Although filings are up, NERA reports that settlement amounts are falling and dismissals are rising. Because defending and resolving securities class litigation remains time-consuming and expensive, Directors’ and Officers’ Liability (“D&O”) insurance can provide critical protection. D&O insurance generally covers directors and officers for non-indemnifiable claims made against them (“Side A” coverage); the company for amounts it pays as advancement or indemnification for indemnifiable claims made against directors and officers (“company reimbursement” or “Side B” coverage); and the company for securities claims made against it (“entity securities” or “Side C” coverage). Most D&O policies respond to civil lawsuits, criminal actions, investigations of directors or officers, and written demands for relief (including securityholder derivative demands), and generally cover damages, judgments, settlements, and defense expenses. D&O policies also contain exclusions that may limit or preclude coverage for certain types of claims, and other terms and conditions affecting coverage that should be carefully reviewed. Beyond these traditional components of D&O coverage, insurers have increasingly responded to market demands by offering enhancements to standard forms, and attempting to fill potential “gaps” in coverage that may arise as securities plaintiffs assert new or creative theories of liability and in a changing regulatory environment. In building a D&O program, companies should ask the following questions and consider coverage enhancements to arm management and the company:

• Can directors and officers be sued in multiple capacities? Directors and officers may be asked to sit on multiple boards of companies, whether profit or nonprofit, portfolio or affiliate.  Most carriers will add endorsements covering directors and officers who may be sued in their capacity as a controlling person or controlling shareholder, and as a “shadow” or “de facto” director. Nearly all insurers offer coverage for service on “outside entities,” and it is important to understand how the policies interact and are prioritized before a claim comes in.
• Are there M&A-specific concerns? Directors and officers can be sued by securityholders for common-law breaches of fiduciary duty, and as players in transactions where the carriers allege that the “bump-up” exclusion precludes or limits coverage. Where possible, the “bump-up” exclusion should be narrowly drafted and limited to the amount of the share price increase, and should not apply to defense costs and to non-indemnifiable claims against directors and officers. In addition, D&O policies should respond to securities claims asserted under common-law theories, as well as statutory law and regulations.
• Is the policy fully non-rescindable? Making the policy fully non-rescindable can be of value even if there is an exclusion for claims based on alleged misrepresentations in the application process. At minimum, Side A coverage should be non-rescindable, and the policy should be severable so that a misrepresentation in the application by one insured person does not affect coverage for other insured persons.
• Does the policy respond to requests for information? Beyond target letters and subpoenas, triggering coverage for requests for information and interviews at the earliest possible time may be of value. Many insurers offer “pre-claim” coverage for the expenses incurred by directors and officers in responding to non-routine interviews or document production to regulators, or in response to a securityholder derivative demand or investigation.
• Are directors and officers fully protected against personal liability for their service to the company? Although nearly all D&O policies exclude coverage for dishonesty, fraud, and unlawful profit, exclusions should be narrowly drafted, should be severable, and should only apply in the event of a final, non-appealable, and adverse adjudication that a specific director or officer committed excluded conduct. In addition, many insurers will advance defense costs to directors or officers within a retention in the event of an indemnification dispute between the individual and the company, subject to the insurer’s right to seek reimbursement from the company. Companies should also consider dedicated Side A-only, difference-in-conditions (“DIC”) policies in the event that traditional D&O policies cannot respond to a claim.

If and when an investigation, request, demand or suit is made, these pitfalls should be avoided:

• Give timely notice to all potentially applicable insurers. Late notice issues remain fodder for coverage challenges. Notice requirements may be technical, and should be reviewed carefully in advance of a claim. Giving notice (whether as a claim, potential claim or both) is important, and can be heightened during renewal. Framing notices to multiple and excess carriers where coverage may be invoked under multiple policies or scenarios should also be carefully considered. And keep in mind that the obligation to give notice of a “claim” may be triggered by something other than a lawsuit, such as a written demand for relief.
• Obtain consent to defense arrangements and to incur defense costs. Most D&O policies provide that the insured defends claims and the insurer consents to counsel. It is critical to secure consent at the earliest opportunity, and negotiating rates may often be time-consuming but vital. Absent language in the policy, insurer billing guidelines are not part of the contract between the insurer and the insured, and should also be negotiated if provisions constrain or limit the defense or potentially impair the attorney-client privilege.
• Keep the insurers apprised of claim developments. D&O policies obligate insureds to cooperate with insurers. Avoid coverage disputes or delay by promptly informing insurers of all material developments.
• Obtain consent to settle. Virtually all D&O policies also obligate insureds to obtain the carrier’s consent to settle a claim, and may also require consent before making an offer to settle or to counter a settlement demand.
• Resolve coverage disputes. Policyholders should respond promptly to reservation-of-rights letters or denials of coverage where prudent. Determine in advance whether the policy requires mediation or arbitration of coverage disputes, or allows the insureds (or the insurers) to litigate.

Client Alert 2017-194