Insurers Too Often Want to Weasel Out of the D&O Insurance They Sold.

Fortunately, they don't always succeed, as evidenced by the recent decision discussed below.

I have returned from vacation and a lot of work that has kept me away from posting. But I am hopefully back in the swing of things now.

One of the many ways that some insurance companies try to avoid honoring their obligations under D&O insurance policies is to claim that one of the many insureds included within the coverage of the policy took some action that assisted the plaintiffs in the lawsuit against the company and its directors and officers. In doing so, they rely upon the insured vs. insured exclusion. That exclusion is frequently called by way of shorthand the IVI exclusion.

It is a good thing that so many people are insureds under the policy because of the need for a company to protect as many officers and directors as possible. But it is a bad thing when one of the numerous insureds claims to have been hurt by the others or even cooperates with the plaintiffs, thus arguably triggering the IVI exclusion. I litigated one such suit several years ago when the only thing two former officers of an indirect subsidiary of the company being sued -- who were insureds under the breadth of the policy's coverage -- did was to talk by phone for about 15 minutes to the plaintiff's attorney. (More about that below). When one insured participates or assists the plaintiffs, many carriers will seek to deny coverage to the entire group of insureds (the company and its directors and officers) based upon the IVI exclusion.

Fortunately, not all courts are willing to buy into the insurer party line. In the recently issued decision of Chartrand v. Illinois Union Insurance Co. et al., No. 08-5805, 2009 WL 2776484 (N.D. Cal. Aug. 28, 2009), the federal district court in California ruled that the carrier, Illinois Union, was not entitled to summary judgment in its favor and instead granted summary judgment in favor of the insureds. In this case, one of the plaintiffs was a new investor in the insured company being sued who claimed that he (and the other investor poaintiffs) had paid too much for the company because of alleged wrongdoings and mis-statements by the former owners. The problem was that he had recently been appointed chairman of the company and thus was now an insured under the policy and was suing other insureds, the former officers. The other investor-plaintiffs were not directors or officers and thus were not insureds under the policy.

The court gave short shrift to Illinois Union's argument that its entire coverage obligation was voided because one of many plaintiffs was an insured. The court held that only the costs allocable to the defense of the claims by that single plaintiff insured were not covered under the policy and that the duty to defend and pay defense costs for the remainder existed. Given that most defense costs in these types of lawsuits go to the defense of the entire action and not to the claim of a single claimant, the practical reality is that the insured defendants will likely be entitled to virtually all of their defense costs.

The case that I litigated, mentioned above, was Harris v. Gulf Insurance Co., 297 F.Supp 2d 1220 (ND Cal) 2003). The facts upon which the carrier predicated its denial of coverage were even slimmer than those in the Illinois Union case. In Harris v. Gulf, two former officers of indirect subsidiaries of the insured, who were not parties to the litigation against other former directors, agreed to spoke with and did briefly speak with an investigator for the suing plaintiffs. That was all they did. Not much assistance but it was enough for Gulf to try to defeat all coverage for all of the defendant officers and directors who were sued. No evidence existed that the two former officers who spoke with the investigator intended to help or aid the prosecution of the litigation or were going to benefit in any way. The district court held that the critical fact that was missing that was required to sustain Illinois Union's denial of coverage was any intent by the two former officer-insureds to obtain any benefit whatever from their cooperation. The court accordingly granted summary judgment for the policyholders and ordered Gulf to pay the defense costs of the litigation against the directors and officers. The court also held that allowing the draconian interpretation asserted by Gulf was dangerously close to inviting a violation of public policy.

For reasons that were never clear, Gulf took this case to the Ninth Circuit, apparently assuming the pro-insured decison would be reversed and taken off of the books. Gulf erred in its assessment. The Ninth Circuit, rather, affirmed the district court in an unpublished slip opinion, the case settled shortly thereafter, and the decision by the district court remains good law today.

The moral of these two cases is simple: when the stakes are high, as they most always are in these types of D&O coverage disputes, an insured needs to be ever vigilant and perhaps aggressive when dealing with its carriers as the carriers will often themselves be quite aggressive in seeking to deny coverage.

Take Care of Your Director's and Officer's Insurance Needs

I know I am on vacation. But in checking my email deliveries this morning, I saw yet another article that made me think about the need of corporate risk managers (or whoever is tasked with purchasing D & O insurance)to think of all possibilities and permutations of those seemingly never-ending lawsuits against Ds& Os.

I saw this morning that the Ds & Os of Lyondell Corporation, now in bankruptcy,are facing problems getting the coverage that the company purchased to protect them. The creditors committee, in large part one of the instigators of the suits against them, has asked the bankruptcy court for some protection against the use of the insurance on behalf of the directors because, the argument runs, that insurance is the asset of the estate. Of course, we know that the company, like almost all companies, primarily acquired the insurance to protect its Ds and Os, and not itself, except to the extent it was legally obligated to indemnify them. With bankruptcy,that is now impossible without much effort.

So along come the creditors and try to pressure the Ds & Os with the threat of limiting their coverage. This may be perfectly proper in love and war and I am not castigating them for pursuing whatever rights they may have under those policies. But this effort demonstrates that it is not only the insurers that can cause a company's directors and officers to forego the coverage they thought they had to protect themselves.

There is an important lesson here. When the company is acquiring its D&O coverage (or when a potential director is reviewing the coverage that has been obtained for her protection), it needs to evaluate exactly what happens in the event of bankruptcy. It needs to negotiate, if at all possible, for contractual clauses that provide coverage for the Ds and Os separately and independantly and that cannot be interfered with by the Company in the event of its bankruptcy, and thus not by the creditors who now control the fate of the company.

Remember, that D&O coverage, unlike general liability policies, are not very uniform and diffent companies offer different terms either by endorsement or even within the basic form itself.

There are many issues with D&O coverage that need to be thought about and negotiated. This is just one twist to keep in mind.

Back-Up Protection for Your D&O Coverage Needs

If you are in charge of purchasing insurance for your comany's directors and officers and you want to keep them happy, you might be very interested in this idea developed by Peter Taffae, Managing Director of ExecutivePerils, Inc.

As reported by Dan Reynolds in the August 2009 edition of Risk & Insurance,

To hear Peter Taffae tell it, he started to get a hunch a little over a year ago that big changes were coming to companies in the insurance sector. Red flags were beginning to go up around American International Group Inc. and some of the sharper people in finance felt that an economic crisis was coming to some of the nation's most important underwriters.

That's when it hit Taffae, a former underwriter himself and current managing director for the Los Angeles-based wholesale broker ExecutivePerils, Inc. Why not give insureds a little more assurance in the realm of their liability coverage?

What Taffae came up with was what he calls the "supercontinuity option." For the price of pennies on the overall D&O premium for the relevant layer, the insured gets the option of switching D&O coverage to a backup carrier if the primary carrier on the insured's first D&O layer suffers a crippling ratings downgrade.

Click here to read complete article.

What a great idea. I bet that not a lot of companies or their brokers are thinking in this manner. I have no idea of what the true costs may be for this protection but I bet that the people who your company wants to get and retain as directors and officers will surely sleep a lot better at night knowing that this double protection is in place.