Beware Of Insurer D&O Rescissions, Law Firm Warns

William G. Passannante, of Anderson Kill said, "There are a tremendous number of rescission claims in the D& O area. He said he had heard but not confirmed that Chubb insurance of Warren, N.J. had brought as many as 100 rescission claims.

A Chubb spokesman did not provide specific numbers but stated, "His [Mr. Passannante's] statement is false and his number is wildly exaggerated."

Mr. Passannante represented Tyco's former Chief Executive Officer Dennis Kozlowski who successfully battled Chubb subsidiary Federal Insurance Company in the courts to have them pay his defense costs after the insurer attempted to rescind his D &O liability coverage.

Ms. Murray, discussing the kind of things that bring on claims against corporate management, said that if a company's "stock price drops enough, we know there is going to be a claim."

She said that there have recently been attempts made to change and narrow the definition of securities claims, which if successful would limit the coverage afforded to companies.

Ms. Murray and Mr. Passannante cited recent cases involving Tyco and the bankrupt Adelphia firm, where the companies have had to litigate to obtain D & O protection from their insurers.

Mr. Passannante said HealthSouth had also been hit with a rescission action by Chubb, and that Xerox had been sued by American International Group after the firm and its auditors, KPMG were sued for defrauding investors.

Ms. Murray said corporations need non-rescindable D&O A-Side coverage, which protects the directors and officers of a company where the company cannot indemnify them as well as coverage for outside directors.

Mr. Passannante said that insurers have sought rescission on the basis of misstatements in company financial reports. He said that to provide proper protection, D&O policies should cover firms against securities actions, class actions, management mistakes, accounting problems, late- trading or market-timing infractions as well as employee, customer and competitor claims.

Ms. Murray warned that if a policy is rescinded and voided, that means that all coverage ends for the entire time the policy has been in effect.

Despite the increasing number of legal actions against directors and officers, Ms. Murray said that policy rates have been declining. "Competition is bringing prices down," she said, noting that despite increased threat levels, "there are a lot more insurers in the market."

Mr. Passannante said that one "hot bed of litigation" concerning D&O coverage has involved questions about language that provides protection "solely in their capacity as directors and officers" of a company. That becomes an issue when a company subsidiary is involved, he said.

He advised that in obtaining D&O coverage, it is wise to include provisions to cover pre-investigation legal costs that may arise when management seeks help from lawyers to advise them after being contacted by regulators.

Mr. Passannante also counseled that firms should be very careful with the information they provide on policy applications. And when the questions on the form cannot be answered with specificity "get them [the insurers] to change their questions," he said.