key d&o policy provisions/issues how they really work!

KEY D&O POLICY KEY D&O POLICY PROVISIONS/ISSUESPROVISIONS/ISSUES

How They Really Work!How They Really Work!

KEY D&O POLICY KEY D&O POLICY PROVISIONS/ISSUESPROVISIONS/ISSUES

How They Really Work!How They Really Work!

2004 PLUS International Conference2004 PLUS International ConferenceSan Diego, CaliforniaSan Diego, California

November 4, 2004November 4, 2004

Carol A.N. ZachariasCarol A.N. ZachariasCounselCounselACE Professional RiskACE Professional Risk

The views expressed are those of the speakers and no other organization or person.

A. Quentin Orza IIA. Quentin Orza IIVice PresidentVice PresidentRLI Insurance GroupRLI Insurance Group

Ernest Martin, Jr.Ernest Martin, Jr.PartnerPartnerHaynes and Boone, LLPHaynes and Boone, LLP

Raul CarrilloRaul CarrilloSr. Vice President Sr. Vice President /General Counsel/General CounselEl Paso Electric Corp.El Paso Electric Corp.

Philip L. BlaisPhilip L. BlaisPresidentPresident

Blais Excess & Surplus Agency of Texas Ltd. Blais Excess & Surplus Agency of Texas Ltd.

PANELPANEL

POLICY PROVISIONS/ISSUES WILL BEPOLICY PROVISIONS/ISSUES WILL BEREVIEWED IN THREE PHASES:REVIEWED IN THREE PHASES:

INTRODUCTION INTRODUCTION – Gray Phase: The panel will provide a– Gray Phase: The panel will provide abasic overview of the policy provision/issue.basic overview of the policy provision/issue.

DISCUSSIONDISCUSSION – Blue Phase: The panel will discuss a – Blue Phase: The panel will discuss anumber of the key points surrounding the policynumber of the key points surrounding the policyprovision/issue. provision/issue.

TRENDS TRENDS – Green Phase: The panel will provide– Green Phase: The panel will provideinformation relating to the past, present and future trendsinformation relating to the past, present and future trends

relating to the specific policy provision/issue.relating to the specific policy provision/issue.

AGENDAAGENDA

POLICY PROVISIONS/ISSUES TO BEPOLICY PROVISIONS/ISSUES TO BEREVIEWED BY THE PANEL:REVIEWED BY THE PANEL:

Insuring Agreements Insuring Agreements Severability Provisions – Policy / ApplicationSeverability Provisions – Policy / Application Notice ProvisionsNotice Provisions Prior & Pending LitigationPrior & Pending Litigation ContinuityContinuity Change of Control provisionsChange of Control provisions AllocationAllocation Retention Waivers Retention Waivers Policy DefinitionsPolicy Definitions

ClaimClaim LossLoss SubsidiariesSubsidiaries Insured PersonInsured Person

AGENDAAGENDA

D&OD&OINSURANCE POLICY INSURANCE POLICY PROVISIONS/ISSUESPROVISIONS/ISSUES

INSURING AGREEMENTS Directors & Officers coverage – available only when the

corporation either cannot or does not or is not allowed to indemnify, no retention applies.

Corporate Indemnification – insurer indemnifies the corporation for its obligation to indemnify the directors or officers, subject to a retention.

Entity – coverage for the entity, normally only applicable to “securities claims” and “employment claims”.

Outside Directorships – available to cover executives serving on other boards at the request of the corporation.


INSURING AGREEMENTS Differences in Public / Private forms What is full entity coverage and what are the pros and

cons? How broad or permissible can the corporate indemnity

be? What if the company is financially unable to indemnify? What is significance of “pay on behalf” language? What is difference in “continuity date” and “retroactive

date”? Why are these important?


INSURING AGREEMENT

“Side A” Only Coverage

Board Direct Side A

Concerns created by “entity coverage”

What is Order or Priority of Payments and why is it important?


SEVERABILITY PROVISIONS Severability of the Application provides that directors or

officers who were unaware that an application for coverage was provided to underwriters that included false or misleading information cannot be denied coverage because of that.

Severability of the exclusions of the policy provides that the “conduct exclusions” (deliberately illegal acts, fraud or personal profit) of one officer or director cannot be imputed to any other director or officer.


SEVERABILITY PROVISIONS Full severability - (Wedtech, SDNY, 1990; Atlantic

Permanent, 4th Cir. 1988)

Imputation to the entity

Application Materiality

Standards for determining “fraud in the application” differs by jurisdiction (e.g. Texas is favorable to the insured; New York is favorable to the Insurer)

Variations in policy applications concerning knowledge of Variations in policy applications concerning knowledge of potential claimspotential claims


SEVERABILITY PROVISIONS Entity

Specified Positions

Non – rescindable Side A

Limiting imputation wording to past executives to a 4 year period from last date of service


NOTICE PROVISIONS Claims Made or Claims Made & Reported

“Notice of Circumstances”

Some have limited automatic extensions of time to report claims – usually 30 to 60 days.

Extended Reporting/Discovery/Tail Coverage


NOTICE PROVISION

“Notice by the Insured”

“As soon as practicable”

Knowledge of claim by General Counsel or Risk Manager or equivalent

Prior/Pending Litigation Exclusion or Endorsement


NOTICE PROVISION

Bilateral/unilateral discovery

Set premium or to be determined

Notice of claim provided to agent vs insurer


PRIOR & PENDING LITIGATION PROVISION

Prior & Pending Litigation Date

Litigation not limited to D&O litigation



P/P date as of inception or backdated?

New carrier on existing limits

New limits

“Laundry List” of claims – pros and cons



Underwriter’s willingness to backdate varies depending on condition of market – hard or soft.

Becoming a necessary element for competing underwriters to obtain “new” business

Does the wording swallow up the coverage (“arising from similar facts, circumstances, situations” language)?


CONTINUITY PROVISION:

Continuity is not defined in the policy. The continuity date is the date an application that included a warranty statement was signed regarding knowledge of claims or circumstances that could give rise to a claim.



Importance of maintaining continuity

Main Form Application vs Renewal Application



Waiver of application

Automatic inclusion of public information, i.e.

Amend definition of application to ..” Public documents filed by an organization with the securities and exchange commission during the last 36 months and prior to the inception date of the policy.


CHANGE OF CONTROL PROVISION:

Change of Control/Organizational Changes

What are the triggers? Variance of triggers in policy forms.

What happens to the policy?

How this provisions effects availability of premium financing



Proxy fights

Bankruptcy

Emergence from Bankruptcy

Board changes

Security for “Old Director” decisions

Who pays the premium?

Purchase and Sale Agreement may require 1-6 years of coverage be purchased by the “Old Directors” if available in the market at a predetermined % of the annual premium



Different language in various insurers’ policies

Specific Waivers of Change of Control provisions


ALLOCATION PROVISION:

Covered & Uncovered Parties

Covered & Uncovered Claims or Allegations


ALLOCATION PROVISION: "Best Efforts" / “Relative Benefits”

Alternative Dispute Resolution

Predetermined Allocation

Coinsurance

Other Solutions


ALLOCATION PROVISION:

Entity coverage or no entity coverage

Protection of individual directors assets

Intent of Directors and Officers coverage


HAMMER CLAUSE:

Defense and Settlement Conditions

To settle or not to settle

“Dropping the hammer”


HAMMER CLAUSE Example of “Hammer” Negotiations

Hard v Soft “Hammer” Clause


HAMMER CLAUSE: Competition in market place affects insurers’

willingness to negotiate amended hammer clause.

POLICY DEFINITION - CLAIM:POLICY DEFINITION - CLAIM:

Claim includes written demand for monetary Claim includes written demand for monetary or non monetary damages and injunctive or non monetary damages and injunctive relief. A claim can also include formal civil, relief. A claim can also include formal civil, regulatory and criminal investigations and regulatory and criminal investigations and formal regulatory proceedings.formal regulatory proceedings.



o Civil and/or Criminal Investigations?Civil and/or Criminal Investigations?o Regulatory Investigations?Regulatory Investigations?o Written demand for injunctive relief?Written demand for injunctive relief?o Informal investigations?Informal investigations?o Informal regulatory proceedings?Informal regulatory proceedings?o Commenced by service of a subpoenaCommenced by service of a subpoena



The definition of claim rarely includes “oral demands” as The definition of claim rarely includes “oral demands” as there is a significant lack of documentation or proof of there is a significant lack of documentation or proof of such demand. such demand.

Also, recently carriers have been amending theAlso, recently carriers have been amending the definition of claim (as respects to Securities Claims) not to include administrative or regulatory proceedings against the company unless an Insured Person is also continuously involved in the claim.

The broader the definition of “claim”, the more diligent the insured must be in notifying the insurer of the “claim”.


POLICY DEFINITION - LOSS:POLICY DEFINITION - LOSS:

Loss includes damages,Loss includes damages,settlements, judgments andsettlements, judgments anddefense costs. defense costs.


POLICY DEFINITION - LOSS:POLICY DEFINITION - LOSS:

Punitive Damages coverage – blanket or securitiesPunitive Damages coverage – blanket or securitiesClaims only? Most favorable jurisdiction language?Claims only? Most favorable jurisdiction language?

Taxes, fines, penalties, multipleTaxes, fines, penalties, multipledamages?damages?

Disgorgement and restitution, under SOX or otherwise?Disgorgement and restitution, under SOX or otherwise?

Uninsurable matters?Uninsurable matters?

Dividends and other profit distributions excluded?Dividends and other profit distributions excluded?

Derivative demand investigative costs covered?Derivative demand investigative costs covered?

Treatment of “Bump up / Bump down” claims Treatment of “Bump up / Bump down” claims


POLICY DEFINITION - LOSS:POLICY DEFINITION - LOSS: Level 3 caseLevel 3 case Conseco caseConseco case Does Level 3 and Conseco make Securities Does Level 3 and Conseco make Securities

Coverage illusory?Coverage illusory?


POLICY DEFINITION - SUBSIDIARY:POLICY DEFINITION - SUBSIDIARY:

Subsidiary is an entity in which the named Insured Subsidiary is an entity in which the named Insured owns directly or through its subsidiaries, more than owns directly or through its subsidiaries, more than 50% of outstanding securities that represent the right 50% of outstanding securities that represent the right to vote for such entity’s to vote for such entity’s directors. The standard directors. The standard definition of Insured organization includes those definition of Insured organization includes those subsidiaries owned or controlled on the inception subsidiaries owned or controlled on the inception date of the policy. date of the policy.



Newly acquired or created subsidiaries – Newly acquired or created subsidiaries – automatic coverage, time limitations, etc.?automatic coverage, time limitations, etc.?

Joint ventures, limited partnershipsJoint ventures, limited partnerships



Trend in reducing the auto sub Trend in reducing the auto sub threshold threshold

Trend in reducing the auto sub Trend in reducing the auto sub reporting period reporting period


POLICY DEFINITION – INSURED PERSON(S):POLICY DEFINITION – INSURED PERSON(S):

Insured Person (s) includes past, present andInsured Person (s) includes past, present andfuture members of the board of directors andfuture members of the board of directors andduly elected officers of the company. Mostduly elected officers of the company. Mostpolicies also extend the coverage to all past,policies also extend the coverage to all past,present and future employees of the companypresent and future employees of the companyas respects securities claims. as respects securities claims.


POLICY DEFINITION – INSURED PERSON (S):POLICY DEFINITION – INSURED PERSON (S):

Broader definition of Insured person mayBroader definition of Insured person maydilute coverage available to D&Osdilute coverage available to D&Os

Spousal coverageSpousal coverage Claims by former directors or officers (time Claims by former directors or officers (time

limit for applicability of Insured v Insured exclusion)limit for applicability of Insured v Insured exclusion) Blanket independent contractor coverage under definition Blanket independent contractor coverage under definition

of employeeof employee Impact of partnerships and joint ventures as insuredsImpact of partnerships and joint ventures as insureds


POLICY DEFINITION – INSURED PERSON (S):POLICY DEFINITION – INSURED PERSON (S):

What is an “officer” and What is an “officer” and “director”?“director”?

Domestic Partner ExtensionDomestic Partner Extension


key d&o policy provisions/issues how they really work!

Documents

policy applications

policy provisionsissueshow

specific policy provisionissue

entity coveragewhat

discussion blue phase

introduction gray phase

trends green phase

employment claims