The D & O Diary : Directors and Officers Liability and Insurance : The D & O Diary : Kevin LaCroix : Securities Laws, Corporate Fraud, D & O Litigation

Last fall, the New York Department of Insurance ignited a firestorm when it issued an opinion that a D&O insurance policy may not place the duty to defend on the insured. As I discussed in an earlier post (here), the opinion is contrary to both the uniform practice of the D&O insurance industry and the unambiguous preference of public company D&O insurance buyers.

On February 26, 2009, following his keynote address at the the Professional Liability Underwriting Society (PLUS) D&O Symposium, New York Insurance Superintendent Eric Dinallo acknowledged the industry’s reaction to his department’s opinion, and indicated that the department would reconsider the issue and address it through the issuance of a new regulation. He also invited the industry to help his department to shape the new regulation.

Based on the Superintendent’s invitation, PLUS is now working with the American Insurance Association (AIA). The AIA has drafted proposed revised regulatory language that is now being circulated among its members. PLUS has also invited its member companies to comment on the draft regulatory proposal. PLUS will compile the comments and share them with the AIA and the New York Department of Insurance.

One representative from each PLUS member company can obtain a copy of the draft proposed regulatory language by contacting PLUS’s Executive Director, Derek Hazletine, dhazeltine@plusweb.org.  

I am setting all of this information out in a separate blog post because the deadline for comment to be received is next Monday, March 23, 2009, so companies that want to participate will have to move quickly.

In his Feb. 26 presentation, Dinallo indicated that he intends to act quickly on the proposed regulations and that he hopes to have the regulations in place by late spring.

Insurers Must Disclose Climate Change Exposures: On March 17, 2009, the National Association of Insurance Commissioners adoped a "mandatory requirement that insurance companies disclose to regulators the financial risks they face from climate change, as well as the actions the companies are taking to respond to those risks." According to the NAIC's press release (here), all insurance companies with annual premiums of $500 million or more will be required to complete an annual Insurer Climate Risk Disclosure Survey with an initial deadline of May 1, 2010. 

In the Survey, insurers will be required to report on "how they are altering their risk-management and catastrophe risk moedline in light of the challenges posed by climate change" and they will also be required to report  on "steps they are taking to engage and education policymakers and policyholders on the risks of climate change" as well as "whether and how they are changing their investment strategies." 

These reporting requirements could have a singificant impact, not just on insurers disclosures, but on their conduct as well. The requirement to disclose what the carriers are doing to "engage and educate" policymakers seems to suggest that the NAIC expects carriers to become proactive on the legislative and regulatory front regarding climate change. The disclosure regarding investment strategies potentially could influence insurers'' investment decisions. The clear implication of the NAIC's rule is that the regulators expect the disclosure requirements will motivate the carriers to become proactive in these areas.

The web page for the NAIC's Climate Change and Global Warming Task Force, including a link to the draft language of the new disclosure requirements, can be found here.

The Hits Just Keep on Coming: Bernard Madoff may now be in jail following his recent guilty plea, but that does not seem to have slowed the flow of new Madoff-related lawsuits. As the new suits have come in, I have added the new suits to my running tally of the Madoff-related litigation, which can be accessed here.

The litigation register has now grown to be quite lengthy. Madoff’s fraudulent scheme may have cost investors billions, but he has stimulated a heaping stack of litigation.Special thanks to the many readers who have been sending me the new complaints as they have come in, especially Jon Jacobson of the Greenberg Traurig law firm. Readers may be interested to know that Jon is also reporting on the new cases on Twitter (here) as they come in.

Speaker’s Corner: Next week I will be in London speaking at the C5 D&O Liability Insurance Conference. The specific panel on which I will be speaking is entitled "Current Litigation Trends in Europe and the U.S.: Are Class Actions on the Horizon?" The conference, which will take place March 24 and 25, 2009 at the Grange City Hotel., will feature a diverse array of speakers on a wide variety of D&O insurance related topics. The entire program agenda can be found here.

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We interrupt our regularly scheduled stream of dispatches from the credit crisis front to provide a quick update on the now seemingly remote options backdating scandal. Even though the whole world has moved on and though options backdating pales by comparison to what followed, many options backdating cases continue to grind on. At least a couple of these cases recently settled, and there appear to be many more yet to come.

First, on December 11, 2008, Amkor Technologies announced (here) that it had reached an agreement to settle the option backdating-related securities class action lawsuit that had been filed against the company and certain of its current and former directors and officers in connection with the company’s historical stock option practices. Background regarding the lawsuit can be found here.

According to the company’s press release, the plaintiffs have agreed to dismiss the case in exchange for a payment of $11.25 million. The company said that its directors and officers liability insurance carrier has agreed to pay $9 million of the settlement amount and the company will pay the balance.

Second, and also on December 11, 2008, the parties to the options backdating-related shareholders’ derivative suit filed against Foundry Networks, as nominal defendant, and certain of its directors and officers, filed a notice of a proposed settlement (here). According to the parties’ filing, the company will receive cash payments of $2.117 million, of which $1.637 represents payments from the individual defendants and $400,000 represents payments from the company’s insurer. Certain shares granted to certain individuals have been repriced and the company also agreed to certain governance changes. The company also agreed to pay plaintiffs’ attorney’s fees and expenses of $1.2 million.

I have added these two settlements to my running table of options backdating-related lawsuit settlements, dismissals and motion denials, which can be accessed here. The Amkor settlement is, by my count, the sixteenth options backdating-related securities lawsuit settlement, and approximately six of the cases were also dismissed. Given that there were according to my count (refer here) 39 options backdating-related securities lawsuits filed in total, there still may be as many as 17 of these cases yet to be resolved.

The individuals’ cash contribution toward the Foundry Networks settlement, if not indemnified, would represent an unexpected element, as it remains an unusual settlement element for directors and officers to make cash settlement contributions out of their own assets.

OK, enough about that. We now resume our regularly scheduled programming, which is already in progress.

California Countrywide Subprime-Related Derivative Case Dismissed: In a December 11, 2008 order (here), Judge Mariana Pfaelzer dismissed the Countrywide subprime-related derivative case pending in the Central District of California.

Judge Pfaelzer previously had denied the defendants’ motion to dismiss the derivative case, in a strongly worded May 2008 opinion (about which refer here). However, in July 2008, Bank of America acquired Countrywide in a stock for stock merger. As a result, and as discussed here, in October 2008, the Delaware federal court dismissed the parallel Countrywide subprime-related derivative case pending in that court, because of the plaintiffs’ lack of standing to pursue the claim owing to the plaintiffs’ inability to show "continuous ownership" due to the BoA transaction.

The plaintiffs in the California Countrywide subprime-related derivative case argued that, notwithstanding the merger, they could still satisfy the "continuous ownership" rule and therefore still had standing based on a merger-related exception to the rule recognized in the Ninth Circuit. After detailed consideration of Erie Doctrine issues, Judge Pfalzer declined to exercise equitable powers associated with the merger-related exception, and granted the defendants’ motions to dismiss the derivative claims due to the plaintiffs’ lack of standing.

Judge Pfaelzer’s ruling on the derivative claims was without effect on the plaintiffs’ merger related class claims, which she previously had stayed in favor of parallel proceedings pending in Delaware Chancery Court. In addition, the Countrywide subprime-related securities class action lawsuit remains pending before Judge Pfaelzer, as a result of her recent dismiss motion denial in that case, discussed here.

In any event, I have added the dismissal of the California Countrywide Derivative lawsuit to my list of subprime lawsuit settlements, dismissals and motions denials, which can be accessed here.

Special thanks to Michael Delhegan of the Tressler Soderstrom firm for providing a copy of Judge Pfalzer’s December 11, 2008 opinion.

Standalone Insurance for Independent Directors: In prior posts (most recently here), I have noted the considerations that may militate in favor of standalone insurance protection for independent directors. In a December 12, 2008 memorandum entitled "Independent Directors Require Additional Protection in Financial Crisis Litigation" (here), the Baker & McKenzie firm suggests that "there is an increasing interest by independent directors in coverage that protects only a company’s independent or outside directors, not its officers."

The memo reviews the origins of IDL insurance and examines why "it may be a useful tool for both attracting high quality independent directors, and as a means of protecting and retaining the best talent." Among other reasons suggesting the need for IDL protection is the increasing susceptibility of traditional D&O insurance limits to erosion or depletion through defense expense or indemnity protection for other persons insured under the D&O policy, a phenomenon on which I previously commented here.

More About the NY Insurance Commissioner’s Recent Opinion: In a recent post (here), I commented on the recent opinion of the New York Insurance Commissioner’s office requiring D&O insurance policies to incorporate a duty to defend. The opinion and its implications are reviewed at greater length in a December 2008 Client Advisory from the Edwards, Angell, Palmer & Dodge law firm entitled "The New York Insurance Department Will No Longer Approve D&O Policies Lacking ‘Duty-to-Defend’Coverage Feature" (here).

This memo contains a detailed analysis of the opinion and raises a number of important considerations about what the opinion does and does not mean. The memo also notes difficulties that carriers may face as the attempt to adapt to the opinion, and also suggests alternative responses available to the carriers, including seeking legislative relief.

Special thanks to John McCarrick of the Edwards Angell firm for sending along a copy of the memo.

And Finally: By far the best thing I have seen written on the Madoff scandal is the column that Wayne State Law Prof. Peter Henning wrote as a guest column on the DealBook blog, here.

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In a deeply troublesome decision, the New York Department of Insurance has issued an October 16, 2008 opinion (here) stating that "a D&O policy may not include a provision that places the duty to defend upon the insured, rather than the insurer." A December 5, 2008 memo (here) written by Carrie Cope, a partner in the Tressler, Soderstrom Maloney & Preiss law firm, diplomatically but accurately summarizes just how far off base the opinion is.

By way of background, public company D&O insurance as it is uniformly distributed and purchased throughout the entire U.S. marketplace today is written on a duty to indemnify rather than a duty to defend basis. Under this arrangement, the insured persons, rather than the insurer, select their defense counsel, subject to the insurer’s consent, and the insured persons control their defense. The insurer reimburses reasonable defense expense.

Not only is this arrangement the uniform marketplace standard for public company D&O insurance, but it is the clear and unambiguous preference of public company D&O insurance buyers, who want to be able to use their own counsel in matters affecting their personal liability.

This arrangement has also has been approved by state court insurance regulators throughout the country. As Cope’s memo succinctly points out, the New York Insurance Department’s opinion is directly contrary to this well established regulatory record.

Cope also notes that the opinion "fails to address the needs and desires of the Insureds that it seeks to protect." She correctly points out that public company D&O insurance policies are purchased by sophisticated parties represented by risk managers and other specialized insurance professionals who seek to procure the best insurance available for their clients. The terms and conditions are highly negotiated. While virtually every word in the policy is subject to intense scrutiny, no one is trying to insert a duty to defend into their public company D&O insurance policy.

The D&O insurance industry’s uniform adoption of a duty to indemnify approach rather than a duty to defend approach is not the result of some insidious insurance company conspiracy. It is instead exactly what sophisticated and well-advised insurance buyers want.

Cope also correctly points out the opinion’s flawed logic. The opinion seeks to criticize the specific insurance policy addressed in the opinion because it transfers to the insured the burdens of litigation "such as managing, controlling or otherwise overseeing the litigation." As Cope notes, the opinion "fails to recognize that the ability to oversee the litigation is exactly what the typical insured purchasing a public company D&O policy wants." (Emphasis added).

The opinion also criticizes the policy because it does not pay the compensation costs of in-house counsel. Cope correctly notes that even if the policy were a duty to defend policy, it would not cover these costs.

Cope concludes her memo by noting that the opinion, "if not further modified, may well have a chilling effect upon the D&O insurance industry in New York and unduly cause applicants to seek means to obtain coverage they need and want outside the State of New York."

Cope is correct. This opinion is not in anyone’s interests, and in particular it absolutely is not in the interests of any person to be insured under a public company D&O insurance policy. Cope’s memo should be a rallying cry for all industry participants to have this erroneous opinion modified or set aside as soon as possible.

Special thanks to the several readers who sent me copies of Cope’s memo.

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