Are D&O Brokers Relevant, Survey Asks

While only 25 percent said no, "uniformly, the people who felt compelled to comment on the issue were those who weighed in on the no side," he said, offering the following examples of typical comments:

o "They often add little value other than chest pounding."

o "Don't know enough about the issues to provide meaningful input."

o "Create unreasonable expectations with insureds and interfere with the process by trying to put business leverage on the insurer."

o "They can be a positive factor, but most view their role solely as advocating for the policyholder for benefits beyond those that the policy provides."

Mirroring the composition of his five-member panel at the session titled, "D&O Claims: What Really Matters," Mr. Townsend said survey respondents included a wide spectrum of legal and claims professionals representing both insurers and insureds.

Roughly 60 percent of survey respondents were carrier representatives (coverage counsel or claims counsel for carriers), while 40 percent represented the insured side (including claims advocates of insureds, defense counsel, insurance broker counsel, general counsel and insurance recovery counsel for insureds).

Summing up the responses to the broker relevance question, Mr. Townsend said: "There is a common thread that the knowledgeable brokers actually do provide value."

In agreement was Joseph Finnerty, a partner of New York litigation group of DLA Piper LLP, who counsels insurance companies. He added that his definition of a knowledgeable broker would be one that seeks to understand both sides of a claim issue–not just the client's (insured's) side.

"It is not value-added…when the broker just joins one team or another," he said. Instead, "an effective broker can be one that literally bridges…the gap between the two [sides]," imparting an in-depth understanding of the legal issues involved and acting as "a shuttle between the two."

Lorelie Masters, a partner for Jenner & Block LLP in Washington, D.C., who counsels policyholders on D&O claims issues, said: "It's not simply the knowledge a broker can bring, but it's also the relationships….Sometimes, in order to settle a claim what we really need is an effective channel to get to the insurance company, and the broker can often provide that."

Norman Allen, senior managing director at Carpenter Moore Insurance Services, a San Francisco-based brokerage, said the fact that 75 percent of respondents believe brokers can be effective was "a positive sign," given that 60 percent of the respondents represent insurers in some way.

Still, Mr. Allen noted, "there were three pages" of negative comments with words like "advocating too strongly and chest pounding, interfering, more harm than good, obstructive, road blocks, hindrance, ignorant, cause more problems, rarely involved, unreasonable"–indicating that 25 percent had an experience in which the broker seemed to be adding to the problem instead of trying to find a resolution.

Analyzing responses to two other survey questions, which revealed that insureds are more likely than insurers to bring coverage litigation and identified key reasons for disputes, the panelists agreed that brokers need to do a better job at managing the coverage expectations of policyholders.

Mr. Townsend, who reported that 83 percent of survey respondents said they believe insureds are more likely to pursue coverage litigation, stressed that the 83-17 split transcended the 60-40 split of respondents between carrier and policyholder representatives.

Mr. Allen offered an explanation for why insureds would respond that they were quicker as a group to pursue coverage litigation. The question didn't ask "if you were forced to bring litigation against your insurer because they sent you a pound sand letter" or coverage denial, "which is clearly what happens" in his view, he said.

Mr. Finnerty noted that there are also some obstacles–both common law and statutory hurdles–to insurer-initiated coverage litigation in many states. "About one-half of the states have some form of fee-shifting provision if the insurance company loses," he said. "While it's always true that when insurers get involved in coverage litigation they believe they're going to win, it's not always true that they do."

Going on to analyze the reasons for disputes in D&O claims, Mr. Townsend noted that a whopping 77 percent identified "unrealistic insured expectations about liability or coverage outcomes" as one of the top-three reasons fueling coverage disputes.

Forty-three percent identified this as the top reason for disputes, he added.

Explaining how the question was posed, Mr. Townsend said that survey participants were asked to rank six possible reasons, with three reasons pointing the finger at carriers and three at insureds.

The three anti-insurer options were "vague policy language," "inconsistencies in tower language" and "aggressive D&O insurer interactions." In addition to "unrealistic insured expectations," choices pointing to policyholder issues were "aggressive policyholder interactions" and "ineffective broker claims support."

PLUS analyzed results by calculating the percentage of respondents ranking a reason among its top-three choices. The final tallies were:

o Unrealistic insured expectations–77 percent

o Aggressive policyholder–roughly 63 percent

o Vague policy language–51 percent

o Aggressive D&O insurer–roughly 48 percent

o Inconsistencies in tower language–roughly 40 percent

o Ineffective broker claims support–roughly 35 percent.

Only about 35 percent of respondents selected "ineffective broker support" among their top-three choices–giving this lowest ranking of the six options, panelists noted.

Still, Jane Keller, senior vice president and chief claims officer for The Navigators Group in Rye Brook, N.Y., suggested the tanking of other choices highlights a key broker role. "Good brokers, who are helpful in managing the insureds' expectations, lend a great deal of value to the process," she said.

Ms. Masters, who said she represents both companies and individual directors and officers, said she never met one single individual director or officer "that understands that there are some circumstances in which D&O coverage may simply not apply….That message is simply not getting adequately communicated to [them] at the pre-claims stage," she asserted.

Mr. Finnerty agreed. The "prevailing theme" of the survey seems to be that there is "a hue and cry out there for some better communication about the specifics of the policies from brokers that are sophisticated about those issues," he said.

The survey also asked specific questions about claims payouts, such as, "Have you been involved in an actual claim where the carrier paid less than the total claim demand due to restrictive wording in the policy?"

Eighty-two percent said yes, Mr. Townsend noted, going on to report the results of a related question that asked respondents to identify the issue giving rise to the reduced payout.

The "definition of loss" was cited most often, with 73 percent of the respondents citing this part of the policy as the culprit, while "definition of claim" was cited by 51 percent, and "fraud and personal conduct exclusions" was picked by 50 percent.

Reacting to the high percentage citing "definition of loss," Mr. Allen said the definition "is obviously an exclusion in the policy. Seventy-three percent of the results say that's the way carriers are avoiding paying some of the loss–in other cases all."

Mr. Finnerty replied: "It's an exclusion if everything in the world is covered," describing the definition of loss as the centerpiece of what the contract says.

"It occurs to me that the question about whether the definition of loss and the definition of claim can be perceived in the general market as exclusions only highlights the earlier questions answered that say there is lack of clarity about what the policy covers–and that not enough good work is being done to explain exactly what these contracts are all about," he continued.

"If indeed an insured feels offended by the very definition of loss under the policy that's a limitation of coverage, then nobody went about the business of telling them what the policy was in the first place. That just seems like the ABCs of what should be [explained] before we get to…what is the law as it applies to subtleties of coverage."

Mr. Townsend focused his remarks on the "definition of claim," and the hot topic of whether regulatory investigations are covered. "Our underwriters are very clear that they didn't price for it, they don't charge for it, and it's not intended to be included in the definition of claim until there is actually a claim against an insured for a wrongful act. We don't generally consider regulatory investigations to be that," he said.

While the policy may say that a formal investigation is one element of the definition of a claim, Mr. Townsend said insureds don't always appreciate that the formal investigation must be "against an insured person for a wrongful act." Sometimes, "in the dynamic with insureds or brokers, that gets left out of the picture," he said.

Mr. Townsend and other panelists also discussed issues that were not cited frequently by respondents–settlement provisions and excess policy language.

"It is certainly my perception that a lot of what happens in the D&O context is a discussion–and sometimes a heated discussion [with the insured]–about what the settlement value of a case is," Mr. Townsend said, expressing surprise that only 28 percent of survey participants cited this as an issue.

Ms. Masters, who noted that only a minuscule percentage cited excess policy language as an issue restricting claim payments, said this is nonetheless "a big pet peeve" of hers.

"It's becoming increasingly common that this language, often without adequate disclosure, says the excess policy won't attach unless there's actual payment of the underlying insurance by the insurer," Ms. Masters said.

"From my perspective, that means you could potentially never attach the excess policy because securities class-actions and derivative cases are typically settled–and if there's any kind of coverage dispute, the coverage dispute is typically settled for less than 100 percent of the limits, too," she said.

Ms. Masters said she advises clients to pay careful attention to attachment point provisions of D&O and fiduciary liability insurance policies for these reasons, and Mr. Townsend noted that insurers have responded to concerns with coverage endorsements that say that if an insured pays part of the limit of the primary policy, then the excess policy limit is similarly reduced.

(For a more detailed discussion of this issue, see related article, "'Workouts' Leave Buyers Battling Up D&O Coverage Towers," in the June edition of E&S/Specialty Lines Extra.)

The PLUS survey also addressed a host of other questions about the claims process–including the perceived cooperativeness of in-house counsel and outside monitoring counsel, views on public-policy issues regarding claims payments for criminals and disgorgement penalties for ill-gotten gains, and questions about how market conditions impacted carrier willingness to pay.

Mr. Townsend said there was no indication of any correlation between soft or hard market and willingness or unwillingness to pay, based on survey responses, and that there was also no indication that insurers with stronger financial strength were more willing to pay claims than were those that are financially stressed.

The PowerPoint presentation outlining key survey results is available on the PLUS Web site in the Past Events Materials section for the 2009 D&O Symposium at https://plusweb.org/files/Events/D&O%20Claims%20-%20What%20Really%20Matters%20Presentation.ppt

See related article:

Nearly 75% Surveyed Say D&O Insurers Sometimes Pay Too Much