d&o insurance

The FDIC and The New Banking Crisis:The FDIC and The New Banking Crisis: Litigation Challenges Past, Present, and Litigation Challenges Past, Present, and

FutureFuture

The Grand Westin, Washington, DCThe Grand Westin, Washington, DCJanuary 15-16, 2009January 15-16, 2009

Professional Liability: Insurance Coverage Professional Liability: Insurance Coverage

IssuesIssues Paul E. WojcickiPaul E. Wojcicki

[email protected]@smsm.com


D&O InsuranceD&O Insurance

Need arises out of high cost of Need arises out of high cost of defending against allegations of defending against allegations of corporate wrongdoingcorporate wrongdoing

Availability of funds for Availability of funds for indemnification necessary to attract indemnification necessary to attract competent directors and officers competent directors and officers

Provides a potential source of Provides a potential source of compensation for victimscompensation for victims– Expanded to provide “entity” coverage Expanded to provide “entity” coverage


D&O InsuranceD&O Insurance

Absent insurance, defense costs and Absent insurance, defense costs and indemnity obligations indemnity obligations – Can drive a company to ruin Can drive a company to ruin

– Compromise a company’s ability to Compromise a company’s ability to defend itself and its directors and defend itself and its directors and officersofficers

– Deter persons from acting as directors Deter persons from acting as directors and officersand officers


Litigation SurgeLitigation Surge

Fueled by credit crisis, subprime Fueled by credit crisis, subprime mortgage collapse, and Madoff schememortgage collapse, and Madoff scheme

Primarily directed at the financial sector Primarily directed at the financial sector Other sectors also saw an increaseOther sectors also saw an increase

– e.g., health technology 19 suits in 2006/29 e.g., health technology 19 suits in 2006/29 suits in 2008suits in 2008


Securities LitigationSecurities Litigation

Six-year high in 2008Six-year high in 2008– Federal securities class actionsFederal securities class actions

2008: 2552008: 255

2007: 1952007: 195

2006: 1312006: 131

Credit crisis and subprime related Credit crisis and subprime related claimsclaims

110 in 2008110 in 2008

-Source: “2008 Trends in Securities Class Actions,” NERA Economics Consulting-Source: “2008 Trends in Securities Class Actions,” NERA Economics Consulting


Securities LitigationSecurities Litigation

Increase in state filingsIncrease in state filings– difficult to trackdifficult to track

Trend likely to continue into Trend likely to continue into 20102010

Long, drawn out, and Long, drawn out, and inefficient processinefficient process


Criminal ProceedingsCriminal Proceedings

DOJ: Prosecution of corporate crimes DOJ: Prosecution of corporate crimes a high priority a high priority

Costly to defend againstCostly to defend against

Cost to avoid an indictment can drive Cost to avoid an indictment can drive a company out of businessa company out of business

DOJ Tactics “aggressive” or DOJ Tactics “aggressive” or “abusive”“abusive”



Cooperation credit considerationsCooperation credit considerations– Waive attorney-client and work product Waive attorney-client and work product

privilegesprivileges– Decline to indemnify personnelDecline to indemnify personnel– May not enter into a joint defense agreementMay not enter into a joint defense agreement– Produce “Category II” informationProduce “Category II” information

Non-factual attorney-client communications, legal Non-factual attorney-client communications, legal adviceadvice

– Discharge personnelDischarge personnel

Not to be considered under recently revised Not to be considered under recently revised DOJ Corporate Charging Guidelines DOJ Corporate Charging Guidelines – Emphasis now on whether a company is Emphasis now on whether a company is

forthcoming with relevant factsforthcoming with relevant facts



Increased political pressure to Increased political pressure to restore the public trustrestore the public trust

White-collar investigations and White-collar investigations and indictments likely to increaseindictments likely to increase

Expect state officials to become Expect state officials to become more activemore active

Are “criminal proceedings” a “claim”Are “criminal proceedings” a “claim”



Evolving definitionEvolving definition– UndefinedUndefined

– ““criminal proceeding …commenced criminal proceeding …commenced by the return of an indictment”by the return of an indictment”

– Some now include “investigations,” Some now include “investigations,” including “criminal investigations”including “criminal investigations”

– ““criminal proceedings”criminal proceedings”


Cost IssuesCost Issues

In 2008 some insurers spent more on In 2008 some insurers spent more on professional liability claims than they professional liability claims than they received in premiumsreceived in premiums

Insurer costs likely to exceed $4.5 Insurer costs likely to exceed $4.5 billion in 2009 on subprime claims billion in 2009 on subprime claims alonealone

Carriers “are reserving pretty Carriers “are reserving pretty substantially” for professional liability substantially” for professional liability claims claims


Madoff ScandalMadoff Scandal

Legal costs could top $1 billionLegal costs could top $1 billion– $50 billion in investor losses$50 billion in investor losses

Insurers did not anticipate or charge for the Insurers did not anticipate or charge for the possibility of investor losses on such a possibility of investor losses on such a massive scalemassive scale

– Much of the loss sustained by foreign Much of the loss sustained by foreign investorsinvestors

– The losses have just begunThe losses have just begun– $1 billion “feels a little low”$1 billion “feels a little low”

Source: Bloomberg January 9, 2009Source: Bloomberg January 9, 2009


Insurance Industry ReactionInsurance Industry Reaction

Mid-1980’s Mid-1980’s – Number and cost of D&O claims has Number and cost of D&O claims has

grown to reach significant levelsgrown to reach significant levels

Market constrictionMarket constriction– Some insurers stopped offering coverageSome insurers stopped offering coverage

Cost containmentCost containment– Reduced limitsReduced limits– Increased PremiumsIncreased Premiums– Added exclusions and limitations Added exclusions and limitations


Insurance Industry ReactionInsurance Industry Reaction

1999-20031999-2003– Surge in amount and cost of securities Surge in amount and cost of securities

litigationlitigation– Corporate scandals and bankruptciesCorporate scandals and bankruptcies

Enron, Adelphia, Tyco, etc.Enron, Adelphia, Tyco, etc.

– Sarbanes-Oxley ActSarbanes-Oxley Act– 9/119/11

Sharp premium increases (30% to 50% Sharp premium increases (30% to 50% annually)annually)

Market constrictedMarket constricted ““Entity” coverage droppedEntity” coverage dropped


Differing PerspectivesDiffering Perspectives

Policyholder – InsurerPolicyholder – Insurer

Explore the differences Explore the differences

Segal McCambridge-Mondaq Segal McCambridge-Mondaq SurveySurvey– ““Timely Notice”Timely Notice”

Not expect drastic divergence of opinionNot expect drastic divergence of opinion


Notice SurveyNotice Survey


Questions & CommentsQuestions & Comments

The FDIC and The New Banking Crisis: The FDIC and The New Banking Crisis: Litigation Challenges Past, Present, and Litigation Challenges Past, Present, and

FutureFutureWashington, DCWashington, DC

January 15-16, 2009January 15-16, 2009

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