In this preview of an article from Issue XXV, Volume 5 of the PLUS Journal (May 2012) author  Kara Altenbaumer-Price looks at how changes to the SEC’s “neither admit, nor deny” settlements could impact the D&O insurance market.

From the article:

Coverage Issues

The impact on D&O insurance is easy to envision.  More trials with the SEC leads to litigation costs and poses a significant risk of loss for companies.  Settlements with the SEC that admit wrongdoing will likely increase the number of follow-on civil suits by shareholders, but more importantly, such admissions could leave companies and their executives virtually unable to defend themselves in civil litigation, leading to larger settlements.  Companies will turn to their D&O carrier for these losses.  D&O carriers will look for ways to avoid or minimize these losses.

All D&O insurance policies contain conduct-based exclusions, which provide that if it is shown that certain conduct occurred, coverage for losses related to that conduct is excluded.  For example, virtually all policies exclude coverage for fraud or intentionally violating the law.  Thus, if admissions in SEC settlements prove that the company or certain executives committed fraud or intentional violations of the law, coverage could be lost.  Carriers may attempt to use the conduct exclusions to both avoid indemnification for settlements in SEC and civil litigation matters, as well as to cut off defense costs.

In order to avoid loss of coverage, it will be very important to draft policies in a manner that tries to prevent or delay the application of conduct-based exclusions, such as delaying the trigger for conduct exclusions until the underlying matter is un-appealable.  To ensure coverage for individuals under a D&O policy, it will be imperative to ensure that the policy contains language to prevent the admission of one individual from being imputed to other individuals covered under the policy.  Also, it may be important to consider the policy’s language on rescission and any warranties made by the company when the policy is placed to avoid scenarios in which admissions by senior-level officials or the company lead to rescission of the policy altogether, thereby denying coverage to those innocent of wrongdoing.

Finally, companies may need to consider whether higher limits may be necessary to address the possibility of additional defense costs or greater settlements in follow-on civil litigation.

For more D&O related coverage check out the video clips from the 2012 D&O Symposium.