Over the course of several years in which the marketplace for D&O insurance has been highly competitive, the scope of coverage available has continued to evolve and expand. Terms and conditions are available today that were not available even a short time ago, as carriers attempt to distinguish themselves in a crowded marketplace. The marketplace is a buyer’s market, but in order to ensure that corporate insurance buyers obtain the best coverage available, it is important for them to understand the options available. In an interesting December 6, 2017 Law 360 column entitled “D&O Insurance Coverage Tips for Financial Institutions” (here) Robert Long and Nanci Weissgold of the Alston & Bird law firm examined the issues and options involving several key areas of D&O liability insurance coverage.
First, the authors examined an issue that will be familiar to this blog’s readers, that is, the question of insurance coverage for regulatory investigations. As the authors note, “because responding to such inquiries can be disruptive and expensive for a company, this question can have significant implications.” One frequent issue is whether or not the policy provides coverage for the costs of responding to informal document requests or informal interviews. These days many D&O policies specifically address these kinds of investigative actions in the form of “pre-claim inquiry coverage.” Many policies also specifically address the question of whether or not an investigative or regulatory subpoena is a claim. Not only is it important for policyholders and their advisors to ensure that their policies address these issues, but it is important for them to be aware that the way the policies address these issues is not uniform, and that care must be given to the specific policy wording used.
As the authors also note, a recurring issue in the context of whether or not the policy provides coverage for regulatory investigations is the question of whether or not the particular investigation constitutes a “claim” within the meaning of the policy. The authors review the September 2017 opinion in the Patriarch Partners case (which I discussed in a prior post, here). In that case, the district court concluded that the ongoing investigation the insured company faced was indeed a claim. Unfortunately for the company involved, that meant that, as a claim, the investigation was subject to the prior and pending claim exclusion in the excess policy at issue. As the authors note, the outcome of this case “emphasizes the importance of clarifying the definition of a claim” and also “the importance of understanding and potentially negotiating the use of prior and pending litigation exclusions in excess policies.”
Readers interested in understanding these questions surrounding the availability of coverage for regulatory investigations will also want to become acquainted with the Tenth Circuit’s October 2017 decision in the MusclePharm case, in which the appellate court held that policy coverage did not extend to the costs MusclePharm incurred in responding to SEC subpoenas issued pursuant to a formal order of investigation. As I noted in my post discussing the MusclePharm case (here), the case highlights the importance for the determination of questions of coverage for regulatory investigations is the issue of whether or not the circumstances involve an actual or alleged Wrongful Act.
Professional Services Exclusion
The authors also highlight problems associated with the wording and application of professional services exclusions. Readers of this blog know that coverage questions involving the professional services is one of the things I think carriers regularly get wrong. The professional services exclusion precludes coverage for loss arising out of the performance of professional services. Problems can and often do arise in the way this exclusion is interpreted and applied, particularly for services companies, given that just about anything the service company might do will arise out of or involve in some way the delivery of professional services.
The authors specifically cite a July 2017 Eleventh Circuit opinion (which I discussed in a prior post, here), in which the appellate court held that a bank’s D&O insurance policy’s professional services exclusion precluded coverage for all insureds, not just those delivering professional services. As the authors noted, the policy at issue did not have a severability provision, specifying that an exclusion does not apply to preclude coverage for persons who did not engage in the precluded conduct. The authors also note that the exclusion at issue used the very broad preamble language precluding coverage for loss arising out of or in any way involved the delivery of professional services.
The authors correctly suggest that companies should consider “narrowing the exclusion in the professional services context to ensure that the clause serves its purpose and does not preclude too much coverage.” This is sound advice; however, companies should also be aware that many insurers will not agree to narrow these exclusions by using the narrower “for” wording, rather than the broader “based upon or arising out of” language.
Another professional services exclusion issue for banks often arises in so-called overdraft fee cases. As discussed in a prior post on this site (here), in an October 2017 decision, the Seventh Circuit affirmed a district court decision that the bank involved was not entitled to coverage for the defense costs the bank involved had incurred in defending against a bank overdraft fee claim. In reaching this decision, the court cited the policy’s exclusion precluding coverage for “Loss on account of any Claim … arising from … any fees or charges.” The authors note that these and other decisions “reinforce the importance of making sure that the language in D&O insurance policies provides defense cost coverage for these kinds of overdraft fee cases.”
Breach of Privacy Exclusion
Another policy exclusion – the exclusion precluding coverage for breach of privacy — has recently become prominent for its possible impact on claims arising out of cyber security incidents. As the authors discuss, the Ninth Circuit recently held that the breach of privacy exclusion in the Los Angeles Lakers’ D&O insurance policy precluded coverage for a claim against the team under the Telephone Consumer Protection Act (TCPA). As the authors note, this decision could affect coverage of cyber liability claims involving cybersecurity and data privacy. The authors note that companies may want to consider negotiating with insurers to obtain exceptions to their existing exclusionary clauses.
As I noted in my prior post about the Ninth Circuit’s Lakers’ decision (here), the coverage carve-backs to the policy exclusion policyholders may want to seek include clarification that the exclusion applies only to claims against the entity and not against individuals, or even that the exclusion does not apply to defense expenses.
Another particularly important policy exclusion is the fraudulent misconduct exclusion found in most D&O insurance policies. As the authors note, these exclusion usually require some form of judicial process confirming that the precluded conduct did indeed take place in order to trigger the exclusion’s preclusive effect. The wording of this judicial procedure trigger varies from form to form and can be critical in determining whether or not the exclusion applies. The authors cite to a 2015 New York state court decision (which I discussed in a prior post, here), in which the court held that a policy exclusion precluding coverage for a “final judgment” operated to preclude coverage even though the convicted individual’s appeal remained pending. As the authors note, the case shows the importance of ensuring that the fraud exclusion uses the language “final, non-appealable adjudication” rather than language like “final judgment.”
The authors conclude their article by noting that even though D&O insurance policies are complex, “many of the terms and features of coverage can be negotiated with D&O insurance providers.” The significance of these issues underscores the importance for policyholder of enlisting the assistance of knowledgeable and experience advisors in their D&O insurance placement process. Without the enlistment of this kind of assistance, policyholders may not obtain the broadest coverage available in the marketplace, which could significantly affect the availability of coverage in the event of a claim.