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.