Directors’ and Officers’ liability (D&O) coverage is important for any organization as it provides coverage for directors and officers who may be personally liable for suits brought against the company. However, all D&O policies are not created equal. Paying attention to nuances in your D&O policy when placing or renewing coverage can have huge implications if a claim is later brought against directors, officers or the company.
All D&O policies contain exclusions that deny coverage for liability arising from bad acts of the insured such as fraud, dishonesty, criminal acts or intentional misconduct. These exclusions are often invoked by insurers when directors and officers are charged with claims alleging fraud and self-dealing, sometimes prohibiting coverage. Insurance policies with these “bad act” exclusions frequently contain final adjudication language, meaning that the exclusions are only triggered if there is an actual finding of the bad act by either the trial court or by a court in separate coverage litigation. Ensuring that this final adjudication language is in your policy will prevent you from forfeiting your right to millions in potential coverage. Without final adjudication language, an insurer could disclaim coverage for a settlement if the underlying complaint alleged fraudulent conduct.
The importance of final adjudication language was underscored in a recent California case. In Stein v. Axis Insurance Co., 10 Cal. App. 5th 673, 216 Cal. Rptr. 3d 804 (2017), as modified (Apr. 6, 2017), the court held that the policy’s “final adjudication” language required the insured to obtain a final judgment after appeal before the insurer was able to disclaim coverage, in spite of a jury’s conviction of the insured for securities fraud.
Similarly important and often ignored during policy placement is the wording of severability clauses in D&O policies.
Severability provisions can preserve coverage for non-bad actor insureds in the event that other directors or officers are charged with acts that would eliminate coverage. Severability provisions in D&O coverage can also ensure that if one insured makes a misrepresentation on the insurance application, which would be a bar to coverage and potentially give an insurer the right to rescind the policy, the coverage is not voided for all of the other covered directors and officers. The U.S. Court of Appeals for the Ninth Circuit (interpreting California law) upheld the rescission of a D&O policy for all insureds because the policy failed to contain a severability provision. Fed. Ins. Co. v. Homestore, Inc., 144 F. App’x 641 (9th Cir. 2005). The policy stated that, in the event of a misrepresentation, the policy was “void and of no effect whatsoever” if the misrepresentation was known to be untrue on the inception date of the policy by one or more people who signed the application; policy rescinded for all insureds regardless of their knowledge of misrepresentation.
Another source of potential coverage disputes occurs when a claim is brought against the company (and/or a director and officer) and the claimant happens to also be an insured under the policy. This could happen in the context of a whistleblower, an employment claim or a claim in bankruptcy proceedings. These disputes can be extremely contentious and represent the type of claim for which your company would expect protection from its D&O insurer. Most D&O policies, however, contain a so-called “insured vs. insured” exclusion, which bars coverage for claims asserted by, or on behalf of, the insured against other parties insured by the policy. These provisions can and should be limited, so that they do not operate as a blanket bar to coverage. Checking to ensure that your policy’s insured vs. insured exclusion carves back coverage for employment claims, whistleblower claims and bankruptcy proceedings will protect you in many claim situations. See, e.g., Hawker v. Doak, No. 15-16013, 2017 WL 1147131 (9th Cir. Mar. 27, 2017), where insured vs. insured exclusion in a bank’s insurance policy barred coverage for a claim brought by the FDIC in its capacity as a receiver of the insured bank.
These are just a handful of the types of D&O policy provisions that have far-reaching and tangible consequences when an insured seeks coverage. Carefully reviewing your policy and working with your insurer to craft endorsements that carve back coverage is essential to preserving coverage and ensuring that you (and your company) actually receive the coverage you believe you are getting.