Presentation by Kevin M. LaCroix, Executive Vice President, RT Pro Exec., a division of RT Specialty, LLC. to the 66th Annual Fowler Seminar on Oct 12 2012 titled Private Company Directors & Officers Insurance
1. Insurance Roundtable of
Baltimore
Annual Fall Seminar
Private Company Directors’ &
Officers’ Insurance
Hunt Valley, Maryland
October 12, 2012
1
2. Presentation Outline
• Private Company D&O
– The Basics
– Terms & Conditions
– Limits and Structure
• Emerging Issues
– M&A Litigation
– JOBS Act
– Social Media
– Excess Coverage Triggers
• Recurring Issues
– Warranties
– Antitrust Exclusion
– Contract Exclusion
– Disconnect: Clients’ Expectations vs. Marketplace Reality
– Client Assuming Not Covered, Therefore Notice Not Given
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3. Claims against Private Companies
Percentage of D&O Claims by Claimant
Private Companies
Other Third Parties Customers & Clients Competitors
11% 3% 11%
Employees Shareholders
43% 32%
Source: Towers Perrin Directors and Officers Liability Survey
4. Why Private Companies Buy D&O
Insurance
• Unanticipated claimants, unanticipated claims
• The high costs of defense
• Unanticipated inability to indemnify
• Relatively modest incremental cost on top of
EPL
• Private company D&O insurance = broad
coverage
5. D&O Insurance-- The Basics
• Professional Liability Insurance for Directors and Officers
• Private Company form includes broad entity coverage
• Provides Coverage for
1. Loss
2. Arising from Claims Made During the Policy Period
3. Against Insured Persons
4. For Wrongful Acts
5. In an Insured Capacity
6. Policy Mechanics Y
TRIGGER TRIGGER TRIGGER
Actions of D&Os that Actions of D&Os that Actions of entity
aren’t indemnifiable are indemnifiable
PAYS
PAYS PAYS On behalf of entity
On behalf of D&Os On behalf of entity to
fund indemnification RETENTION
RETENTION
Applies
None RETENTION
Applies
A B C
7. D&O Insurance: Exclusions
• D&O Insurance is Not “All Risks” Insurance
• Conduct Exclusions
• Exclusions to Fit D&O Insurance with other coverages
• Prior Notice / Other Insurance / Prior Claims
• Environmental / Nuclear Exclusions
• Uncommon Exclusions:
– Commissions Exclusion
– Failure to Maintain Insurance Exclusion
– Antitrust Exclusion
8. Key Coverage Considerations
• Separate or Combined limits
• Duty to Defend or reimbursement
• Full prior acts coverage
• Broad definition of Claim
• Broad definition of Employment Practices Wrongful Act
• Full coverage for private securityholder exposures
• Coverage for punitive damages
• Wage and Hour law claim defense costs coverage
9. Key Coverage Considerations
• Third Party discrimination and sexual harassment coverage
• “Final adjudication” language on misconduct exclusions
• Fully severable exclusions
• Fully severable application
• No major shareholder or family exclusions
• No anti-trust or unfair trade practices exclusions
• No bankruptcy / insolvency exclusion
10. Limit Distribution
First Third
Median Average
Participants Quartile Quartile
Total Assets ($ ($
Reporting ($ ($
millions) millions)
millions) millions)
$0 to $6 million 669 1 2 3 2.51
$6 to $10 million 306 1 2 3 2.78
$10 to $50 million 406 2 3 5 4.55
$50 to $100 million 72 2.25 5 10 5.72
$100 to $400 million 72 3 5 10 8.58
12. Special Considerations Involving Outside
Directors
• Individuals’ Separate Interests Have Policy
Structure Implications:
– Interests of Insider Officers and Outside Directors
Not Always Aligned
13. Outside Directors? Divergent Interests
• Problem of Single Policy, Shared Limits
– Limits Exhaustion (Collins & Aikman)
– Insolvency (Just for Feet)
– Individual targets / plaintiff “bounties”
– Derivative Suits (Options Backdating)
• Advantage of Dedicated Insurance
• Program Structure Solutions
– Dedicated Side A/DIC Policy
– Individual Director Liability Insurance (IDL)
14. Excess Side A/DIC Protection
• Side A: When the company is unable to
indemnify (insolvency or legal prohibition)
• Difference in Condition:
– Carrier Insolvency
– Traditional carrier denies coverage (fewer
exclusions)
– Company refuses to indemnify
– Traditional Carrier Rescinds Coverage
17. What to Talk About When Talking D&O
• Personal liability exposure
• Indemnification – and its limits
• Individual liability protection (possible need for
Excess Side A only coverage?)
• Limits Adequacy
• Program Structure
• What Underwriters Look For
• Risk Management
• “Never Had a Claim/Don’t Need the Insurance”
18. Emerging Issues: Merger Objection
Litigation
Year Deals Litigation % With Litigation
2005 181 70 38.7%
2006 230 97 42.2%
2007 249 97 39.0%
2008 104 50 48.1%
2009 71 60 84.5%
2012 124 105 84.7%
2011 103 97 94.2%
Total 1,062 576 54.2%
U.S. publicly traded targets, Transaction > $100 Million
(Source: M. Cain, S. Davidoff, Takeover Litigation in 2011)
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19. Merger Objection Litigation
• Shifting Mix of Litigation
• Not Only Frequency, But Severity
• Data Reports Concern Large Public
Companies, But Small Deals Involved, Too
• Affecting Primary D&O Pricing
• Separate M&A Retentions (More Common for
Public D&O But Also for Private Company
D&O)
20. Emerging Issues: The JOBS Act
• Jumpstart Our Business Startups (JOBS) Act
• Signed Into Law April 2012
• Intended to Facilitate Capital Formation and
Boost Employment
• Potential Effects Much Greater for Private
Companies
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21. The JOBS Act: Key Features
• Eased Restrictions for Private Offerings
– Advertising, Solicitation Allowed
– Reporting Exemptions Expanded (e.g., up to 2,000
shareholders now allowed)
• IPO “On Ramp” Procedures
– Confidential Filing
– “Testing the Waters” Allowed
• Emerging Growth Companies
– Reduced Reporting Requirements
– Relief from Dodd-Frank, Sarbanes Oxley Requirements
• Crowdfunding on Internet Portals Allowed
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22. Crowdfunding
• Subject to SEC Rules (Due January 2013)
• Limited to $1 Million Per Year
• Must Register with SEC
– Over $500 Million: Audited Financial Required
• Potential Securities Act Liability for
Misrepresentations
• Concern: Blurs the Line Between Private and
Public Companies?
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23. Private Placements
• JOBS Act provisions allow much larger private
offerings
• Allowance of Solicitation and Advertising:
Potential for Mischief
• Private Companies with as many as 2,000
Shareholders
• Again, Blurs the Line Between Private and
Public Companies
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24. JOBS Act: D&O Insurance Implications
• Private Company D&O Insurers Concerned
• Most Concerned About Reduced Private Financing
Restrictions
• Crowdfunding
– Revised Securities Offering Exclusions
– Crowdfunding Exclusion Endorsements
• Special Considerations for Pre-IPO Companies
• Stay Tuned
– Most Insurers Still Determining Response
– Crowdfunding Rules Not in Place Until January 2013
– JOBS Act is THE Hot Button private company
D&O topic for 2013
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25. Emerging Issues: Employer Social Media
Policies
• Costco Wholesale Corp., National Labor
Relations Board, September 7, 2012
– Company Policy: statements “posted electronically (such
as [to] online message boards or discussion groups) that
damage the Company, defame any individual or damage
any person’s reputation, or violate the policies outlined in
the Costco Employee Agreement may be subject to
discipline, up to and including termination of
employment.”
25
26. Employer Social Media Policies:
The NLRB’s Decision in Costco
• The NLRB Found that Costco’s Rule “clearly
encompasses concerted communications
protesting *Costco’s+ treatment of its
employees.” Costco’s maintenance of the rule
therefore “has a reasonable tendency to
inhibit employees’ protected activity” and as
such “violates” the National Labor Relations
Act.”
26
27. EPL Insurance Implications of the
Costco Decision
• Social Media Policies May Inhibit “Concerted”
Communications, Violate NLRA.
• Problem: Typical EPL Policy Contains NLRA Exclusion
• Possible Option?: NLRA Exclusion Carve-Back to
preserve coverage for Retaliation Claims
– preserving coverage for claims based on retaliation for
exercising rights protected by the NLRA
• Limitation: Carve-back rarely extends to class or mass
actions.
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28. Excess Insurance Trigger
• Circumstance: Underlying Insurer Pays Less
Than Full Policy Limits, Policyholder “Funds
the Gap”
• Excess Insurer Contends: Payment Duty Not
Triggered Because Underlying Insurance Not
Exhausted by Payment of Loss
• Historically: Zeig v. Massachusetts Bonding:
Exhaustion Requirement Ambiguous, Excess
Insurer Payment Obligation Enforced
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29. Excess Insurance Trigger
• Exhaustion Requirement: Comerica case (E.D.
Mich. 2007) found exhaustion trigger
requirement unambiguous
• Long Line of cases now holding that excess
insurer’s payment obligation not triggered
where underlying insurance not exhausted by
insurer’s payment of loss.
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30. Excess Insurance Trigger
• Solution: Excess Policy Payment Trigger
Expressly Contemplates Payment of
Underlying Amounts by Insurer or Insured
• Practice Pointer: Amended Trigger Coverage
Must be Incorporated All the Way Up the
Tower.
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31. Recurring Issues: Antitrust Exclusion
• Insurer Shall Not be Liable for Loss:
– Based upon, arising from, or in any way related to
any actual or alleged violation of any law, rule or
regulation relating to anti-trust, restraint of trade,
unfair business practices or interference with
another’s business, contractual or economic
relationships or interests
31
32. Antitrust Exclusion (Cont’d)
• Referred to as “Antitrust” exclusion but sweeps much more
broadly
• Many (but not all) insurers have some form of the exclusion in
their base policies
• Most (but not all) insurers will remove the exclusion on
request
• Even if they won’t remove, will at least provide sub-limited
coverage, coverage with coinsurance or defense cost only
coverage
• Not a problem with carriers asking for it, problem is allowing it
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33. Recurring Issues: Contract Exclusion
• The Insurer Shall Not Be Liable for Loss
– Based Upon, arising from, related to or in any way
involving, directly or indirectly, any actual or
alleged obligation of the Company under any
express contract or agreement
33
34. Contract Exclusion
• Basic fairness of exclusion: insured should not be
able to voluntarily undertake contractual obligation,
fail to perform, and they pass the obligation along to
the insurer
• Problem: Exclusion Often Framed and Enforced
Overly Broadly
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35. Contract Exclusion (Cont’d)
• Should Be Limited to Entity Coverage Only
• Should provide that it does not apply to the
extent that liability would otherwise attach in
the absence of contract
• Arguably Should Use “for” working rather
than “based upon, etc.”
• Arguably Should Not refer to “directly or
indirectly”
35
36. Recurring Issues: Warranties
• Application for New Coverage: Is the Insured Aware of
Circumstances That Could Give Rise to a Claim? (or some
variation)
• Perfectly legitimate question for new coverage or increased
limits
• Not legitimate question for renewal coverage
• Not a legitimate question even if on renewal coverage is
moving to a new carrier
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37. Recurring Issues: Warranties
• Carrier can rely on warranties to seek
rescission or to bootstrap a coverage defense
• All too often, policyholders are sent the wrong
application
• All too often, policyholders fill out main form
application when moving carriers on renewal
• Knowledge Issue, Process Issue, Training Issue
37
38. Recurring Issue: Notice
• Recurring Notice Problems:
– “Didn’t Think it Would Be Covered”
– “Didn’t Think it Would Exceed Retention”
– Worried About Effect on Renewal Premium
– EEOC Claims
• First Principle of D&O Insurance:
– Presumption Should Be: Give Notice
– Corollary: Submit Matter as Notice of Claim or in the
Alternative Circumstances that Could Give Rise to a Claim
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39. Recurring Issues: Expectations Gap
• Often Disconnect Between Insured’s Expectations and
Marketplace Reality
– Current Marketplace: More Important Than Ever to Set
Expectations
– Problems Arise When Insured Not Prepared for What is
Coming
• Particularly Important in Claims Context
– Explain to Insured at the Outset What to Expect from
Claims
– Prepare the Insured for Likely Difficult Issues (e.g.,
Allocation)
– Critical Importance of Keeping Carriers(s) in the Loop)
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40. Expectations Gap (Cont’d)
• Address Choice of Counsel Issue at the Front
End
– Insured May Discover at the Time of Claim that it
really does want its own counsel
– Carrier May Agree in Advance to Insured’s
Preferred Counsel
– Hourly Rates May be More Susceptible to
Negotiation in Advance
– Always Easier to Negotiate Outside of the Claims
Context
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