D&o power point presentationrims 2010.10.21

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D&o power point presentationrims 2010.10.21

  1. 1. D&O Coverage: Tailoring Coverage for the Risks that Matter to YouRisk & Insurance Management Society - Chesapeake Chapter October 21, 2010
  2. 2. IntroductionI. D&O Coverage: OverviewII. Current Issues & Negotiable Terms
  3. 3. I. D&O Coverage: Overview Directors and Officers Face Significant Litigation Exposure – Where Does D&O Coverage Fit-In?:
  4. 4. D&O Coverage: Overview (cont.) Protection For Corporate Officers and Directors is Found in Four Main Areas: – The Business Judgment Rule – Exculpation Provisions – Indemnification – D&O Insurance
  5. 5. D&O Coverage: Overview (cont.) The Business Judgment Rule – The legal presumption that officers and directors have fulfilled their fiduciary duties in the absence of a showing of self-dealing or bad faith.
  6. 6. D&O Coverage: Overview (cont.) Exculpation Provisions – Many states allow corporations to include in their incorporation documents a provision stating that officers and/or directors cannot be held personally liable for their actions in the absence of a showing of self-dealing or bad faith.
  7. 7. D&O Coverage: Overview (cont.) In Addition to The Legal Protection Afforded by the Law and Corporate Documents, Companies also Typically Protect Executives from Legal Expenses and Liability Exposure Through: – Indemnification – Insurance
  8. 8. D&O Coverage: Overview (cont.) When Structuring Indemnification and Insurance Programs, it is Helpful To Keep in Mind the Types of Cases that Pose the Greatest Threat to Officers and Directors: – Securities Fraud Class Actions – Derivative Actions – SEC, DOJ, and Other Regulatory Investigations
  9. 9. D&O Coverage: Overview (cont.) Securities Fraud Class Actions – Generally brought by a sophisticated Plaintiffs’ bar. – A common example is where a company learns of a mistake or misrepresentation in its financial disclosure to investors, and indicates to those investors that it intends to restate those financial statements – resulting in a significant drop in the company’s stock price.
  10. 10. D&O Coverage: Overview (cont.) Derivative Actions – Those actions brought by shareholders on behalf of the corporation against the officers and directors for alleged breaches of fiduciary duty to the corporation.
  11. 11. D&O Coverage: Overview (cont.) SEC, DOJ, and Other Regulatory Investigations – The SEC has broad power to investigate potential securities law violations both formally and informally. • The SEC can also seek civil penalties against officers and directors. – The DOJ has the power to bring criminal charges. – Other regulatory bodies have broad investigatory powers (e.g. Food and Drug Administration)
  12. 12. D&O Coverage: Overview (cont.) Indemnification is the First Line of Defense for Corporate Officials: – Statutorily Authorized – Embodied In Corporate Documents – Generally Very Broad – Theoretically Unlimited Protection
  13. 13. D&O Coverage: Overview (cont.) Indemnification has its Limitations: – There are Times When a Corporation May Not Indemnify an Individual (e.g., barred by law) – Company Insolvency
  14. 14. D&O Coverage: Overview (cont.) Indemnification Under Maryland Law – A corporation may indemnify any director . . . • unless the act or omission of the director was material to the matter giving rise to the proceeding and: – was committed in bad faith, or – was the result of active and deliberate dishonesty; • or the director actually received an improper personal benefit in money, property, or services; • or in the case of a criminal proceeding, the director had reasonable cause to believe that the act or omission was unlawful. See Md. Code Ann., Corps. & Ass’ns §2-418(b)(1).
  15. 15. D&O Coverage: Overview (cont.) Indemnification Under Maryland Law (cont.) – Indemnification may be against judgments, penalties, fines, settlements, and reasonable expenses actually incurred by the director in connection with the proceeding. • However, if the proceeding was one by or in the right of the corporation, indemnification may not be made in respect of any proceeding in which the director shall have been adjudged to be liable to the corporation. See Md. Code Ann., Corps. & Ass’ns §2-418(b)(2).
  16. 16. D&O Coverage: Overview (cont.) Indemnification Under Maryland Law (cont.) – The termination of any proceeding by judgment, order, or settlement does not create a presumption that the director did not meet the requisite standard of conduct set forth in this subsection. – The termination of any proceeding by conviction, or a plea of nolo contendere or its equivalent, or an entry of an order of probation prior to judgment, creates a rebuttable presumption that the director did not meet the standard of conduct. See Md. Code Ann., Corps. & Ass’ns §2-418(b)(3).
  17. 17. D&O Coverage: Overview (cont.) Indemnification Under Maryland Law (cont.) – A director may not be indemnified under subsection (b) of this section in respect of any proceeding charging improper personal benefit to the director, whether or not involving action in the director’s official capacity, in which the director was adjudged to be liable on the basis that the personal benefit was improperly received. See Md. Code Ann., Corps. & Ass’ns §2-418(c).
  18. 18. D&O Coverage: Overview (cont.) D&O Coverage Provides Protection for Corporate Officials When Corporate Indemnification is Not Available – Legal prohibition – Company insolvency – Where the company chooses not to indemnify D&O Coverage Also Provides a Mechanism by Which a Corporation can be Reimbursed When it Does Provide Indemnification
  19. 19. D&O Coverage: Overview (cont.) D&O Policies Typically Provide Defense and Indemnification for: – Securities Class Actions – Shareholder Derivative Suits – Miscellaneous proceedings not covered by other traditional insurance policies (e.g., employment practices claims, regulatory investigations).
  20. 20. D&O Coverage: Overview (cont.) The Typical Insuring Clauses: 1. Side A 2. Side B 3. Side C
  21. 21. D&O Coverage: Overview (cont.) Side A Coverage: “Personal” Coverage – Reimburses individual directors and officers for losses that are not indemnified by the company (typically no retention or deductible).
  22. 22. D&O Coverage: Overview (cont.) Side A Coverage: “Personal” Coverage (cont.) – Generally, insurance company agrees to indemnify or pay on behalf of, the director or officer, all “Loss” that the individual becomes legally obligated to pay for a “Wrongful Act” committed in their capacity as an officer or director.
  23. 23. D&O Coverage: Overview (cont.) Side A Coverage: “Personal” Coverage (cont.) – Loss: • Defined in the policies, and generally includes amounts paid in judgment or settlement, as well as the costs of defense. – Generally, “Reasonable Defense Costs” includes attorneys’ fees, court costs, filing fees, expert or specialist fees – consented to in advance. • Generally excludes fines, penalties, treble/multiple damages, and matters uninsurable as a matter of law.
  24. 24. D&O Coverage: Overview (cont.) Side A Coverage: “Personal” Coverage (cont.) – Wrongful Act: • Generally defined to include any negligent act, error or omission, or breach of duty committed by the officer or director in the discharge of their duties in the capacity as director or officer. – Duty of Care – Duty of Loyalty – Duty to Disclose
  25. 25. D&O Coverage: Overview (cont.) D&O Dedicated Limit Policies – Generally a separate policy providing Side A type coverage – Provide additional/excess coverage limits – Fill potential gaps in coverage • Dedicated to officers and directors – Coverage for company’s liability will not deplete coverage. • Where the underlying D&O policy is held to be a bankruptcy asset. • Where the underlying D&O insurer becomes insolvent. • Where the underlying D&O insurer attempts to rescind coverage.
  26. 26. D&O Coverage: Overview (cont.) D&O Dedicated Limit Policies (cont.) – Side A Excess Policies • Can be structured as simply excess coverage to the Side A coverage of the underlying D&O policy.
  27. 27. D&O Coverage: Overview (cont.) D&O Dedicated Limit Policies (cont.) – Side A Difference-In-Conditions Policies • Can serve as an excess policy or drop down to the primary position if the underlying traditional D&O policy cannot, or fails to respond. – Provides broader coverage terms.
  28. 28. D&O Coverage: Overview (cont.) D&O Dedicated Limit Policies (cont.) – Independent Directors Liability Policies • Only provides coverage to independent or outside directors.
  29. 29. D&O Coverage: Overview (cont.) Side B Coverage: “Corporate Reimbursement” Coverage” – Reimburses the company for its indemnification of losses incurred by directors and officers (typically large retention or deductible). – Does not provide coverage to the company for its own liability.
  30. 30. D&O Coverage: Overview (cont.) Side C Coverage: “Entity” Coverage – Covers loss incurred by the company for claims against the company (retention). • For public companies, generally only responds to SEC related claims against the company. • Coverage for claims against the entity can erode coverage for individuals.
  31. 31. D&O Coverage: Overview (cont.) Employment Practices Liability Add-On – Sometimes added to D&O Policy by Endorsement • Generally covers officers, directors, employees and/or the company against employment-related claims brought by employees (coverage for claims by third-parties can be added). – Wrongful discharge – Failure to promote – Sexual harassment – Violations of state and federal employment and discrimination law
  32. 32. D&O Coverage: Overview (cont.) Typical Policy Features of D&O Coverage – Claims-Made Coverage • Only covers claims that are first made during the policy period (i.e. date of wrongdoing is irrelevant). – Claims-Made and Reported Coverage • Some policies also require that the claim be reported to the carrier during the same policy period.
  33. 33. D&O Coverage: Overview (cont.) Typical Policy Features (cont.) – Generally no “duty to defend” • However, they do provide coverage for defense costs and give insurer the right to associate with the defense and approve defense strategies, expenditures and settlements. • Although they do not control the defense, the insurer generally only required to reimburse “reasonable defense costs.”
  34. 34. D&O Coverage: Overview (cont.) Typical Policy Features (cont.) – “Pay-on-Behalf of” Coverage • Insurer is obligated to pay all covered loss “on behalf of the insured” (i.e. the insured does not have to pay the loss and then seek reimbursement from the insurer—this is broader than simple indemnification).
  35. 35. D&O Coverage: Overview (cont.) Typical Policy Features (cont.) – Outside Position Coverage • Coverage often provided for claims arising from directors’ and officers’ roles as directors and officers of outside entities, if service is at request of or with consent of the insured company (e.g. non-profit organizations).
  36. 36. D&O Coverage: Overview (cont.) The D&O Policy Market – No standard form means that policies vary greatly from insurer to insurer. – Important terms are usually negotiable.
  37. 37. II. Current Issues & Negotiable Terms1. Definition of “Claim”2. Conduct Exclusions3. Presumptive Indemnification4. Policy Rescission and Severability Clauses5. Definition of “Insured Person”6. Insured v. Insured Exclusion
  38. 38. Current Issues and Negotiable Terms (cont.)1. Definition of “Claim” – Civil proceedings – Written demands? – Criminal proceedings? – Administrative proceedings? – Administrative investigations?
  39. 39. Current Issues and Negotiable Terms (cont.)2. Conduct Exclusions – Coverage typically excluded for certain self-serving, egregious acts • Personal profit and advantage • Fraud • Willful violation of the law – How must such conduct be proven in order to preclude coverage • “In fact” determination • Adjudication – in underlying proceeding or in coverage action – Standard of proof will affect ability to settle claims
  40. 40. Current Issues and Negotiable Terms (cont.)3. Presumptive Indemnification – Policy requires Company to indemnify to fullest extent permitted by law. Failure or refusal to do so could result in large deductible being applied to personal coverage.
  41. 41. Current Issues and Negotiable Terms (cont.)4. Policy Rescission and Severability Clauses – With relatively recent wave of large-scale corporate scandals, D&O insurers have attempted to rescind policies based on misrepresentations in the policy application. • Issue: If misrepresentations are made in the application, whose coverage may be rescinded?
  42. 42. Current Issues and Negotiable Terms (cont.)Policy Rescission and Severability Clauses (cont.) – Severability clauses govern whether the knowledge of one insured person may be imputed to another insured person • e.g. can the knowledge of senior executives be imputed to innocent directors and officers so as to rescind their individual coverage?
  43. 43. Current Issues and Negotiable Terms (cont.)Policy Rescission and Severability Clauses (cont.) – Policyholders should seek full severability provisions that disallow the imputation of any one insured person’s knowledge to another insured person.
  44. 44. Current Issues and Negotiable Terms (cont.)5. Definition of “Insured Person” – Does the insured want coverage for more than just D’s and O’s? • Management positions (e.g. general counsel) • All employees?
  45. 45. Current Issues and Negotiable Terms (cont.)6. Insured v. Insured Exclusion – Policyholders must look for and attempt to eliminate provisions that exclude coverage for claims brought by shareholders with the assistance of a whistleblower who is an “Insured Person.”
  46. 46. ConclusionsQuestions?

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