C L A I M D E N I E D September 2002 A publication of the Lowenstein Sandler Insurance Law Practice Group THE D&O HARD MARKET: TOP TEN SUR VIVAL TIPS By Robert D. Chesler, Esq. F or years companies have bene- cally and suddenly reversed this claims if the insured had sufficient fited with lower rates and better trend. What should companies do knowledge of the claim in the pre- coverage as insurers competed for to protect their directors and offi- vious policy year. The insured their D&O business. Now, the cers in this crisis? does not want to be caught in a combination of World Trade situation where it did not give Center losses, declining invest- 1. Report anything that even notice in the first year because a ment income, and the threat of looks like a claim. D&O policies formal claim was not filed, only to huge losses from Enron, Worldcom are claims-made, and failure to lose coverage in the second year and other scandals, have dramati- give notice of a claim will fore- because of the knowledge of a close coverage. Policies use differ- potential claim that it possessed. ent definitions of ‘claim,’ but the Inside tendency is to define it broadly. 3. Watch out for retroactive Thus, a ‘claim’ frequently includes dates. Coverage does not exist for ALLOCATION IN ‘any written demand for monetary acts that occur before the policy’s ENVIRONMENTAL or non-monetary relief.’ The retroactive date. Obviously, insur- INSURANCE: insured’s duty to give notice thus ers try to limit their risk by having includes not only formal com- a recent date; indeed, on policies NEW YORK WEIGHS IN plaints but also administrative pro- issued to a new insured, insurers By Alexander J. Anglim, Esq. ceedings and angry letters. Failure like to use the policy inception to give timely notice can be fatal. date as the retroactive date. Today, when statutes of limitation COURT SAYS NO TO 2. Report ‘circumstances’ as are often meaningless because of AOL ON INSURANCE well. Most D&O policies include the discovery rule, companies COVERAGE FOR a provision that allows the insured should negotiate for as early a DEFECTIVE to report circumstances that are retroactive date as possible. SOFTWARE CLAIMS likely to give rise to a claim, and By Robert D. Chesler, Esq. not just an actual claim. New 4. Obtain maximum severability D&O policies often exclude for innocent insureds. D&O pol- This document is published by Lowenstein Sandler PC to keep clients informed about current issues. It is intended to provide general information only. A L D
icy exclusions for fraud and dis- D&O policies that provide entity officers precisely in these terms. If honesty often are written to deny coverage are assets of the estate, the complaint only alleges inten- coverage for all directors and offi- and that directors and officers tional or fraudulent acts, the insur- cers if any one officer or director is being sued in the wake of a bank- er may refuse to defend. Many liable for a fraudulent act. A sev- ruptcy should not be allowed to D&O policies have provisions that erability provision protects the access those policies for defense state that in such a circumstance, innocent insureds in this situation. costs. You can address this issue by the insurer must defend the direc- This is particularly important for a “priority of payment” provision, tor or officer until there is a final policy provisions that allow rescis- and also through a provision adjudication of wrongdoing. sion of the policy for misrepresen- negating the entity coverage in the tations made in the application. event of bankruptcy. 7. Should a D&O policy include employment practices liability insurance (“EPLI”)? The inclu- 5. Is ‘entity coverage’ a blessing 6. Obtain ‘final adjudication’ or a curse? Entity coverage provision. As is true of all insur- sion of EPLI coverage in a D&O includes the corporation as an ance policies, D&O policies do not policy is usually presented as an insured on the D&O policy, which provide coverage for intentionally advantage, while in fact it presents broadens coverage and avoids allo- wrongful or fraudulent acts. problems as well. A D&O policy cation issues. However, bankrupt- Plaintiffs frequently couch their with an EPLI add-on will protect cy trustees are now asserting that complaints against directors and the directors and officers, but not the corporation and other employ- ees, such as the human resources Upcoming New Jersey Insurance manager. The EPLI coverage of Coverage Institute Seminars the D&O policy can be extended to include all of these parties. However, that leaves a D&O poli- October 2 nd cy with a single policy limit exposed to employment claims. A THE SEMINAR FOR INSURANCE BROKERS significant employment claim A Risky Business: against the company can erode or Selling Insurance in the 21st Century exhaust the limits of the D&O pol- icy, leaving the directors and offi- cers unprotected against the claims November 5 th for which the policy was intended. Surviving the D&O Hard Market 8. Review the ‘insured v. insured’ exclusion and negotiate 8:00 am - 11:30 am with the insurer for the least Park Avenue Club restrictive language. This exclu- sion applies to claims by current or Florham Park, New Jersey former directors or officers — pre- Please register online at www.insurance-lowenstein.com, cisely the people who frequently by phone to Karen Cerreto at 973.422.6466, bring suits. Some insurance com- or by email to kcerreto@lowenstein.com. panies are now writing more favor-
able ‘insured v. insured’ exclusions. ALLOCATION IN Allstate Insurance Company, Slip For example, one insurer does not ENVIRONMENTAL Op. 03419, May 2, 2002, 2002 WL apply the exclusion to shareholder INSURANCE: 827174 (N.Y.), the Plaintiff (“Con derivative actions, and another NEW YORK WEIGHS IN Edison”) sued its primary and only applies it to present, but not excess insurers for defense and former directors and officers. If By Alexander J. Anglim, Esq. indemnification arising out of con- there is a choice, look for the poli- tamination at its former manufac- cy with the narrowest ‘insured v. Environmental insurance tured gas plant in Tarrytown, New insured’ exclusion. coverage litigation is in some York. Some of the upper-level respects a relatively mature phe- excess insurers moved to dismiss on 9. Beware allocation, choice of nomenon. After more than twen- the grounds of nonjusticiability. In law and arbitration provisions. ty years of vigorous advocacy on deciding the motion, the trial court Many complaints name as defen- both sides, many of the key cover- used a simple time-on-the-risk dants both insured directors and age issues are now settled law in allocation method. It “took the officers and uninsured individuals the majority of states. However, highest projection of damages by and entities. Thus, allocation of even where the insured’s entitle- Con Edison’s expert ($51 million), defense and damages between the ment to coverage is clear, other divided by the number of years insured and the uninsured defen- hotly contested issues remain. One named in the complaint (50), dants becomes a contested issue. such issue is allocation — namely, and…determined that policies that In most states, the insureds have the issue of which policies must attach at levels above $1.1 million won this issue, and the law on allo- bear losses that trigger policies pur- were nonjusticiable because they cation is very favorable. As a chased over a period of several would not be reached even if Con result, insurers frequently attempt years or even decades. The two Edison prevailed at trial.” Thus, to insert provisions into the policy competing allocation rules are the the trial court granted the motion designed to undo the victories won “all sums” method (also known as to dismiss as to those policies in the courts. “joint and several” or “pick and whose attachment points were in choose”) on one hand, and various excess of that threshold. 10. PAY ATTENTION!!! All pro-rata methods on the other. D&O policies are not the same. The all sums method expedites After losing at trial against While negotiation over policy recovery by the insured; pro-rata the remaining insurers, Con Edison terms is increasingly difficult in methods typically impose on the appealed on several grounds, today’s hard market, examine the insured the burden of seeking including the trial court’s time-on- proffered policy carefully and go recovery of each insurer’s “fair” the-risk allocation methodology. back to the insurer with a list of share of the total liability. New Con Edison argued it should be amendments. Where possible, York is the latest state to have its permitted to pick and choose from obtain quotes from different insur- highest court weigh in on this among the applicable policy peri- ers and compare their policy provi- issue. Unfortunately for policy- ods, because each of the policies sions. While everyone hopes that holders, the New York Court of obligated each carrier to pay “all they will never need to make a Appeals has given its approval to sums which the insured shall be claim under the D&O policy, make the pro-rata approach. obligated to pay” for property dam- sure that you have the best possible age caused by an occurrence. policy if a claim does arise. In Consolidated Edison Conversely, the carriers argued Company of New York, Inc. v. that the joint and several approach
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