there are always exceptions. For example, one type of D&O policy, the so-called Excess Side A/DIC policy, often has fewer exclusions than the traditional D&O policies. In addition, more recently introduced D&O insurance policies may have different or narrower exclusions that are found in the typical policy. D&O insurance policies for financial institutions often have exclusions relating specifically to the type of financial activity in which the institution is engaged.
Any attempt to try to identify all of these exclusions and exceptions would be far beyond the scope of this post. For purposes of this introductory overview, I have limited my observations to what generally is the case, and in most cases, my observations relate to traditional D&O insurance policies.
Exclusions to Define the Policy’s Relation to Other Policies: In order to avoid overlapping policies or duplicate coverages, most D&O policies contain exclusions providing that coverage is precluded for matters that have been reported or the subject of notice under other policies. Consistent with the claims made nature of D&O policies, many policies also include exclusions precluding coverage for litigation that was pending prior to the policies inception.
Exclusions to Fit the Policy with Coverage Afforded by Other Types of Insurance: D&O insurance policies are built with the presumption that it is just a part of the policyholder’s overall program of insurance. With that in mind, most D&O policies contain exclusions to preclude coverage for claims that are typically covered by other types of insurance. Thus, most policies contain exclusions for loss arising from claims arising from bodily injury or property damage, as those hazards are typically insured under Commercial General Liability Insurance (CGL) policies. Similarly, most D&O policies exclude coverage for claims under ERISA and similar laws, as those claims typically would be covered under Fiduciary Liability Insurance policies.
Catastrophic Hazards: Many policies include separate exclusions for loss arising from catastrophic hazards, such as nuclear events, environmental damage and war. Some of these exclusions, particularly the environmental damage exclusion, will often have coverage coverage carve backs for shareholder claims or for loss for which the company is unable to indemnify individual directors and officers. In addition, in the wake of the events of September 11, 2001, and in compliance with the Terrorism Risk Insurance Act (TRIA), many policies will also contain specific provisions relating to acts of terrorism.
Refer here for an example of a coverage dispute arising in connection with the question whether or not a D&O policy’s pollution exclusion precluded coverage for a shareholder claim alleging pollution related misrepresentations and omissions.
Conduct Exclusions: Most D&O policies contain one or more exclusions precluding coverage for certain types of conduct. The conduct exclusions typically preclude coverage for two categories of conduct: first, for loss relating to fraudulent or criminal misconduct; and second, for loss relating to illegal profits or remuneration to which the insured was not legally entitled.
These exclusions can often have subtle wording differences that can significantly affect the availability of coverage. The most important wording variant is with respect what is required in order for the exclusion to be triggered. In recent times, these provisions usually require a prior "adjudication" that the precluded conduct has actually occurred in order for the exclusion to be triggered. Different variations of the adjudication requirement may require the adjudication to take place in the underlying claim, while other exclusions may allow the determination to be made in a separate proceeding (such as a declaratory judgment proceeding).
Another important aspect of these exclusions are the accompanying provisions defining when one insured person’s conduct may be attributed to another person or to the insured entity. In more recent times, many policies restrict the imputation of conduct among insurerds – policies with these provisions are said to have "full severability of conduct."
An example of a recent case illustrating the importance of the precise wording of the adjudication trigger in the fraud exclusion can be found here.
Insured vs. Insured Exclusion: Most D&O policies have exclusions precluding claims brought by one insured against another insured, in order to preclude coverage for collusive claims and for infighting among senior corporate officials. The Insured vs. Insured exclusion typically includes numerous exceptions (or "carve backs" as they are usually called). The exceptions preserve coverage for derivative claims, cross claims, certain employment practices claims, and claims brought by bankruptcy trustees.
The Insured vs. Insured exclusion (often referred to as the I v. I exclusion) has evolved over time, and so there are many variants both to the exclusion and to the carve backs. As others have noted (refer here), the Insured vs. Insured exclusion continues to be heavily litigated and is often at the heart of many coverage disputes. Insured vs. Insured disputes can often arise in the context of corporate bankruptcy, as noted here. More recently, whistleblower provisions in the Sarbanes Oxley Act and the Dodd-Frank Act have also potentially raise Insured vs. Insured concerns, if the whistleblower is also an insured person. Many insurers will agree to Insured vs. Insured exclusion carve backs designed to preserve coverage for whistleblower claims.
Particular Circumstances: In the course of insurance acquisition process, it sometimes happens that the insurance underwriter will identify a specific circumstance or event that represents a risk the underwriter is unwilling to accept. In that event, the underwriter will sometimes insist on an exclusion precluding coverage for the event or circumstance. While these kinds of specific event (or "laser" exclusions as they are sometimes called) are not uncommon, the typical insurance buyer that has an alternative will try to acquire a policy without the event exclusion.
Private Company D&O Insurance Policy Exclusions: As discussed in the preceding post in this series, the entity coverage available in a private company D&O insurance policy is quite a bit broader than the entity coverage in a public company D&O policy. In a public company policy, the entity coverage extends only to securities claims. The entity coverage available under a private company policy is not so restrictive, and in fact is quite comprehensive.
In order to protect themselves from the breadth of claims that otherwise might come within the entity coverage, many private company D&O insurers will include a number of exclusions applicable solely to the entity coverage. Some examples of entity coverage exclusions of this type include the contract exclusion (about which refer here), an exclusion precluding coverage for intellectual property claims, and an exclusion for antitrust and other competition related claims.
The antitrust or competition exclusion is not found in all private company D&O policies, and many insurers will remove or at least modify the exclusion upon request. There are a very limited number of insurers who insist on retaining this exclusion or at most allowing only defense cost coverage. In the current competitive insurance environment there are usually private company D&O insurance alternatives available that do not include the antitrust exclusion.
Since private company D&O insurers do not want to include the risks associated with public securities trading, most private company policies contain exclusions relating to public securities offerings and trading. It is important for these exclusions to be worded appropriately so that they do not preclude coverage for activities that might take place in advance of a planned public offering. If the planned offering does not go forward, the private company policy will have to respond to any claims, so it is important that the wording of the exclusion contemplates that possibility.
Miscellaneous and Anachronistic Exclusions: As the exclusion involved in the Stanford Financial coverage dispute demonstrates, there a many other kinds of exclusions out there in the insurance marketplace, some of them quite unusual. Among other exclusions that sometimes appears is the so-called "bump up" exclusion, precluding coverage for additional amounts paid to investors claiming inadequate consideration in a corporate buy out situation (about which refer here).
There are a host of other exclusions that have been around for a long time but that you just don’t see that much any more. An example of this kind of exclusion is the "failure to maintain insurance" exclusion (or FTMI exclusion, as it sometimes is called), precluding coverage for claims against corporate officials based on their negligent failure to obtain or maintain insurance.
Another example of this type of exclusion is the old "Commissions" exclusion The commissions exclusion, as typically worded, precludes coverage for loss incurred in connection with any claim "alleging, arising out of, based upon or attributable to payments, commissions, gratuities, benefits or any other factors to or for the benefit of" an agent or employee of any foreign government.
This exclusion was instituted after the Foreign Corrupt Practices Act was enacted in the late 70s. The exclusoin has largely fallen into disuse since that time, although you still see it on some policies from time to time. As discussed at greater length here, in an era of heighted FCPA enforcement activity, the Commissions exclusion is highly undesirable from the policyholder’s perspective.
As I noted at the outset, D&O insurance policies for companies in the financial sector sometimes contain exclusions particularly relevant to claims and exposures associated with the companies’ specific activities. An example of this kind of exclusion is the so-called regulatory exclusion sometimes found on policies issued to commercial banks. This exclusion became relative rare in the mid-90s and until recently, but as the number of failed banks began to rise a couple of years ago, the exclusion began to reappear in at least some commercial banks’ D&O insurance policies. Refer here for a brief overview of the regulatory exclusion.
A Final Note about Policy Wording: One final note is that language accompanying the exclusions can often be critically important. As discussed here, some exclusions are preceded by all-encompassing omnibus language, precluding all loss "based upon, arising out of, or any way relating to" the excluded conduct or matter. In other instances, the exclusion is preceded only by the more limited "for" preamble. The broader preamble can substantially expand an exclusion’s preclusive effect, and accordingly it is critically important to consider not only what exclusions a policy contains, but also how the exclusions are worded and what terms and conditions accompany the exclusions.
Towers Watson Survey 2010: The 2010 version of the Towers Watson survey is underway, but the window is closing soon. This survey, which so many of us in the industry depend upon, queries companies about liabitliy issues and D&O insurance questions. Because we all depend on the survey results, and because the more survey responses the more complete the survey results will be, we all have an interest in as many respondents as possible completing the survey.
The survey, the questionnaire which can be accessed here, will close Friday October 22, 2010, so please have your clients and companies complete the survey form.
Prior Installments in the D&O Nuts and Bolts Series: Readers who would like to read the prior posts in this series about the nuts and bolts of D&O insurance should refer here:
Executive Protection: Indemnification and D&O Insurance – The Basics
Executive Protection: D&O Insurance – The Insuring Agreement
Executive Protection: D&O Insurance—The Policyholder’s Obligations
D&O Insurance: Executive Protection – The Policy Application
Executive Protection: Private Company D&O Insurance
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My primary objective on this blog is to address important developments in with world of directors’ and officers’ liability as they occur. From time to time, however, readers contact me with more fundamental questions about executive liability and protection, particularly regarding the basics of indemnification and D&O insurance. In response to these recurring questions, I intend to prepare a series of posts, to be published intermittently in the weeks ahead, discussing these more basic issues.
