Coverage issues and D&O insurance
Contrary to the predictions at the time, there have not been as many claims against directors in England & Wales since the introduction of the Companies Act 2006 and following on from the financial downturn. However, D&O insurance is an important asset to companies and directors operating in England & Wales, and experience suggests that the most used aspect of cover is the indemnification of costs incurred in regulatory and other formal investigations.
However, for companies (and their directors) operating on the international stage, the experience has been different. This is particularly the case if those companies operate or have exposure to the legal jurisdictions where the laws are such that claims against directors are more commonplace, such as the United States, and some countries in Europe, (e.g., Italy, Germany and Austria).
Insurers, insurance brokers, risk managers/legal departments and lawyers can learn a great deal from a review of insurance coverage disputes. These not only provide an insight into which clauses and issues regularly arise but such information and knowledge is invaluable when perfecting policy wordings to ensure contract certainty and quality. Over the last 12 months a number of clients have requested advice on coverage issues, including:
- Definition of Wrongful Act
The insuring clause in D&O policies normally contains a requirement for a claim to arise from a wrongful act by the director or officer. What constitutes a wrongful act will be defined in the policy. Definitions in use vary and can have a significant effect on the scope of the cover provided.
- Outside Directorship Liability Extension (ODL Extension)
This extension is regularly purchased by companies as part of their D&O cover where company directors or officers are likely to hold outside directorships. There are industry sectors where this is a common business practice, for example, the private equity sector where a director or officer of a private equity firm may be appointed to the board or supervisory board of a portfolio company. The ODL Extension is normally drafted in such a way to ensure that it sits in excess of the outside entity’s local insurance, to ensure no double insurance issues arise. In situations where the outside entity’s insurance is not valid and collectable, the ODL Extension cover will apply. However, issues have arisen where both policies are valid and collectable and are governed by different laws and jurisdictions.
- Investigation costs cover
Usually the cover provided is for “formal” or “official” investigations. An area of contention is whether such cover includes internal investigations. This depends greatly on the nature of those investigations and what the policy wording says. Further difficulty arises when the main trigger for an internal investigation is a concern about the company’s own liability. In those circumstances indemnification of the company may fall to other insurance policies such as professional indemnity or errors and omissions insurance. Where the investigation costs are covered and the investigation involves company and director liability issues, it may be a case of having to allocate costs between two different policies.
- Professional Services exclusion
- Such exclusions are usually drafted broadly in D&O policies incorporating language to ensure that the cover on offer excludes claims “arising from or attributable to or in connection with” the performance or failure to perform professional services “by or on behalf of” any director or officer. This is an exclusion that frequently causes difficulties for insureds whose business is to provide professional services. The rationale for the exclusion is that such claims should be covered by the insured’s professional indemnity or errors and omissions policy.
- Presumption of Indemnity
Side B cover of D&O policies provides an indemnity to companies where those companies have indemnified a director for a legal liability or paid the legal defence costs of the director. Side B cover normally requires a deductible to be paid by the company. However, there are legal limitations on companies as to what they can indemnify a director for and where a company cannot legally indemnify a director, that director can usually seek an indemnity under Side A of the policy, which responds where the claim is a “non-indemnifiable loss”, i.e. a liability that cannot be legally indemnified by the company. Side A insurance cover does not require a deductible to be paid and difficulties can arise where a company has refused to indemnify a director, even though it is able to legally do so. In such situations, a director may be unable to claim under Side A for a “non-indemnifiable loss” as the company should have indemnified the director but has simply chosen not to do so. Arguments arise as to whether the director has cover at all. Some policies contain clauses (Presumption of Indemnification clauses) specifying that in such circumstances the Side B deductible, which can be substantial, is payable by a director to ensure there is no doubt over the position. There are moves afoot in the insurance market to try to overcome this issue and there are new wordings being marketed to alleviate this potential issue.
- Erosion of policy limit
Usually D&O policies are written with annual aggregate limits. A concern directors frequently have is the erosion of the aggregate limit by claims made by the company for indemnification where it has indemnified a director (a Side B claim). Some policies contain Order of Payments clauses, which provide a degree of protection for directors, but such clauses will not stop the erosion of the policy aggregate limit. Often the solution lies in the way the insurance programme is structured. An excess Side A layer of insurance, for example, can provide a layer of cover which is ring-fenced specifically for directors’ Side A claims.
- Global cover
For a company that operates across a number of jurisdictions, insurance cover can be extremely complicated. There are many jurisdictions that require local policies to be in place and as such, one global policy placed in the London insurance market may not achieve the geographically broad cover required. The risks of not abiding by the local insurance requirements can be extremely draconian for both the company and the director. The answer is to put in place a carefully crafted global programme to ensure that not only all local insurance laws are adhered to but that the insurance requirements of the company and directors are satisfied to the extent that they can be.
This briefing raises just a few of the issues that we have advised upon in the last 12 months. The D&O policy wordings in use today vary considerably in their terms and the cover provided, not to mention their quality. In a soft market policy wordings can be broad and ambiguous thereby blurring the scope of the policy cover which increases the risk of coverage disputes.
For more information, please contact Graham Denny, Associate, on +44 (0)20 7264 8387 or firstname.lastname@example.org, or your usual contact at HFW.