A Potpourri of Interesting California Insurance Coverage Decisions
0 Comments
Permalink |
Still on trial, but I did have time this afternoon to read this interesting piece, summarizing a number of interesting appellate decisions over the past year from California courts on a range of insurance coverage issues, running from post-claim underwriting of health insurance to the scope of coverage granted by directors and officers policies. The cases include one that provides an interesting analysis of the scope of the attorney-client privilege in the context of insurance, an issue I have talked about at some length in the past on this blog. You can find the article right here. For those of you interested in the subjects covered by this blog, it is probably a worthwhile read.
On Directors and Officers Insurance
0 Comments
Permalink |
Earlier in the week, I promised to pass along over the course of the week some interesting articles on insurance coverage issues that I had been reading, and here we are, the end of the week already, and I haven’t done so, having been waylaid along the way by breaking news like the Ninth Circuit’s stay of the ruling that San Francisco’s health insurance ordinance was preempted. So in this post, I will pass along two more of the articles, both having to do with directors and officers insurance, a topic that I have mentioned in the past often raises problems for practitioners and clients, particularly in terms of understanding the scope of the coverage it grants and the nature of its exclusions. The first is this outstanding article here, laying out a road map for in-house counsel at publicly traded corporations over how to protect themselves from the various liability traps that have appeared for such corporate lawyers by navigating them through the ins and outs of the insurance coverage that may be available to them in that role. The article explains that many corporate counsel faced with problems from backdating inquiries and similar exposures will not in fact be protected by the directors and officers insurance purchased by their employers, and instead need to have their companies purchase a stand alone policy directed at covering the unique risks faced by in-house counsel to protect them against all of the investigations and lawsuits written up on the front pages of the business pages.
The second is this terrific interview here, in the Metropolitan Corporate Counsel, that really breaks down the structure of directors and officers insurance and the variables at play in obtaining it. One of the things I liked best about the article is that it reinforces the same point I often make when discussing directors and officers coverage and protection for people serving in that role, as I did here in this post, which is that directors and officers need to protect themselves by creating two separate lines of protection: first, they need to be guaranteed indemnification under the company’s by-laws against claims filed against them in their role as directors and officers, and then second they need to be protected as well by directors and officers insurance purchased by the company. In that way, the indemnification agreement can protect them against claims that might fall into exclusions or other gaps in the directors and officers coverage, thus keeping them free from personal exposure, and the insurance can protect them should the company go belly up or otherwise fall down on its obligation to indemnify them.
And this last point leads me to another topic that has crossed my path recently, namely the need to make sure that former directors and officers of public companies can rest their heads comfortably at night, without tossing and turning worrying about the possibility that their prior service as corporate officers might come back to haunt them, in the form of being named as a defendant in suits based on events that took place while they served on a board. Given the headlines in the papers and the increased risks of such service, one can understand how former board members may be concerned about personal liability after leaving a board. One answer to their concern is policies targeted directly at the risks and exposures of retired or former directors and officers, written for the express purpose of insuring them against claims instituted after they stop serving in that role. In much the same way that, as noted above, directors and officers insurance for current board members provides an additional level of shielding from potential personal liability, this product does the same thing for board members after they stop serving; one company providing the product, and more information on this type of insurance product, is here.
Disgorgement, Directors and Officers Insurance and the Meaning of Loss
0 Comments
Permalink |
Ten, twenty years ago, insurance coverage litigation was predominately about broad issues and big ticket items, about the extent of insurance coverage across decades of policies for long term environmental pollution or for tens of thousands of asbestos related bodily injury claims. The actual coverage issues themselves tended to be of a big picture nature - such as whether years of dumping of pollutants was an accident for purposes of insurance policies, for instance - and were frequently not heavily focused on very narrow and highly technical aspects of policy language. Insurance coverage litigation today is, in contrast, much narrower in its focus, much more technical (see my post here, for example, about the years I once spent litigating the effect on coverage of the absence of the letter “s” from a particular provision in an insurance policy); it’s not necessarily better or worse than the whole forest picture cases of the past, just different.
A perfect example is in this (very good) article on the subject of whether disgorgement or restitution constitutes loss covered by directors and officers insurance. As the article explains, the issue revolves around the question of whether any particular recovery from directors and officers should fall within a policy’s specific definition of loss - these types of policies typically cover “loss” as defined in the policy, rather than damages, as is typically covered under liability policies - and on whether the exact recovery from the directors and officers in the particular claim at issue fits that definition.
For insurance coverage lawyers, it’s the kind of thing that is fun to fight over, but it is definitely the type of dispute where you are really focusing on a particular tree in the forest, and not (to happily and intentionally mix my metaphors) on a bigger picture. It is also the type of issue that shows why directors and officers insurance is often its own little planet when it comes to evaluating insurance coverage, because this particular issue is driven by the fact that the structure of and coverage under directors and officers policies focuses on the defined term loss. Business liability coverages, in contrast, do not center coverage on this concept, and instead are built around coverage for damages, and the question of whether disgorgement or restitution can constitute damages for purposes of such policies is quite different than the question of whether or not they constitute loss for purposes of directors and officers policies.
Directors and Officers Insurance, Backdating and Effective Coverage Counsel
0 Comments
Permalink |
Sometimes when I give seminars on directors and officers coverage, I like to pass along a story I once heard of a law professor who gives his students what he considers an impossible hypothetical, namely, how would you respond to a client who walks in the door saying that she has been asked to join a board of directors and needs to know whether the company’s directors and officers insurance is sufficient protection for her. The reason the hypothetical is impossible, the professor posits, is because no one can say whether the directors and officers policy is sufficient in the abstract, and the scope of its coverage can only be understood by waiting to see the latest theories of liability being asserted against directors, and then examining how insurers are responding to them under the language of the directors and officers policies that they issue.
Now I have always thought that story overstates the case a little bit, in that certainly most areas of directors and officers exposure are sufficiently well developed that one can look at a directors and officers policy and provide a present or future board member with at least some general sense of the scope of their insurance protection. This is, after all, why people and companies hire insurance coverage lawyers: because they have the experience and knowledge base to understand a policy and provide some guidance, even in the abstract, as to what it covers and what it does not.
That said though, the story I noted above rang clearly in my head - and rang true - the other day when I came across a New York Times piece (only available by subscription or to those of you who still have Friday’s paper lying about) on the expanding risk of personal liability for directors based on backdated option grants. Two things jumped out at me. The first is that if there was ever an object lesson as to the need for directors and officers coverage, and why no one should ever leave home for a board meeting without it, this is it. Counsel to board members must look in advance, preferably at each renewal, at the scope of coverage being acquired for directors and officers exposures and the potential exposures of the board members, and make sure that the best product available on the market, the one that is best suited for those board members and their exposure risks, is obtained.
The second thing that really drew my attention was that the story fit perfectly with the law professor’s hypothetical, although in a way that may reflect insurers being at risk as much as the directors. To what extent are lawsuits and liabilities arising out of this newest scandal, if that is in fact what we should call it, within the coverages provided by directors and officers policies, most of which were drafted before the expansion of this fast growing risk? Does it fit within standard coverages that were already in play, or within standard exclusions already contained in the policies? Or is it a risk of a nature no one anticipated, and insurers are sitting there with policies that don’t have language that controls this risk? The answers to these questions are going to make a big difference in who actually ends up paying if directors are personally liable for these type of stock option manipulations - the officers themselves (or the companies they serve if they are obligated to indemnify the directors) or the insurers who issued directors and officers policies to those companies.
More on Who Should Pay for the Defense of Corporate Officers and Directors
0 Comments
Permalink |
Looks like I was not the only one intriqued by the article earlier in the week in the New York Times about companies who stop paying the legal bills of their officers, directors or employees, and the effect it has on the affected individuals. The wired gc talks about it here http://www.wiredgc.com/2006/04/17/corporate-legal-defense-fees-and-cooperation/.
This is one of those issues where your take on it seems to depend on where you sit. As my earlier posting on the subject showed, it illustrated to me the need for officers and directors to be proactive in ensuring that the company's bylaws and its directors and officers coverage work in tandem to protect them as much as possible from personally incurring substantial legal fees.
Funding the Defense of Corporate Directors and Officers
0 Comments
Permalink |
Directors and officers policies generally require an insurer to pay the defense costs incurred by a covered corporate officer when a claim is made against her or him. The insurer in that circumstance does not actually provide a defense, but instead, under the terms of the policies, normally must reimburse either the officer for his defense costs or the company itself, if the company is paying the defense bill. I have written and spoken on this point elsewhere, http://www.mccormackfirm.com/pubs/WhatEveryBusinessLawyer.pdf, and have mentioned that a corporate officer or director's best proactive plan is to both have such coverage and ensure that the company bylaws require indemnification; this provides directors and officers with two sources to pay the high legal bills that are often incurred in the types of cases brought against them. Although not directly on point, in the New York Times today is an interesting article about the impact of having to fund their own defense on corporate officers and employees who are charged with criminal wrongdoing, http://www.nytimes.com/2006/04/17/business/17legal.html?_r=1&oref=slogin.