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Sixth AnnualIn-House Counsel
Conference
General Counsel RoundtableD&O Coverage in the 21st
Century – A Survivor’s Guide to Understanding Your Coverage
22
Catherine (Kit) Chaskin, Partner, Reed Smith LLP
Chris Crawford, Senior Vice President & Regional Practice Leader, Willis Executive Risks Practice
Michael (Mickey) Green, VP, General Counsel, Vitesse Semiconductor Corporation
Monika McCarthy, fmr General Counsel, New Century Mortgage Corporation
Ronald Morrison, EVP, General Counsel, Impac Mortgage Holdings, Inc.
Moderator–Douglas Rawles, Partner, Reed Smith LLP
Presenters
33
What we will cover:The current landscape for coverageWhat your D&O policy typically looks
likeIssues that arise in the BoardroomWhen to tender a claim and why notice
is keyIssues and provisions you must
understandTop 10 take-aways!
55
Federal Securities Class Actions – Frequency of Filings 1996 to 2009
169223
177
119
182
239227
266
498
209241
173
111
216
Prepared by Stanford Law School utilizing data supplied by Securities Class Action Clearinghouse.
66
2010 D&O LandscapeThe Finance sector (53% in 2009) has
dominated securities litigation since the start of the credit crisis in 2007 Health technology and services has
overtaken Electronic technology as a secondary target
In 2009, there were more standard (non-credit or ponzi scheme) cases filed in the Ninth Circuit than any other region
32 individuals were named in FCPA enforcement actions brought by the DOJ or SECThe most for any year since the
enactment of the law in 1977* NERA Recent Trends in Securities Class Action Litigation: 2009 Year-End Update and the 2009 FCPA Enforcement Index
77
2010 D&O LandscapeDeloitte C-suite poll released 12/7/09:
37% say they are at least as concerned and 18% state they are more concerned about their company becoming the target of securities litigation than they were two years ago
Korn/Ferry’s 34th Annual Board of Directors Survey: While only 38% of respondents in 2001 stated they were finding it more difficult to recruit high-quality Directors, by 2008 the number had risen to 55%
Have you ever turned down a Board position because you felt your personal risk was too great? 59% = YES
88
THE D&O CONTRACT OVERVIEW
CLAIMS AGAINST ENTITY
CorporateBalance Sheet
Self InsuredRetention
Entity Coverage
D&O Insurance Policy
NOTINDEMNIFIABLE
Executives’Personal Assets
NO Self InsuredRetention
Executives’Personal
Asset Protection
D&O Insurance Policy
D&O CLAIMD&O CLAIM
INDEMNIFIABLE
CorporateBalance Sheet
Self InsuredRetention
CorporateReimbursement
Coverage
D&O Insurance Policy
“Side A”
“Side B”
“Side C”
99
Typical D&O Program
$1M RETENTIONNO RETENTION
Broad Form A-Side DIC CoverageDrops down to primary if:
underlying insurance or the company refuses to indemnify underlying is financially unable to indemnify underlying insurance is rescinded underlying insurance is subject to automatic stay under the
U.S. Bankruptcy Code underlying exclusions are broader than DIC exclusions
Is non-rescindable for any reason
BROAD FORM DIC(Difference in Conditions)
EXCESS A-SIDE COVERAGE
A-SIDE COVERAGE
EXECUTIVES’PERSONAL ASSETS
PROTECTION
B-SIDE COVERAGE
CORPORATEBALANCE SHEET
PROTECTION
C-SIDE COVERAGE
CORPORATEENTITY
PROTECTION(Securities Claims
only)
Annual, Aggregate Limit
+ $10 Mil
e.g., $10m - $50 Mil
Excess Independent Director Side-A Coverage
1010
Typical Key DefinitionsInsured Persons: Past, present or future duly
elected or appointed director or officerWrongful Act: Any error, misstatement,
misleading statement, act or omission or neglect or breach of duty in their capacity as such
Claim: Written demand; civil, criminal or administrative proceeding; may include formal investigation (Note: writing does not need to be a lawsuit to qualify as a “claim”)
Loss: Defense costs, damages, settlements, judgments, punitives (if insurable). No coverage for fines, penalties or taxes
1111
D&O Coverage – In the BoardroomCoverage is a “must have”Outside Directors insist on itIssues to watch for
Priority of PaymentsExcess or Separate Side-A CoverageNot all Insurers are the sameAllocation of Defense CostsAbility to select counsel of choice
1212
D&O Coverage – In the BoardroomMergers, acquisitions, spin-offs create
issues for D&O coverageDuty to reportLiabilities that stay or goLiabilities that arise from conduct prior
to separation or mergerRun-off insurance – protection for
claims made after for conduct that occurs before transaction
1313
Notice of Claims“Claims–made” coveragePolicy responds to claims first made
during policy period May also require claims to be reported in writing during policy period or within specified time after policy period – “Claims Made and Reported” coverage
1414
Timely Notice Is Critical1. Notice frequently stated as a
condition precedent to coverage
2. Failure to adhere to notice provisions can void coverage in certain jurisdictions even if the insurer wasn’t prejudiced
3. Insurer may refuse to pay defense costs incurred prior to time Claim is reported
1515
2009 Developments in Notice LawTwo Texas cases setting trend in
“claims-made” noticeFinancial Indus. Corp. v. XL Specialty Ins.
Co.: Insurer must show prejudice when denial is based upon breach of prompt-notice provision, where notice is given during the policy’s coverage period.
Prodigy Communications Corp. v. Agricultural Excess & Surplus Ins. Co.: When insured gave notice within specified reporting period, the failure to provide prompt-notice will not defeat coverage absent prejudice to the insurer.
1616
Considerations in BankruptcyLikelihood of claims being filed
Bankruptcy TrusteeCreditors’ CommitteeLitigation CommitteeStockholders seeking recovery for
elimination or reduction in the value of their holdings
Consumers/attorneys’ generalGovernment agencies
1717
Issue: Who Owns the Policy, and Who Has a Right to the Proceeds?The filing of a bankruptcy petition
operates as a stay of “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” 11 U.S.C. §362(a)(3)
Property of the estate is defined to include “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. §541(a)
1818
Issue: Who Owns the Policy, and Who Has a Right to the Proceeds?Purchased by CompanyOwned by Company (even though the
directors and officers may be the intended beneficiaries)
Policies typically property of the estate, but proceeds of policies may not be. Key: What claims are being asserted,
against whom, by whom?
1919
Issue: Who Owns the Policy, and Who Has a Right to the Proceeds?In the event of a Loss arising from a Claim
or Claims for which payment is due under the provisions of this policy, then the Underwriter shall:first, pay such non-indemnifiable Loss for
which coverage is provided under the Directors & Officers Liability (Individual) Section of this policy, and
then, with respect to whatever remaining amount of the Limit of Liability is available after payment of such non- indemnifiable Loss, at the written request of the chief executive officer of the Entity, either pay or withhold payment of such other Loss for which coverage is provided under this policy…
2020
Rescission of D&O PolicyInsurer argues that the policy is void
ab initio, or from the beginning.Conceptually, the policy never existed.CONTEXT: Where insured knowingly in
bad faith made a false representation or omission that was material to the insured risk in the application for coverage.
2121
Common bases for rescission:False statements submitted in or in conjunction with the application, especially with respect to financial statements.e.g., “Cooking the books”
Failure to disclose knowledge of potential claims.
2222
Obligation to DiscloseGenerally, the insured has no affirmative obligation to volunteer information not requested by the insurer.
The insured should not, however, withhold responsive information -- it can be argued that it was done in bad faith with the intent to deceive.
2323
SeverabilityTip to avoid rescission:
The insurer’s ability to avoid a policy ab initio may or may not be limited by language in the policy providing that knowledge of a material misrepresentation or omission will not be imputed to innocent Directors or Officers
It is important to negotiate a severability clause
2424
Top Ten Take-Aways1. Make sure your team understands
policy notice requirements and has a plan in place to meet them, early!
2. When you make a recommendation to place D&O insurance, know your audience in the boardroom and have your data ready.
3. Always compare current operations versus limits—too little coverage can create problems.
2525
Top Ten Take-Aways4. Anticipate and plan against
coverage gaps that might occur as a result of corporate transactions.
5. Make sure that your excess exhaustion language gives you flexibility in settling cases.
6. Make sure that your broker understands the risks and coverage needs.
2626
Top Ten Take-Aways7. Customize your coverage as much
as possible and select your carriers strategically.
8. Carefully review the application materials and make sure disclosures are accurate.
9. Protect the policy with good severability language – try to prevent one “bad apple” from spoiling the whole bunch.
2727
Top Ten Take-Aways10.D&O insurance is an
asset that should be used; don’t treat it like a collectible not to be touched!
2929
Douglas Rawles, Reed Smith [email protected] , 213-457-8128
Kit Chaskin, Reed Smith [email protected], 312-207-6478
Chris Crawford, Willis Executive Risks [email protected], 213-607-6294
Mickey Green, Vitesse Semiconductor [email protected], 805-388-7541
Monika McCarthy, New Century Liquidating [email protected], 949-517-1725
Ron Morrison, Impac Mortgage Holdings, [email protected], 949-475-
3942
Contact Information