D&O Coverage – It’s Not Just for Ds&Os…

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Recording of this session via any media type is strictly prohibited.

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D&O Coverage – It’s Not Just for Ds&Os…

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• Sheryl MyersDirector, Risk Management American Standard Brands, Piscataway, NJ

Ms. Myers directs all of the company’s risk management needs and also oversees all claims. She was previously Manager, Risk Management for Sony Corp. of America.

• Brian J. OsiasPartner, McCarter & English, LLP, Newark, NJMr. Osias is a partner in the firm’s insurance coverage group where he regularly counsels policyholders and represents them in all manner of coverage disputes.

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What to Expect Practical Risk Management considerations. D&O Insurance in a nutshell – the A, B & Cs… Attendees will learn the basic structure of D&O

insurance policies. Identify who and what is (and is not) covered;

explore key conditions and exclusions. Attendees will gain an appreciation for some

common issues that often arise in claims & coverage disputes.

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Risk Manager’s Concerns…• What would a risk manager want to know?• Understanding technical aspects of policy.• Broker or counsel can help explain policy

coverages/exclusions. • Key differences in policies under consideration.• Broker should help compare policy provisions.• May seek review by outside counsel.

• Carrier’s willingness to pay claims.• Does carrier have a reputation of paying or resisting

claims?

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Risk Manager’s Concerns• Do we have enough insurance?• Seek a Benchmarking analysis.• Peer group comparison of coverage.• What do other similar companies have?• Only a guide – consider your company’s unique risk

profile!

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D&O Insurance – History • 1930s – Lloyds of London • Not a big seller.• Laws prohibited indemnification of D&Os.

• 1960s – Increase in M&As • Change in laws; indemnification now permitted.

• 1980s • Coverage Sides A & B.

• 1990s• Coverage Side C introduced.

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D&O Protection• Indemnification• Corporations will indemnify their officers and

directors for certain claims against them arising out of their performance of their duties.

• Corporations are prohibited from indemnifying for some claims (e.g., public policy).

• In some circumstances, corporations are unable to indemnify (bankruptcy).

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D&O Protection • D&O Policies generally protect Directors and

Officers (“in capacity” as such) against “Claims” for “Wrongful Acts.”

• D&O Policies also can protect the company against certain claims. • Narrow for public companies (often just securities

related claims). • Broader coverage for private companies.

• Coverage for Ds&Os and Company can lead to tension.

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D&O Policy Structure

• D&O often packaged with other insurance.• EPL, Crime/Fiduciary Coverages, etc.

• Entire policy may have one general set of terms & conditions and definitions.

• No standardized forms.• Can be significant variation.

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D&O Policy Structure• Typical policy components: • Declarations• Insuring Clauses• Definitions • Exclusions• Terms & Conditions

• Notice Provisions • Interrelated Wrongful Acts• Defense/Settlement

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“Claims Made” Coverage• “Claims Made” or “Claims Made & Reported?”• “Claims Made” requires only that claim be made

during the policy period or extended reporting period.• “Claims Made & Reported” requires that claim be both

made and reported during the policy period or extended reporting period.

• Claims Made & Reported is more restrictive. • Not always obvious; read the policy carefully!

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Claims Made or Claims Made & Reported?

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Claims Made or Claims Made & Reported?

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Declarations – The Basics

Next page

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Declarations – Limits & Retentions

(from previous page)

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Declarations – Key Dates• Retroactive Date• Bars claims for wrongful acts committed before the

“retro” date. • Continuity Date• Bars claims related to prior litigation that arose prior

to the continuity date.• Discovery or Extended Reporting Period (“Tail”)• Extends time to report claims made during the

discovery period but only for wrongful acts committed before the end of the policy period.

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Declarations – Key Dates• Discovery or Extended Reporting Period (“Tail”)• Not an extension!• Typically available only when insurer cancels or

renews.• Usually can purchase for a percentage of the

premium. • Run-Off Coverage• Works similar to Discovery Period. • But right to purchase only occurs upon corporate

change (e.g., takeover).

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Terms & Conditions – “Discovery Period”

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Who is an Insured?

• Definition of Directors & Officers is typically broad.• Usually includes not only the directors and

officers and high level executives but any employees – full-time, part-time, etc.

• Includes current, past and future employees.• May include foreign equivalents of D&Os for

foreign companies.

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Who is an Insured?

• May Include “Outside Entity” coverage.• Coverage for insured persons acting as D or O

or other high ranking position with an “Outside Entity” (i.e., not the Company).• Outside Entity is often confined to a non-profit or

charitable entity.• Must be serving in said capacity with knowledge

& consent of the Company.

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Definitions – “Directors and Officers”

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Three “Sides” to Coverage• Side A Coverage• Individual Directors and Officers liability.

• Side B Coverage• Reimbursement of Corporation’s indemnification

of individual Directors and Officers. • Side C Coverage• Entity liability.

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Insuring Agreements1. The Insurer shall pay the Loss of the Directors and Officers for which the Directors and Officers are not indemnified by the Company and which the Directors and Officers have become legally obligated to pay by reason of a Claim first made against the Directors and Officers during the Policy Period or, if elected, the Extended Period, and reported to the Insurer pursuant to subsection E.1. herein, for any Wrongful Act taking place prior to the end of the Policy Period.

2. The Insurer shall pay the Loss of the Company for which the Company has indemnified the Directors and Officers and which the Directors and Officers have become legally obligated to pay by reason of a Claim first made against the Directors and Officers during the Policy Period or, if elected, the Extended Period, and reported to the Insurer pursuant to subsection E.1. herein, for any Wrongful Act taking place prior to the end of the Policy Period.

3. The Insurer shall pay the Loss of the Company which the Company becomes legally obligated to pay by reason of a Claim first made against the Company during the Policy Period or, if applicable, the Extended Period, and reported to the Insurer pursuant to subsection E.1. herein, for any Wrongful Act taking place prior to the end of the Policy Period.

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Insuring Agreements – Sides A, B & C

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Other Coverages• Policy may provide other coverages.• Can be for the Company or individuals. • May be subject to sublimits.• Often added by endorsement.

• Derivative Investigation Coverage.• For the Company.• Pays for costs and fees incurred by the Company

in investigating/evaluating a shareholder derivative demand.

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Other Coverages• Preliminary Investigation Coverage.• For individuals.• Pays for costs and fees incurred in preparing for

and responding to a preliminary investigation (e.g., interview; deposition; document request) by a state or federal government entity/agency (e.g., DOJ; SEC) involving the Company or the person’s work for the Company. o May not require the allegation of a “Wrongful Act.”

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Other Coverages• Crisis Coverage.• For the Company.• In the event of a crisis event (defined), it will pay

for professionals (e.g., crisis management/public relations firm) to manage a crisis or potential crisis. o Bankruptcy announcement; death or incapacity of key

personnel; alleged scandal, etc.

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Other Coverages• Employed Lawyers Professional Coverage.• For in-house counsel only.• Must be acting for Company in capacity as a

lawyer. • Insures against acts, errors, omissions of an

employed lawyer in rendering legal services for the Company.

• May be excess to other coverage (e.g., malpractice/professional liability; E&O).

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Terms & Conditions - ADR

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Definitions – “Claim”

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Subpoena = Claim? • Syracuse University v. National Union Fire Ins. Co. of

Pittsburgh, Pa., 976 N.Y.S.2d 921 (App. Div. 2013).• State and federal subpoenas related to the investigation

of abuse allegations involving Syracuse basketball coach. • Affirming trial court’s opinion that a subpoena is a Claim.• Broad reading of the policy’s definition of claim to include the

subpoenas and grand jury investigations as “written demand[s] for non-monetary relief” and the investigations as “‘criminal proceedings for monetary or non-monetary relief which [are] commenced by: ... (ii) return of an indictment, information or similar document (in the case of a criminal proceeding).’”

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Definitions – “Loss”

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Definitions – Costs, Charges and Expenses

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Definitions – “Wrongful Act”9. Wrongful Act means any actual or alleged error, omission, misleading statement, misstatement, neglect, breach of duty or act allegedly committed or attempted by: a.any of the Directors and Officers, while acting in their capacity as such, or any matter claimed against any Director and Officer solely by reason of his or her serving in such capacity; b.any of the Directors and Officers, while acting in their capacity as a director, officer, trustee, governor, executive director or similar position of any Outside Entity where such service is with the knowledge and consent of the Company; and c.the Company, but only with respect to Insuring Clause 3. of this Coverage Section.

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Definitions – “Interrelated Wrongful Acts”

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Exclusions – “All Claims = Single Claim”

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Exclusions – “Bodily Injury / Property Damage”; “Prior Wrongful Acts”

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Exclusions – “Insured vs. Insured”

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Exclusions – “Illegal Profit or Gain”

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Exclusions – “Prior or Pending Litigation or Facts & Circumstances” “Prior Knowledge”

“Employment Related Matters”k. alleging, based upon, arising out of, attributable to, directly or indirectly resulting from, in

consequence of, or in any way involving:

i. any prior or pending litigation or administrative or regulatory proceeding, demand letter or formal or informal governmental Investigation or inquiry filed or pending on or before the Continuity Date; or

ii. any fact, circumstance, situation, transaction or event underlying or alleged in such litigation or administrative or regulatory proceeding, demand letter or formal or informal governmental investigation or inquiry;

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Terms & Conditions – “Notice of Claim”/“Notice of Circumstances”

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Terms & Conditions – “Settlement & Defense”

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Duty to Defend or to Advance Defense?• Duty to defend? To associate in defense?• Defense of advancement?• Defense costs usually waste limits.• Insured may be required to select counsel from

panel counsel list. • Allocation of defense costs between

covered/uncovered claims?• Policy may require repayment of defense

costs!

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Consent to Settle• Requires policyholder consent to settle a claim.• Consent shall not be unreasonably withheld.

• “Hammer” clauses:• If insured refuses to consent to a settlement

agreeable to both the carrier and claimant then carrier’s continued defense and potential future indemnity obligations may be capped or reduced by some %.

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Settlement Concerns • Qualcomm Inc. v. Certain Underwriters at Lloyd’s

London, 161 Cal. App. 4th 184 (2008).• California Court of Appeal held primary insurer must

actually pay limits before excess coverage is implicated.

• Policyholder cannot agree to “fill the gap” between what primary insurer is willing to pay and limits.

• Strict reading of the policy language. • Practical tip: try to get excess insurer to change

triggering language. • Excess cover is implicated if primary insurer or policyholder

pays complete primary limits.

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Settlement Concerns • Vigilant Ins. Co. v. The Bear Stearns Cos., Inc., 10

N.Y.3d 170 (2008). • New York Court of Appeals held that Bear Stearns

could not recover from its insurers its $80 million settlement payment with the SEC, NASD and NYSE where insured failed to get insurer’s consent to settle.

• Bear Sterns was a “sophisticated business entity” and acted in direct contradiction to its policies when it agreed to the settlement.

• Policies required insurer consent for settlements in excess of $5 million.

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Severability • Two distinct concepts:• Severability of exclusions:

• Protects coverage for innocent insureds despite malfeasance of other insureds.

• Severability of application:• Protects insureds for misrepresentations in the

application process. • Application is usually made a part of the policy.

• Full severability: • Only those who are at fault (committed the bad acts

or made/knew about application misreps.) lose coverage.

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Severability (cont.)• Limited severability: • All insureds lose coverage if bad acts/misreps. by key

executives (e.g., CEO, CFO, GC…).• Non-rescindable coverage:• Prohibits insurer from seeking to rescind the policy.• Provides insureds with more protection than

severability clause. • Not the norm / not easy to get.

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Shared Limits• Shared limits can lead to tension.• Competing claims by Ds&Os & Company.

• How to mitigate this concern?• Stand alone Side A coverage.• Non-rescindable Side A coverage.

• Priority of Payments provision.• Dictates order of payment. • Individuals first/company last.

• Does not completely alleviate concern• Company claims may reduce limits before other

claims surface.

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Takeaways… Read your policy – all D&O insurance is not the

same. Coverage is often broader than just the Ds&Os –

employees, the Company itself. Definition of Claim – not necessarily just lawsuits. Understand notice requirements. Timely notice is

key to coverage! Are limits adequate? Competing interests.

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Questions, Final Comments and Contact Information

Sheryl MyersDirector, Risk ManagementAmerican Standard Brands, Piscataway, NJ732.980.3042 // [email protected]

Brian J. OsiasPartnerMcCarter & English, LLP, Newark, NJ973.639.6956 // [email protected]

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D&O Coverage – It’s Not Just for Ds&Os…

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