In Part I of this blog, I discussed issues that real estate and construction companies face when placing and renewing Directors and Officers Coverage. Specifically, I addressed avoiding gaps in coverage, knowledge of insureds, the definition of who is an insured, and notice. In this Part II, I will address arbitration provisions, choosing policy limits, and defense provisions.
Arbitration and Litigation Provisions
Many D&O policies contain an arbitration provision. Some are mandatory and the arbitration results are binding. Others are optional requiring agreement of the parties. While arbitration provisions may be inviting, policyholders may want to think twice before agreeing to them. They are touted as a cost saver, but in my experience, arbitrations can be as costly as litigation. Some arbitration organizations require up-front fees that are set based upon the potential size of the underlying claim, regardless of the likelihood of recovery. Additionally, without the benefit of the civil rules of procedure, certain witnesses may be unavailable, and some arbitrators may or may not rein-in the discovery process. In the absence of fraud or conflict of interest, unfavorable arbitration awards are very difficult or impossible to appeal, even if they deviate from legal precedent. Finally, there are some built in safeguards that are lost as a policyholder. The rules of interpretation that are applied against carriers are sometimes lost in arbitration. Arbitrators are likely to see the same, few carriers repeatedly, but are very unlikely to see the policyholder in a future arbitration. The fact that they might be selected by a carrier in the future can have a not-so-subtle effect on the results of the arbitration. As a policyholder attorney I generally recommend that these provisions be avoided, or that any arbitration provision be optional.
Finally, look to make sure that the policy doesn’t have a limitations period that is shorter than what your state law allows. Many policies state that a claim under the policy must be made within two years of a loss. Minnesota, for example, has a six-year statute of limitations for breach of contract. These shorter contractual periods can work to significantly limit coverage.
The issue of how much coverage to buy could take up an entire blog post. There are several factors that go into the analysis of choosing policy limits. It is always better to have more coverage, but cost will be a significant factor. That cost is particularly important with the tightening insurance market we are presently experiencing. Some excess coverages may no longer be available at all. In the case of D&O, one must ask whether the policy limits available are shared with other coverages and will claims likely implicate more than one coverage. Are there separate limits with, for example, employment practices liability coverage, and are there separate limits for the different coverages under the D&O policy? That is, will a claim made by the company under either Side B or C coverage erode the limits available to pay directly to the directors and officers? Many policies provide for separate, additional, limits for Side A coverage. If there is excess coverage, lower primary limits may make sense if the excess insurance follows form. However, if the excess policy has different coverages or does not provide a defense, that can significantly affect what limits should be purchased. Additionally, as will be discussed below, is the policy a duty to defend policy, or does it only require the insurer to reimburse defense costs? Is the policy a wasting policy where defense costs erode the limits available to pay claims, or are defense costs provided in addition to the policy limits? These factors can be substantial because often the biggest expense in these claims is the cost of defense.
Duty to Defend vs. Duty to Reimburse
Does the policy state that the insurer has the duty and right to defend the policyholder, or does it state that the carrier will reimburse the defense costs incurred for covered claims? While this difference doesn’t seem that significant on its face, it can be in application. In most states the duty to defend is separate from and broader than the duty to indemnify. That is, a duty to defend arises if there is arguable, or probable coverage. This is true even if it is later found that there is no coverage under the policy. Therefore, if the policy provides a duty to defend, that kicks in well before a finding of actual coverage under the policy. However, the duty to reimburse defense costs only applies when there is a determination of actual coverage under the policy. In addition, as discussed above, certain exclusions in the policy for intentional acts, fraud, improper financial advantage, may not apply unless there is a final adjudication. In those instances, the duty to defend would still apply. Finally, most policies are silent on the right to select counsel, or state that counsel will be selected from panel counsel lists of the insurer. The time for the policyholder to negotiate who will represent them is before the claim arises. If the policyholder has trusted counsel, they should make sure that the counsel is approved at the time the policy is placed, because insurance carriers will be much less flexible after a claim comes in. Finally, as discussed above, strong consideration should be made to policy limits and whether defense costs will impact those limits. Policyholders should be sure that they have enough coverage for a settlement or judgement after lengthy litigation.
These are but a few of the considerations that a policyholder should factor when they are placing or renewing their D&O insurance. Consultation with a trusted broker or insurance attorney is always recommended.
Larkin Hoffman’s insurance coverage department can help you and your business assess its insurance and maximize coverage. You can contact Chris Yetka at email@example.com