Below is a great review of the session “Coverage Wishlist: Everything but the Kitchen Sink?” session at the 2013 PLUS D&O Symposium. The review is written by Chris Christian, CIC, RPLU of U.S. Risk. Check out her blog, Professional Liability Tidbits, for more D&O Symposium and professional liability takes.
Moderator Dan Bailey of Bailey Cavalieri, LLC moderated an entertaining and enlightening panel of industry professionals discussing several typical enhancements that have evolved in the last few years, or which are requested by brokers in the placement of (predominantly) publicly-traded D&O policies.
The session was a cautionary tale in being careful what you ask for, as many of these enhancements, although well-intentioned when devised, have unexpected consequences. A highly summarized sampling is presented for your reading enjoyment and subsequent rumination:
Persons placing insurance for firms involved in mergers and acquisitions – specifically the sellers – must be aware of an exclusion fondly referred to as the “bump-up” exclusion. This exclusion bars coverage for claims seeking additional consideration for the shareholders beyond what was negotiated or obtained by the selling entity and its board.
Randy Bodner, of Ropes & Gray, LLC, advised the audience that there are two types of bump-up exclusions, which he would categorize as “broad” and “limited”. The broad version of the exclusion applies to claims pertaining to increased consideration, or anything even resembling or approximating consideration, related to the selling of securities – Anyone’s securities, any time, anywhere.
The limited version, on the other hand, confines itself pretty handily to actual consideration (The selling company got $1.50 per share; the shareholders sue to make it $1.75 per share), and only as it relates to the insured’s sale or purchase of its own securities – Much more palatable.
Coverage for Investigations
After further exploring the topic of litigation around M&A transactions, Dan moved the conversation to the topic of coverage for investigations. Coverage available varies depending on who is investigating whom, and with what documentation. The SEC rarely starts an action against a company or its Ds & Os with an actual complaint. In fact, the preliminary requests for information that foreshadow impending doom often go out of their way to be clear that the SEC is not accusing anyone of wrongdoing…..yet. This is all just a routine inquiry; yeah, that’s the ticket.
The lack of a specific allegation can render investigation wording moot if the extension to investigations is imbedded in the definition of a claim. Why? Because a “claim” requires an allegation of a “wrongful act”, and no such allegation is made. It’s much better to frame such an extension as a separate coverage grant. One must also be cognizant of the wording used to describe the action to be covered. Is it a “formal investigation” only? Is it any investigation? Is it a “proceeding”? What’s a proceeding? Is that an investigation? Nick Conca, Chief Claims Officer at Alterra Capital advised that per an 11th Circuit decision, a “proceeding” is most definitely not an “investigation.”
Dan suggests that pre-claim inquiry coverage is probably a better fix to this whole boggle. Such coverage will respond to requests to produce documents, subpoenas and other preliminary documentation required by regulators.
Subrogation and Recoupment
The panel next tackled the prickly subjects of whether an insurance company can recoup monies it has advanced in defense of actions later determined to be ineligible for coverage, and whether a carrier can subrogate against its own insured. Although there is some tendency to think of these terms as interchangeable, the panel made clear that they are not. Recoupment is the recovery by the carrier of funds it advanced to the insured. Subrogation is the enforcement by the carrier of the insured’s legal rights to be made whole by a third party.
Nick advised the audience that recoupment is allowed if the policy provides for the carrier to recover monies advanced for a claim that is later determined not to be covered, and/or if the carrier reserved its rights to do so. However, as a practical matter, the recoupment rarely occurs due to the tendency of claims to be settled short of final adjudication. A carrier is rarely provided a sufficient amount of detail to have a factual basis upon which to determine exactly what causes of action were covered, and which were not.
Additionally, there would be a public relations challenge meeting any carrier that routinely came back to its insureds after a claim to recoup monies it had advanced.
If a carrier is asked to add language to its policy providing that it will not subrogate against an insured, except in cases where the conduct exclusions have been triggered, the very addition of that wording may be doing the insured a disservice. Interestingly, Dan pointed out that based on an abundance of case law, insurance carriers are not allowed to subrogate against their own insureds under any circumstances. So adding what may initially appear to be a safer alternative to silence regarding subrogation actually opens the door for the carrier to take action they may not have taken in its absence.
Excess Attachment Points and Follow Form
The panel shared two very interesting and chilling observations regarding excess policies. You may be familiar with the excess language that requires underlying limits be exhausted by payment of covered loss in order for the excess policy to attach. There has been movement in the industry over the last few years to address the fact that some claims reach the limits of the primary layer with a contribution of funds made by the insured. With the usual language, that arrangement would not trigger the excess policy because the underlying limit has not been exhausted by payment. Wording can be adjusted to accommodate these types of arrangements. However, the “covered loss” wording then comes into play. If the primary carrier has determined any part of the claim to be uncovered, and the payment up to the primary limit has included any contribution to that uncovered part, the excess policy may not be triggered.
There is also a little quirk in some excess forms of which the panel made the audience aware. In the follow form wording, some policies indicate that they will follow the primary carrier’s form, and any more restrictive form underneath them. We can understand how this makes sense if there are exclusions that the excess carriers need and want, and those exclusions roll up the line intentionally. But there can be a huge challenge if a mid-level excess market is replaced, and there is a fresh warranty or a prior and pending litigation date that causes a claim to be excluded by that layer. Such restrictions in the mid-level excess policy can cause the higher-level excess carriers to decline coverage thereafter. Heather Fox, Chief Brokerage Officer of ARC Excess & Surplus, LLC indicated that she has been successful in some cases in getting this restrictive wording removed.
Side A Coverage
The last topic was Side A coverage. The main thrust of this portion of the presentation was how important it is that outside directors have their own limits. However, as Heather pointed out, an agent or broker rarely has the opportunity to discuss coverage or products with the directors, and the internal person at the insured’s business does not necessarily make their purchasing decisions based on what the directors would like to have.
Dan pointed out that although some policies offer reinstated limits for the independent directors, for the most part, the reinstated limit is only available for a subsequent claim. This does not help the independent directors as the ongoing claim comes to rest at their feet after exhaustion of the policy’s limits.
This panel sure has given the audience a lot to think about. As Dan said in summary of our take-aways: “Read the darned policy, and every word counts.”
The opinions expressed here are Chris Christian’s, and do not represent US Risk’s positions in any way. Nothing on this post is intended as legal advice. Post is for informational and entertainment purposes only. Please seek qualified legal counsel for a thorough understanding of any coverage matters.