I make it my business on this blog to try to write about the latest developments and current trends in the world of D&O, but I think that every now and then it is a good idea to step back and take a look at the bigger picture. For example, let’s consider the standard D&O Insurance policy form. A D&O insurance policy is usually a lengthy document with detailed terms and conditions. The details are extremely important. But when you boil it all down, the insurance provided by the D&O policy comes down to a few very basic things.
The basic value proposition of D&O Insurance is that, subject to all of the other policy terms and conditions, it provides coverage for
- Loss
- Arising from Claims made during the policy period
- Alleging a Wrongful Act
- Against an Insured acting in an Insured Capacity
- That is not otherwise excluded under the policy
These five items are easily stated, but they are also the source of a very large percentage of the coverage disputes that arise under D&O policies.
For starters, in order for there to be coverage, all five of these requirements must be met. To cite one recurring example, it is not enough to trigger coverage merely that Loss has been incurred; there must also be a Claim. Policyholders sometimes struggle with this, out of the belief that if they are incurring legal fees, they ought to be able to recover under the insurance policies. However, it is not enough to trigger coverage if the policyholder is incurring legal fees. There must also be a Claim within the meaning of the policy. The policyholder may have concerns, say, about a possible legal dispute, and as a result, the policyholder may have hired counsel. But the concern itself is not a claim. The concern may be sufficiently concrete for the policyholder to provide the carrier with a notice of circumstances that may give rise to a claim. But the provision of a notice of circumstances only establishes the claims made date (as any subsequent claim will be deemed first made as of the date of the notice). The provision of a notice of circumstances by itself in not a Claim and does not trigger coverage. Not only would there be no coverage for any legal fees incurred before there is a Claim, but the fees incurred before a Claim is made would not even be applied to satisfy the retention amount.
Another example of a situation where there is no coverage unless all five requirements are met is a situation where there is a Claim but no Wrongful Act has been alleged. This might happen if, say, the policyholder is served with a subpoena. The carrier may contend that the subpoena is not a Claim. Some policyholders have succeeded in arguing that a subpoena is a Claim. However, even if a policyholder is successful in arguing that the subpoena is a Claim, the policyholder may face the further argument from the carrier that the subpoena does not allege a Wrongful Act.
In addition to the requirement that the action involved must meet the policy’s definition of Claim, the Claim must be first made during the policy year in order for there to be coverage. While it might seem that figuring out the claims made date should be pretty straightforward, it can often be a source of problems. An example of a situation where problems might arise is when the lawsuit is merely the final step in the course of a long-running dispute that involved numerous threatening letters and demands that took place before the policy incepted. Another example of a situation where problems can arise is where a complaint is filed before the policy period but not served until after the policy has incepted (an example of this situation is when a claimant files a qui tam action; the complaint may be filed years before it is finally served on the policyholder, as discussed here).
Coverage is also available only for Insured Persons. Questions can sometimes arise about the status of persons who are named as defendants in a complaint. For example, as discussed here, is the individual an officer of the company or merely an employee? Is the person an officer of a joint venture or other enterprise that is not a subsidiary of the company?
In order for the claim against an individual to be covered, the Insured Person must also have been acting in an Insured Capacity at the time of the alleged Wrongful Acts. Problems can emerge, for example, if at the time of the alleged Wrongful Acts the person was acting in a personal capacity rather than in their capacity as a director or officer of the company. Another example involves a situation where a representative of a private equity firm sits on the board of one of the firm’s portfolio companies. Questions may arise, depending on what is alleged, about whether at the time of the alleged Wrongful Acts the person was acting as a representative of the private equity firm or in his capacity as a director of the portfolio company. These kinds of issues can be a particular problem if the policy is worded so as to require that the insured person was acting “solely” in an Insured Capacity (which in turns shows why the inclusion of the word “solely” is so undesirable).
The policy exclusions obviously can also be important to the question of whether or not there is coverage. Some exclusions are simply meant to make the D&O Insurance policy fit in with policies in the policyholder’s insurance program. For example, the typical D&O insurance policy will exclude bodily injury and property damage, as those matters are addressed in the policyholders CGL policy. The D&O insurance policy will also exclude claims under ERISA, as those claims are covered under the fiduciary liability policy.
Some exclusions are meant to preclude coverage for certain kinds of claims. For example, most D&O insurance policies preclude coverage for claims by one insured against another insured. The purpose of the exclusion is to preclude coverage for claims that involve in-fighting or that may be collusive. However, the exclusion usually has numerous exceptions that carve-back coverage for certain types of claims. Whether or not any particular claim is precluded from coverage will depend not only on what is alleged and by whom and against whom, but also the specific wording of the exclusion.
In some instances, it may not be clear at the outset of the claim whether or not a particular policy exclusion is applicable. An example of this is a claim alleging fraud. Most D&O insurance policies have exclusions precluding coverage for fraud. However, mere allegations alone are not sufficient to trigger the exclusion. Depending on the specific wording of the clause, the exclusion may only be triggered if there has been an adjudication that the fraud has taken place. That is why at the outset of the claim the insurance carriers will issue a so-called reservation of rights letter. The carrier’s letter is meant to inform the policyholder that in the event it turns out that the events involved in a claim do in fact trigger the exclusion, the carrier will then seek to deny coverage and enforce its other rights under the policy.
In the end, while the basic value proposition of a D&O insurance policy simply stated , the actual operation of the policy will still depend on a wide variety of factors. Whether or not any particular matter is covered could prove to be a complicated question. Thus, even though the basic insurance mechanism of the D&O Insurance policy can be boiled down to a short list of items, the policy itself and its operation can be complicated. The specific wording of these basic provisions, and of all of the other policy terms and conditions, can determine whether or not the policy’s coverage is triggered.
Because of this complexity, it is critically important for insurance buyers to enlist the assistance of an experienced and knowledgeable insurance advisor in their purchase of D&O insurance. Among the most important ways for policyholders to try to ensure that the policy responds when a claim arises is enlist the assistance of a knowledgeable advisor in their insurance purchase, so that the policy contains the terms and conditions most favorable to coverage.
Readers interested in reading more about the basic nuts and bolts of D&O insurance will want to review my “Nuts and Bolts of D&O Insurance” series, which can be found here.