The world of D&O insurance has changed: Previously, companies purchased D&O coverage to insure securities cases against officers and directors. After restrictive U.S. Supreme Court rulings, securities cases are less common. But D&O insurance is more important than ever because of heightened regulatory scrutiny of a wide range of issues including accounting improprieties, antitrust, Foreign Corrupt Practices Act investigations, and oversight and disclosure of cybersecurity.
While D&O insurance has evolved to address well-known exposures like securities class actions, it does not provide the protection directors and officers expect due to evolving investigatory approaches of important government agencies. Fortunately, careful attention to today's regulatory exposures and relevant D&O policy provisions yields substantial improvements in protections afforded to D&O insureds.
What is a claim?
The most important of these issues concerns the definition of "claim." While all D&O policies include coverage for actual lawsuits or monetary demands against an officer or director, today's environment necessitates coverage for injunctive relief. Even where coverage is unavailable for costs of complying with an injunctive order, most D&O policies insure costs to defend against suits for an injunction.
Many D&O policies provide only limited coverage for governmental investigations. This is critical for many insureds, as investigative enforcement activities have increased significantly following the financial crisis. Common provisions, which trigger regulatory coverage only upon receipt of an SEC subpoena or formal order of investigation, reflect outdated regulatory procedures.
For example, current SEC procedures allow staff great latitude to demand documents, emails and testimony without formal order. Resulting electronic discovery and witness testimony can cost millions of dollars even in routine investigations, yet D&O policies may provide no coverage. D&O policies should cover investigations by governmental and self-regulatory authorities, whether they are commenced by the receipt of an investigative request or inquiry or by informal or formal investigation.
Regulatory coverage that purports to limit "claim" to a "formal proceeding" commenced by complaint or similar document is similarly problematic. Typically, a critical goal in defending a regulatory investigation or inquiry is to avoid such a "formal proceeding." Companies and lawyers often engage in extensive dialogue with regulators, which may include interviews and document production without a subpoena. These efforts may save substantial time and effort in the long run, but can be time-consuming and expensive. The D&O policy definition of "claim" should be broad enough to cover these critical defense activities.
Finally, it is important that the policy definition of "claim" extends to regulatory inquiries by the authorities around the world. This is essential given globalization of business and the wide range of governmental authorities, including state attorney generals, and state, federal and international bodies, with enforcement authority. There are important regulators in the UK, EU and Asia, and insureds frequently face investigations in multiple jurisdictions. To insure these situations, D&O coverage should extend to inquiries by international regulators as well the broad panapoly of state and federal regulators in the U.S.
Next page: Settlements and final adjudication
Settlements: What coverage is needed?
Even where there is coverage for regulatory investigations, substantial issues may affect coverage for resulting settlements, administrative orders, consent decrees or judgments. For example, there may be questions concerning coverage for fines, penalties and punitive damages. Insurance jurisprudence on coverage for these types of remedies varies among jurisdictions. Most insurance policies do not include choice of law provisions, but many D&O policies agree to controlling law that does not preclude such coverage. Some D&O policies expressly insure statutory damages and penalties under the Foreign Corrupt Practice Act and other statutes, as well as non-multiplied portions of antitrust and other multiple damage awards.
A related issue concerns coverage for sums labeled as disgorgement or restitution. In many cases, regulatory settlements require payments that regulators press to label as disgorgement or restitution. Courts have reasoned that mere labels placed in a document by aggressive regulators do not determine coverage, but rather, that coverage must be determined from the purpose and basis of the amounts at issue. In other words, regardless of the label used, amounts akin to compensatory damages or non-punitive statutory damages should be covered, while amounts that constitute actual return of ill-gotten gains by a particular insured arguably may not. Modern D&O policies often provide coverage for "loss" as opposed to "damages" to enhance the potential of coverage for disgorgement, restitution and similar remedies.
Disputes also arise concerning the extent to which a regulatory or other settlement is insured when resulting releases cover claims against a covered D&O and a company that is not covered. Some D&O policies require allocation based on the "relative legal exposures" of the claims and parties. Such provisions should be removed because the law often applies a "greater settlement rule" under which all amounts paid are presumed to protect the covered D&O. If specific policy language is preferable, the parties can negotiate their D&O policies to include "pre-set" allocations of defense costs and indemnity.
Even where there is coverage for the claim and remedy, issues arise over exclusions for arguably intentional acts. A key goal of a regulatory or other settlement is to put the matter behind you—not to litigate it again in a coverage dispute.
Final adjudication
Include "final adjudication" language in D&O policy exclusions, which will ensure that the exclusion will not apply absent a final adjudication or admission of intentional harm. Language should be clear that the requisite adjudication must take place in the underlying claim, not in a coverage case, so that once a matter is settled, coverage will not be disputed. Many D&O policies also include severability clauses so a finding of wrongdoing by one insured cannot be imputed to another.
D&O policies also should contain a priority of payment provision ensuring that individuals get paid first. Individuals should consider dedicated coverage for officers and directors that applies if indemnification is denied or other insurers refuse to pay.
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