2012 PLUS D&O Symposium Developments in D&O Coverage February 9, 2012 9:00AM to 10:30AM New York - February 8-9, 2012
Download ReportTranscript 2012 PLUS D&O Symposium Developments in D&O Coverage February 9, 2012 9:00AM to 10:30AM New York - February 8-9, 2012
Slide 1
2012 PLUS D&O Symposium
Developments in D&O
Coverage
February 9, 2012
9:00AM to 10:30AM
New York - February 8-9, 2012
Slide 2
Developments in D&O Coverage
MODERATOR:
• Susanne Mast Murray, Alliant Insurance Services
– Insurance Broker
PANELISTS:
• Matthew Shulman, Arch Insurance Company
– Insurance Company Underwriting Executive
• Carolyn Rosenberg, Reed Smith
– Policy holder counsel
Slide 3
Agenda
• Investigations as covered claims
• Loss includes coverage for fines and penalties
• In-Fill for denial of indemnification
• Waiver of subrogation rights
• Deletion of the “Prior Notice” exclusion
• Deletion of the “Pollution” exclusion
3
Slide 4
Coverage for Investigations
The definition of Claim in a typical D&O policy provides coverage for
administrative and regulatory proceedings brought “against” Insureds
(among other things). Some also provide coverage for regulatory or
other external investigations as well:
• when the investigations are “formal”; and
• when the investigation targets an Insured Person (and not the entity).
4
Slide 5
Coverage for Investigations
• How does investigations coverage differ between Insured Persons and
the Insured Entity? Is there an allocation issue?
• In the most recent D&O policies, third party investigations coverage
has been further broadened:
– Example: informal investigations involving Insured Persons prior to being
identified as a target
5
Slide 6
Coverage for Internal Investigations
• Internal investigations have not been considered claims under a D&O
policy because they are not done in defense of an actual claim, but
instead are generally conducted by the company to determine
whether wrongdoing was / is occurring and whether to bring a claim
based on the findings of the investigation (prosecuting rather than
defending a claim)
• D&O policies have been evolving in this area as well. Coverage has
been extended to include coverage for certain internal investigations:
6
Slide 7
Coverage for Internal Investigations
• Shareholder derivative demands
• Special litigation committees
• Preliminary investigations or inquiries
– into whistleblower allegations
– Based on internal audit results
• Do these expansions unduly water down the product?
7
Slide 8
Fines and Penalties Coverage
• The definition of Loss generally includes damages, judgments,
settlements and defense costs. Over time this has been expanded to
also include coverage for punitive, exemplary and multiplied
damages, coverage for pre and post judgment interest, and other
discrete elements of out of pocket costs.
• The definition of Loss on most D&O policies historically had a much
more detailed listing of what Loss did not include, and this always
listed fines, penalties and taxes.
8
Slide 9
Fines and Penalties Coverage
• Coverage for fines and penalties has evolved to include specific
portions of the Foreign Corrupt Practices Act (but not all sections) and
to include coverage for fines and penalties outside the U.S. if such
damages would have been covered loss if brought in the U.S.
• Now it can include broader coverage (not limited to any particular
law or regulation):
– If insurable by law
– If neither intentional nor willful
– If a personal obligation of an Insured Person
9
Slide 10
Coverage for Other Types of Damages
• Is there coverage under most D&O policies for disgorgement or the
return of monies from an Insured Person?
– Example: 304A Claw back scenario
• Where does public policy come into play?
Slide 11
What happens when indemnification is
denied?
Traditional D&O policies include coverage for
• non-indemnifiable loss (generally referred to as Side A),
• indemnifiable loss (generally referred to as Side B), and
• entity coverage (generally referred to as Side C).
Self Insured Retentions apply to indemnifiable loss and entity coverage
and D&O policies typically include a “presumption of
indemnification”.
11
Slide 12
What happens when indemnification is
denied?
D&O insurance has evolved to include coverage for wrongful denial of
indemnification and to delete the presumption of indemnification
– Failure or refusal for any reason (not just financial insolvency)
– Insurer will pay within retention with "express corporate obligation to
repay“
– Insurer will recognize payment as eroding the retention
• How does this mesh with Side A DIC coverage offering the same
protection?
12
Slide 13
Subrogation Rights – Can the Insurer seek
repayment from an Insured?
• Subrogation clauses in D&O policies provide that in the event of a
payment under the policy, the Insurer shall be subrogated to the
Insured’s right of recovery from any person or entity who may be
potentially responsible for the loss.
• Does this leave an Insured Person vulnerable to a claim by the Insurer
for recovery of amounts paid out under the policy?
• Should an Insurer ever subrogate against an Insured?
13
Slide 14
Partial or Complete Waiver
of Subrogation Rights
• The Subrogation Clause has been modified in several alternative ways:
– limit or even to eliminate their rights to subrogate against Insureds
under the policy.
– waive all right of subrogation against Insured Persons.
– limit their subrogation rights as against Insureds to be available only
in the event that a conduct exclusion is triggered.
• How does subrogation differ from recoupment of advanced defense
costs?
14
Slide 15
Narrowing or Deleting Exclusions
• There are certain exclusions that are standard on D&O policies, but
that have been eroded and recently even deleted entirely in some
instances. Three examples are the following:
• Prior Notice exclusion
• Pollution exclusion
• Conduct exclusion(s)
15
Slide 16
Narrowing or Deleting Exclusions
Prior Notice exclusion:
– This exclusion is intended to eliminate coverage for claims made
during the pendency of the current policy that are related to claims
made prior to the inception date of the current policy. Related
claims are considered a single claim and date back to the first such
claim. Problems:
• Was the previously noticed claim a D&O claim?
• Was it covered or accepted for coverage when previously
noticed?
16
Slide 17
Narrowing or Deleting Exclusions
Pollution exclusion:
• D&O policies have historically had an absolute pollution exclusion,
with a very broad preamble (“alleging, arising out of, based upon or
attributable to, directly or indirectly“) but this absolute exclusion
meant that even securities claims were excluded. Exceptions have
evolved, including:
•
•
•
•
•
Side A non-indemnifiable loss carve back
Securities claim carve back
Independent directors carve back
Insured Persons carve back
Deletion of the exclusion entirely
17
Slide 18
Narrowing or Deleting Exclusions
• Conduct exclusion(s)
• D&O policies traditional include one or more conduct exclusions, that
eliminate coverage for some of the following wrongful conduct:
fraudulent, dishonest, criminal, malicious acts, willful violation of
statute, illegal personal profit, remuneration or advantage.
• The standard necessary to trigger the exclusion(s) has been
continually narrowed, from “in fact”, to “final adjudication” to “final
adjudication in the underlying proceeding” to “final adjudication in
the underlying proceeding, but even then not applying to defense
costs, indemnifiable loss or independent directors.
18
Slide 19
Change in Control
• When there is a change in control of an Insured Entity (such as a
merger into another, or sale of substantially all assets), D&O policies
typically trip into run off for the remainder of the policy period
(covering acts up to the change in control but not afterwards)
• Insurance considerations with a change in control generally focus on
ensuring coverage (somewhere) for past acts, and ensuring coverage
(somewhere) for acts going forward.
Slide 20
Change in Control
• Generally, Insureds purchase a separate tail or run off policy for 3-6
years to insure all prior acts, and a separate policy with no prior acts
coverage going forward (so they are starting with a clean slate).
• Are there potential gaps between the tail and the go forward?
• Interplay between the prior acts exclusion on one and the go forward
exclusion on the other.
Slide 21
D&O Coverage Evolution
• Is coverage too broad?
• Limits are stretched to pay for this expanded coverage
• Does the board or the officers (or the shareholders) expect coverage
for fines and penalties or for pollution, under their D&O policy
• What’s next?
21
Slide 22
Questions?
• Submit questions for this panel to:
[email protected]
22
2012 PLUS D&O Symposium
Developments in D&O
Coverage
February 9, 2012
9:00AM to 10:30AM
New York - February 8-9, 2012
Slide 2
Developments in D&O Coverage
MODERATOR:
• Susanne Mast Murray, Alliant Insurance Services
– Insurance Broker
PANELISTS:
• Matthew Shulman, Arch Insurance Company
– Insurance Company Underwriting Executive
• Carolyn Rosenberg, Reed Smith
– Policy holder counsel
Slide 3
Agenda
• Investigations as covered claims
• Loss includes coverage for fines and penalties
• In-Fill for denial of indemnification
• Waiver of subrogation rights
• Deletion of the “Prior Notice” exclusion
• Deletion of the “Pollution” exclusion
3
Slide 4
Coverage for Investigations
The definition of Claim in a typical D&O policy provides coverage for
administrative and regulatory proceedings brought “against” Insureds
(among other things). Some also provide coverage for regulatory or
other external investigations as well:
• when the investigations are “formal”; and
• when the investigation targets an Insured Person (and not the entity).
4
Slide 5
Coverage for Investigations
• How does investigations coverage differ between Insured Persons and
the Insured Entity? Is there an allocation issue?
• In the most recent D&O policies, third party investigations coverage
has been further broadened:
– Example: informal investigations involving Insured Persons prior to being
identified as a target
5
Slide 6
Coverage for Internal Investigations
• Internal investigations have not been considered claims under a D&O
policy because they are not done in defense of an actual claim, but
instead are generally conducted by the company to determine
whether wrongdoing was / is occurring and whether to bring a claim
based on the findings of the investigation (prosecuting rather than
defending a claim)
• D&O policies have been evolving in this area as well. Coverage has
been extended to include coverage for certain internal investigations:
6
Slide 7
Coverage for Internal Investigations
• Shareholder derivative demands
• Special litigation committees
• Preliminary investigations or inquiries
– into whistleblower allegations
– Based on internal audit results
• Do these expansions unduly water down the product?
7
Slide 8
Fines and Penalties Coverage
• The definition of Loss generally includes damages, judgments,
settlements and defense costs. Over time this has been expanded to
also include coverage for punitive, exemplary and multiplied
damages, coverage for pre and post judgment interest, and other
discrete elements of out of pocket costs.
• The definition of Loss on most D&O policies historically had a much
more detailed listing of what Loss did not include, and this always
listed fines, penalties and taxes.
8
Slide 9
Fines and Penalties Coverage
• Coverage for fines and penalties has evolved to include specific
portions of the Foreign Corrupt Practices Act (but not all sections) and
to include coverage for fines and penalties outside the U.S. if such
damages would have been covered loss if brought in the U.S.
• Now it can include broader coverage (not limited to any particular
law or regulation):
– If insurable by law
– If neither intentional nor willful
– If a personal obligation of an Insured Person
9
Slide 10
Coverage for Other Types of Damages
• Is there coverage under most D&O policies for disgorgement or the
return of monies from an Insured Person?
– Example: 304A Claw back scenario
• Where does public policy come into play?
Slide 11
What happens when indemnification is
denied?
Traditional D&O policies include coverage for
• non-indemnifiable loss (generally referred to as Side A),
• indemnifiable loss (generally referred to as Side B), and
• entity coverage (generally referred to as Side C).
Self Insured Retentions apply to indemnifiable loss and entity coverage
and D&O policies typically include a “presumption of
indemnification”.
11
Slide 12
What happens when indemnification is
denied?
D&O insurance has evolved to include coverage for wrongful denial of
indemnification and to delete the presumption of indemnification
– Failure or refusal for any reason (not just financial insolvency)
– Insurer will pay within retention with "express corporate obligation to
repay“
– Insurer will recognize payment as eroding the retention
• How does this mesh with Side A DIC coverage offering the same
protection?
12
Slide 13
Subrogation Rights – Can the Insurer seek
repayment from an Insured?
• Subrogation clauses in D&O policies provide that in the event of a
payment under the policy, the Insurer shall be subrogated to the
Insured’s right of recovery from any person or entity who may be
potentially responsible for the loss.
• Does this leave an Insured Person vulnerable to a claim by the Insurer
for recovery of amounts paid out under the policy?
• Should an Insurer ever subrogate against an Insured?
13
Slide 14
Partial or Complete Waiver
of Subrogation Rights
• The Subrogation Clause has been modified in several alternative ways:
– limit or even to eliminate their rights to subrogate against Insureds
under the policy.
– waive all right of subrogation against Insured Persons.
– limit their subrogation rights as against Insureds to be available only
in the event that a conduct exclusion is triggered.
• How does subrogation differ from recoupment of advanced defense
costs?
14
Slide 15
Narrowing or Deleting Exclusions
• There are certain exclusions that are standard on D&O policies, but
that have been eroded and recently even deleted entirely in some
instances. Three examples are the following:
• Prior Notice exclusion
• Pollution exclusion
• Conduct exclusion(s)
15
Slide 16
Narrowing or Deleting Exclusions
Prior Notice exclusion:
– This exclusion is intended to eliminate coverage for claims made
during the pendency of the current policy that are related to claims
made prior to the inception date of the current policy. Related
claims are considered a single claim and date back to the first such
claim. Problems:
• Was the previously noticed claim a D&O claim?
• Was it covered or accepted for coverage when previously
noticed?
16
Slide 17
Narrowing or Deleting Exclusions
Pollution exclusion:
• D&O policies have historically had an absolute pollution exclusion,
with a very broad preamble (“alleging, arising out of, based upon or
attributable to, directly or indirectly“) but this absolute exclusion
meant that even securities claims were excluded. Exceptions have
evolved, including:
•
•
•
•
•
Side A non-indemnifiable loss carve back
Securities claim carve back
Independent directors carve back
Insured Persons carve back
Deletion of the exclusion entirely
17
Slide 18
Narrowing or Deleting Exclusions
• Conduct exclusion(s)
• D&O policies traditional include one or more conduct exclusions, that
eliminate coverage for some of the following wrongful conduct:
fraudulent, dishonest, criminal, malicious acts, willful violation of
statute, illegal personal profit, remuneration or advantage.
• The standard necessary to trigger the exclusion(s) has been
continually narrowed, from “in fact”, to “final adjudication” to “final
adjudication in the underlying proceeding” to “final adjudication in
the underlying proceeding, but even then not applying to defense
costs, indemnifiable loss or independent directors.
18
Slide 19
Change in Control
• When there is a change in control of an Insured Entity (such as a
merger into another, or sale of substantially all assets), D&O policies
typically trip into run off for the remainder of the policy period
(covering acts up to the change in control but not afterwards)
• Insurance considerations with a change in control generally focus on
ensuring coverage (somewhere) for past acts, and ensuring coverage
(somewhere) for acts going forward.
Slide 20
Change in Control
• Generally, Insureds purchase a separate tail or run off policy for 3-6
years to insure all prior acts, and a separate policy with no prior acts
coverage going forward (so they are starting with a clean slate).
• Are there potential gaps between the tail and the go forward?
• Interplay between the prior acts exclusion on one and the go forward
exclusion on the other.
Slide 21
D&O Coverage Evolution
• Is coverage too broad?
• Limits are stretched to pay for this expanded coverage
• Does the board or the officers (or the shareholders) expect coverage
for fines and penalties or for pollution, under their D&O policy
• What’s next?
21
Slide 22
Questions?
• Submit questions for this panel to:
[email protected]
22