Editor: What are the first points about D&O insurance that you try to get across to clients?
Metzger: Clients should understand that the coverage terms of D&O insurance policies are negotiable. In that way, these policies are different from some other types of business insurance. You can, in fact, often obtain enhancements to your policy without paying more. That point alone surprises some clients.
Also, your D&O policy should be customized to meet your particular needs. There is no one standardized list of policy modifications good for all companies. First, every D&O insurance carrier has its own policy form, and there often are substantial differences between those forms, each of which needs different modifications. Second, no two businesses are exactly alike. Issues that may be important under a D&O policy for one company can be very different for another.
Finally, know that this process takes time. Make sure to leave an ample runway for the negotiation of these policies in order to have enough leverage to negotiate effectively.
Editor: Isn't it possible for directors and officers also to rely on indemnification from their companies?
Metzger: Yes. The way D&O insurance typically works is as an additional firewall of protection from personal liability for directors and officers. That's in addition to the individual's rights to indemnification. The D&O insurance policy often will stand in the shoes of the company's indemnification obligations. Under the policy, there is typically a retention (a deductible) which the company pays before the insurance kicks in, but then the D&O insurance pays on behalf of the company. The company thus is spared the expense of the indemnification. This is what's often referred to as the Side B coverage of the policy.
Editor: Would you please describe what Side A, B and C coverage means?
Metzger: Typically the first provisions of a D&O insurance policy are called the insuring agreements, and the first three clauses are A, B and C.
Side A coverage comes into play when a director or officer has a claim against him or her and is not able to receive indemnification from the company. This can happen because either the company is bankrupt and has no assets with which to indemnify a director or officer, or, as a matter of law, some types of claims are not indemnifiable but may still be covered by the D&O insurance. With Side A coverage, the D&O insurance provides full coverage, and the retention does not apply. The individual thus does not have to pay any money out of pocket.
Traditionally, a D&O policy would have both Side A and Side B insuring clauses, with Side B coverage being the one most commonly triggered. This is due to the fact that companies generally do not go bankrupt and most claims are indemnifiable. Again, with Side B coverage, the D&O insurance responds but the retention must be paid by the company.
While policies typically have both Side A and Side B provisions, more companies now are also buying an additional layer of Side A coverage called a Side A Only policy. Such policies respond only when both corporate indemnification and any underlying D&O insurance are exhausted or otherwise cannot respond.
The Side C coverage is coverage for the company itself. For public companies, it applies to securities claims only.
Editor: Should companies use more than one D&O insurance carrier?
Metzger: Public companies today are buying substantial amounts of coverage. No one insurance carrier likely is going to offer the full amount of coverage needed by a good-sized public company. Typically, your D&O insurance program is structured in layers of coverage with a different carrier for each layer. For example, the first carrier, the primary carrier, could provide coverage for the first $10 million to be paid, and the second carrier could provide coverage for $10 to $20 million, and so forth.
Editor: Do all D&O insurance carriers do due diligence, or is it just the primary policy carrier?
Metzger: Typically, each of the carriers involved in your program will be involved in the underwriting. I'm commonly with clients who are being interviewed by multiple underwriters. If a company has been insured by the same carriers for multiple years, it likely will not be subject to extensive due diligence or underwriting at each renewal.
Editor: Does D&O insurance coverage differ for public and private companies?
Metzger: Yes. For example, private company D&O insurance policies typically offer broader Side C coverage. Insurers are willing to provide broader entity coverage because the risks overall are perceived to be lower.
Generally speaking, D&O insurance for private companies has evolved quite substantially over the last 10 years. In the past, smaller private companies often went without D&O insurance. It was perceived that the risks were not significant enough to justify the premiums charged. That is not the case now. Additionally, when private companies in the past did have D&O insurance, it typically provided coverage solely for the directors and officers. Nowadays policies are more broadly written. Coverage also can be added for employment practices claims and for claims arising from ERISA or benefit plan issues.
Editor: In view of recent scandals involving CEO culpability, do you encourage clients to review their policies and perhaps seek further coverage?
Metzger: In light of these situations, board members and officers alike are concerned about making sure that they and the company are well protected from the bad acts of any possible "bad guy" employee. Now definitely is a good time for a D&O insurance policy check-up. Too often, policy renewals are just a rubber-stamping of the existing program. Look hard to see how the D&O insurance program can be improved. Management also should make sure that board members are well educated about the scope of coverage - not just what is covered but also what types of claims are NOT covered by the policy.
Editor: Is the annual renewal the appropriate time to make a change in your D&O policy?
Metzger: The renewal process is typically the time when companies are in the best position to modify their coverage program. It can be a competitive process where the incumbent insurance carrier knows that the insured company may be considering other carriers for next year's program. However, there is nothing that should stop a company from evaluating its coverage mid-term. For example, if it is found that a company is underinsured, it should not wait to supplement its coverage.
Editor: Are D&O policy provisions concerning severability and rescindability major areas subject to negotiation?
Metzger: Those two points have received particular attention because they are provisions that relate to coverage for innocent insureds when someone else at the company has engaged in misconduct. For example, if a CFO has engaged in some impropriety, while it might be appropriate for that CFO to lose coverage, the innocent directors and officers should not lose coverage. Severability provisions address this issue and so need to be carefully reviewed.
That being said, there are many other provisions of the policy that should be evaluated as well.
Editor: Is it advisable to have an attorney with expertise in D&O insurance review your policy before each renewal and when first entering into a contract?
Metzger: Yes, though I tell clients that the first step is to make sure that they have a top-notch D&O insurance broker involved in the process. A truly expert D&O insurance broker really can make a big difference in the strength of your coverage. Do your homework to find an insurance brokerage with the highest level of D&O insurance expertise. It's okay for your company to use different insurance brokers for different types of insurance coverage programs - the key is to lock in the expertise for each program. All of that said, outside counsel also should play a role in providing a different perspective on the policy and coverage issues.
Editor: Can you discuss any recent cases involving claims by D&O insurance carriers against companies?
Metzger: One recent "hot" area of D&O coverage litigation is the issue of what constitutes insurable loss under a D&O policy for certain types of securities claims. The new case law has led to new policy endorsements for D&O policies, if you know what to ask for. The issue is relevant to all public companies. Such companies should see to it that their current coverage addresses this issue.
Editor: When presenting company documentation to a carrier, why is it of paramount importance that all documentation be carefully screened for errors?
Metzger: Providing the carrier with inaccurate information during the underwriting process could lead a carrier to determine that a subsequent claim will not be covered, or even to argue that the policy as a whole can be rescinded. D&O insurance applications sometimes can feel long and tortuous, but it is mandatory to spend sufficient time to make sure that you answer each question correctly. This next point sounds obvious, but make sure that the employee filling out the application knows enough about new or sensitive developments at the company to complete the application accurately. I've seen situations where that employee has not been "brought over the wall" about confidential developments at the company and so misrepresents important information to the carrier even though that employee thought he was telling the truth.
Editor: Do insurance providers issue excess policies?
Metzger: Public companies often do have excess policies. Excess policies provide the additional layers of coverage beyond the first "primary" policy that I described before. Excess policies often are referred to as "follow form" policies because they typically follow the terms and conditions of the primary policy.
Terms of the excess policies, however, still need to be carefully reviewed. They may have provisions that need to be changed, particularly if you have a heavily manuscripted primary policy. The key point is to make sure that your excess policies are not in any way more limited than the coverage you have under your primary policy.
Editor: How do you answer the question: If outside parties know we have D&O insurance, they might bring an action, so why have the insurance?
Metzger: I get asked this question frequently. Another variation of it is, "if we increase the amount of our D&O coverage, is that just going to lead to larger payouts?"
These are good questions. Ultimately, though, they should not drive your D&O insurance purchasing decisions. There are situations where companies and their directors and officers will be sued regardless of whether the company has D&O insurance. Plaintiffs' lawyers who bring such suits against directors and officers are not first checking to see whether the company has D&O insurance and, if so, how much. Yes, it may be that the amount of coverage will influence the settlement process. But if a basis for a serious claim exists, the lawsuit is going to be brought seeking significant damages regardless of the size of your D&O insurance coverage program.
With the risk of personal liability in play, I think the most important factor is to make sure that companies and their directors and officers are not underinsured. In this litigious society, that would be a dangerous thing. There always is a cost-benefit analysis in evaluating how much coverage to have. I'm sensitive to that. At the end of the day, though, my goal is to find a cost effective way to wrap my clients in titanium against the risk of personal liability.
Published January 1, 2008.
