You may recall that Rodney Dangerfield died just a little more than one year ago at age 82. In reflecting on his comedy routines, we were struck by how one of his famous quips applies to Directors & Officers (D&O) insurance. Dangerfield often recounted how when his psychiatrist told him he was crazy, he said, "Oh yeah? Well, I want another opinion." The doctor instantly replied, "Okay - you're ugly, too." The lesson is: when negotiating D&O insurance coverage, you can benefit from a second opinion, particularly if the off-the-shelf D&O policy you are offered is "ugly."
The first opinion, of course, comes from your insurance broker who recommends a particular policy, policy limits, retentions and certain enhancements. The second opinion should come from an independent source - a lawyer experienced at negotiating D&O policies and who represents policyholders only. Consulting with a D&O lawyer can meaningfully improve your D&O program. For one thing, a D&O insurance lawyer brings to the procurement process legal training and experience that your broker, typically not a practicing lawyer, does not have. Also, an independent insurance expert by definition represents your interests exclusively.
Like Dangerfield, you can find a source for a second opinion by asking the person who provided your first opinion - your broker. He or she should be able to recommend a D&O lawyer. Or, you can ask your counterparts at other companies. These leads can be supplemented by your own research on the Internet.
A D&O Policy Is A Complex Legal Document
A D&O policy is a labyrinth of arcane legal provisions drafted by veteran insurance company lawyers. While your broker will be familiar with many D&O policy provisions and can address many issues, he or she typically is not a lawyer familiar with the intricacies and legal consequences of certain policy provisions. For example, you surely do not need a lawyer to negotiate for punitive damage coverage if the standard policy form does not provide it. But getting an insurer to cover punitive damages is only half the battle. Punitive damages are not insurable in every state. To get the benefit of punitive damages coverage, you must also negotiate for a "most favorable venue" clause, which provides that the insurability of punitive damages shall be governed by the applicable state law that most favors insurability.
One form of a most favorable venue provision reads as follows: "For the purpose of insuring punitive damages under the Policy, the Insurer and the Insureds agree that the law of the jurisdiction most favorable to the insurability of punitive damages shall control, provided such jurisdiction: (a) is where such punitive damages were awarded; (b) is where the Corporation is incorporated or has a place of business; (c) is where the Insurer is incorporated or has its principal place of business; or (d) is where any Wrongful Act occurred for which such punitive damages were awarded." This provision can, by a factor of five or more, increase the chances of a court holding that punitive damages are insurable under your policy.
Not any second opinion will do - it should come from an independent D&O lawyer. The value of independence is widely recognized in many business contexts. The need for independence in negotiating D&O insurance policies was underscored this past year by lawsuits filed by, among others, New York Attorney General Eliot Spitzer concerning improper practices in segments of the insurance brokerage industry. In the D&O insurance context, two benefits of an independent D&O lawyer are that he or she will have no stake in the amount of D&O insurance you buy and the insurer selected. An independent D&O lawyer's only job is to negotiate the best possible policy for his or her client.
Despite the good reasons to retain an independent expert to work with your broker, many insureds do not do so because cost is an overriding issue. This could prove to be false economy. For an amount that is less than 1 percent of a D&O program's limits of liability, an experienced D&O lawyer can assist in the review and negotiation of your policy. In certain circumstances that could mean the difference between no coverage and the availability of the full policy limits.
Published November 1, 2005.