The private company management liability insurance environment is constantly changing. The liability environment is constantly evolving. Because of the changes in liabilities and exposures and because of the competitive nature of the insurance marketplace, the available terms and conditions are constantly changing as well. Unfortunately, all too often, some private companies simply renew their management liability insurance programs year after year, without ensuring that their policies contain the most up-to-date terms and conditions available. In order for companies assess whether their policies are current, I have listed some of the important items for companies to look for in their policies. I have added some additional comments below, as well.
As a preliminary matter, it is important to emphasize at the outset that not all of the terms I discuss below are available from all insurers, and with respect to some of the terms, even the insurers that are willing to offer the terms may not be willing to offer them to all policyholders. For example, some insurers may not be willing to offer the terms to companies in certain industries or with certain other characteristics, or that have a history of claims. In addition, some insurers may require additional premium for some of these terms to be included.
Subject to those considerations, private companies will want to assess whether or not the following terms and conditions are included in their insurance programs.
Notice of Claim Trigger: All private company management liability insurance policies have provisions stating that the policyholder must provide the insurer with notice of claim within certain time limits. While the requirements are relatively straight forward, the reality is that policyholders’ late provision of notice of claim is a recurring problem. The delay in providing notice can arise for many reasons; often the notice is delayed because the person who knows about the claim and the person responsible for the insurance may not be the same person. In one recent case, the notice was delayed because the company’s CFO had left the company and as a result the complaint and summons went unnoticed for a time.
In order to try to eliminate the possibility that a delayed notice might result in the loss of insurance coverage, the notice provision should be modified to provide that the period within which notice must be provided does not commence until one of a short list of specified company officials (usually the CEO, the CFO, the General Counsel, and, sometimes, the Risk Manager) has become aware of the claim. This protects against the possibility that coverage might be precluded due to late notice simply because awareness of the claim had not made its way to the right people within the company.
Antitrust Exclusion: Many private company management liability insurance policies contain so-called “antitrust exclusions.” This descriptive label for the exclusion is somewhat misleading, because these exclusions typically sweep much more broadly than just with regard to antitrust allegations. For example, one “antitrust” exclusion precludes coverage for any claim “any actual or alleged price fixing; restraint of trade, monopolization, or unfair trade practices, including actual or alleged violation of the Sherman Anti-Trust Act, the Clayton Act, or similar provisions [of] any state, federal or local statutory law or common law anywhere in the world.”
The problem with the broadly encompassing provisions of this type of exclusion is that many of the management claims that private companies face contain allegations of, for example, deceptive trade practices. Insurers whose policies contain one of these broadly worded exclusions often attempt to deny coverage for these kinds of claims, often arguing that the entire claim – including defense expenses – is barred. (Refer here for a recent example where a court upheld a carrier’s attempt to deny coverage for a wide range of claims based on this type of exclusion.)
Given this broadly preclusive effect of these kinds of exclusions, private companies should have a strong bias in favor of policies that do not contain this exclusion, and where coverage is available without the exclusion, they should have a strong preference for policies lacking the exclusion. Many carriers will remove the antitrust exclusion upon request. Even in those instances where the carriers will not remove the exclusion, they may be willing to offer the coverage on a sub-limited basis or on a defense cost only basis.
Social Engineering Fraud Coverage: There has been an alarming increase in the incidence of “business payment instruction fraud,” or as it is sometimes know, “social engineering fraud.” In these schemes, scammers using official seeming email communications to induce company employees to transfer company funds to the imposters’ account. According to the FBI, during the period October 2013 through February 2016, law enforcement agencies have received reports of this type of fraud involving 17,642 victims. Complaints involving these kinds of fraudulent schemes have arisen in every U.S. state and 79 different countries and amount to over $2.3 billion losses.
The companies that are the victims of these types of scams may try to recover their losses under their crime insurance policies. However, the insurers often seek to deny coverage for the losses, arguing that courts draw a distinction between losses where a thief hacks the insured’s computer systems and losses in which the insured voluntarily transfers funds. While the courts generally allow coverage for losses arises from hacking, the courts have found that losses from voluntary transfer of funds, including social engineering losses, are generally not covered because they do not arise “directly” from the use of a computer to fraudulently cause a transfer of property; they arise from an authorized transfer of funds.
From the policyholders’ perspective, the question of whether the traditional commercial crime policies cover this type of loss is at best uncertain. Several carriers are now offering coverage by endorsement to the commercial crime policy for these kinds of losses. The endorsements are designed to provide coverage when an employee is intentionally misled by electronic or written instructions from a person purporting to be a company executive or employee, vendor, client, or customer, to transfer money or property. (Some cyber liability insurers also offer this type of coverage as well.) However, most of the carriers that are willing to offer this coverage extension will do so only on a sub-limited basis. Often these sub-limits are as low as $250,000 or less. Even if the coverage available is limited, the limited coverage is preferable to none at all.
Settlor Liability Coverage: The law draws a distinction between fiduciary liability and settlor liability. Fiduciary liability arises from actions taken in administering employee plans. Settlor liability arises in connection with actions to establish or discontinue employee plans. In the past, fiduciary liability insurance carriers have taken the position that their policies provide coverage only for fiduciary liability but not for settlor liability (about which refer for example here). Many fiduciary liability carriers will now upon request agree to endorse their policies to expressly state that their policies will provide coverage for settlor liability claims, often subject to the payment of additional premium.
As a general matter, it is a good idea for private companies to ensure that their fiduciary liability insurance policies contain the settlor liability coverage extension. This extension may be particularly important in light of the requirements of the Affordable Care Act. The ACA contains a number of employer mandates. While some of these mandates have not yet or not yet fully taken effect, companies may take steps to avoid the mandates’ financial impact. Companies that alter or eliminate benefit plan or employment arrangements may be exposed to liability claims (as, for example, happened to one employer that reduced its full-time staff to part-time status in order to avoid an ACA mandate, as discussed here). These types of claims potentially could include settlor liability claims, of the type that would not be covered under a fiduciary liability insurance policy that does not have the settlor liability extension. Accordingly, in the current environment and in light of the ACA, the addition of the settlor liability extension to the fiduciary liability policy is well-advised.
Conduct Exclusion Wording: These days, the conduct exclusion in most management liability insurance policies contain an adjudication requirement, providing that the exclusion’s preclusive effect is not triggered until there has been an adjudication that the precluded conduct occurred. However, the wording of the requirement is not standard. The presence or absence of certain wording could make a difference. The preferred wording will provide that the exclusion does not apply until there is (1) an adjudication in the underlying proceeding (2) that is final, and (3) that is non-appealable.
All three of these requirements are important but the specification that the adjudication must be non-appealable is particularly important. Without this requirement, the carrier may take the position that a judgment of a trial court alone is sufficient to preclude coverage. This could put an insured person in a position where his or her insurance is cut off at the very time when they might need it most – that is, when they want to appeal a trial court judgment that could result in their imprisonment or criminal penalties (as happened in a recent case, discussed here). In order to ensure that the insured persons will have benefit of the insurance in order to be able to appeal an adverse judgment, it is important that the management liability insurance policy’s conduct exclusion provide that the exclusion is not triggered until there has been a non-appealable adjudication. Not all carriers offer this wording, but a request for the wording is well-advised.
Conclusion
This short list shows that there are details that could become important in the event of a claim and that must be addressed at the time that the management liability insurance policies are put in place. There is, in fact, a long list of other items that also should be addressed at the time of the insurance transaction. Indeed, not only is there a long list, but the list is changing all the time. That is why it is crucially important for all companies, even small private companies, to ensure that their coverage is placed by an insurance advisor that knowledgeable and experience with product lines. Only a knowledgeable and experienced advisor is going to remain fully aware of both the changes in the legal environment and of the latest terms and conditions that are available in the marketplace.
I often am asked to review small private companies’ insurance programs. I frequently find that the policies reflect terms and conditions from an earlier time and lack the more favorable terms and conditions now available in the marketplace. Other times, I find that the private companies’ insurance policies reflect their insurer’s off-the-shelf product, with none of the favorable terms and conditions that are available from the insurer upon request. The insurers often are willing to provide the latest terms and conditions or to include terms and conditions that are more favorable than in their off-the-shelf product. However, these terms and conditions are available only upon request. The terms and conditions won’t be in the policy if no one asks for them. That is why all companies, even small private companies, need a knowledgeable and experienced insurance advisor – to make sure that the companies are getting the most value for their insurance dollars, they need to make sure that their insurance advisor knows what to ask for.
Conference Invitation: The Rutgers Center for Corporate Law and Governance is presenting a conference on corporate compliance on Friday, May 20, 2016, from 8:30 AM to 3:30 PM, entitled New Directions in Corporate Compliance. The conference will take place at Rutgers Law School, 217 North Fifth Street, Camden, NJ 08102.
This conference will bring together academics, practitioners, and government officials, who approach compliance from different perspectives. The conference will include sessions on litigating the adequacy of a compliance program, structural issues in the compliance department, and organizational culture and developing a culture of compliance. Andrew Donohue, Chief of Staff of the U.S. Securities and Exchange Commission, will present a keynote luncheon address.
Other speakers include: Catherine Bromilow, Partner, PwC Center for Board Governance; Stephen L. Cohen, Associate Director, Securities and Exchange Commission; James Fanto, Gerald Baylin Professor of Law, Brooklyn Law School; Donald C. Langevoort, Thomas Aquinas Reynold Professor of Law, Georgetown Law; Joseph E. Murphy, Author of 501 Ideas for Your Compliance & Ethics Program; Donna Nagy, C. Ben Dutton Professor of Law, Indiana University Maurer School of Law; Charles V. Senatore, Executive Vice President, Fidelity Investments, Greg Urban, Arthur Hobson Quinn Professor of Anthropology, University of Pennsylvania; and John Walsh, Partner, Sutherland
The conference is free and open to the public. A reception will follow. To RSVP, please contact Deborah Leak at dl524@camden.rutgers.edu. CLE credit is available for NJ, NY, and PA. For additional information about CLE credit, contact Deborah Leak.