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Sixth Annual In-House Counsel Conference General Counsel Roundtable D&O Coverage in the 21st Century – A Survivor’s Guide to Understanding Your Coverage.

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Presentation on theme: "Sixth Annual In-House Counsel Conference General Counsel Roundtable D&O Coverage in the 21st Century – A Survivor’s Guide to Understanding Your Coverage."— Presentation transcript:

1 Sixth Annual In-House Counsel Conference General Counsel Roundtable D&O Coverage in the 21st Century – A Survivor’s Guide to Understanding Your Coverage

2 22 Catherine (Kit) Chaskin, Partner, Reed Smith LLP Chris Crawford, Senior Vice President & Regional Practice Leader, Willis Executive Risks Practice Michael (Mickey) Green, VP, General Counsel, Vitesse Semiconductor Corporation Monika McCarthy, fmr General Counsel, New Century Mortgage Corporation Ronald Morrison, EVP, General Counsel, Impac Mortgage Holdings, Inc. Moderator–Douglas Rawles, Partner, Reed Smith LLP Presenters

3 33 What we will cover: The current landscape for coverage What your D&O policy typically looks like Issues that arise in the Boardroom When to tender a claim and why notice is key Issues and provisions you must understand Top 10 take-aways!

4 44 Current Landscape for D&O What did 2009 look like? What can we look forward to?

5 55 Federal Securities Class Actions – Frequency of Filings 1996 to Prepared by Stanford Law School utilizing data supplied by Securities Class Action Clearinghouse.

6 D&O Landscape The Finance sector (53% in 2009) has dominated securities litigation since the start of the credit crisis in 2007 Health technology and services has overtaken Electronic technology as a secondary target In 2009, there were more standard (non-credit or ponzi scheme) cases filed in the Ninth Circuit than any other region 32 individuals were named in FCPA enforcement actions brought by the DOJ or SEC The most for any year since the enactment of the law in 1977 * NERA Recent Trends in Securities Class Action Litigation: 2009 Year-End Update and the 2009 FCPA Enforcement Index

7 D&O Landscape Deloitte C-suite poll released 12/7/09: 37% say they are at least as concerned and 18% state they are more concerned about their company becoming the target of securities litigation than they were two years ago Korn/Ferry’s 34 th Annual Board of Directors Survey: While only 38% of respondents in 2001 stated they were finding it more difficult to recruit high-quality Directors, by 2008 the number had risen to 55% Have you ever turned down a Board position because you felt your personal risk was too great? 59% = YES

8 88 THE D&O CONTRACT OVERVIEW CLAIMS AGAINST ENTITY Corporate Balance Sheet Self Insured Retention Entity Coverage D&O Insurance Policy NOT INDEMNIFIABLE Executives’ Personal Assets NO Self Insured Retention Executives’ Personal Asset Protection D&O Insurance Policy D&O CLAIM INDEMNIFIABLE Corporate Balance Sheet Self Insured Retention Corporate Reimbursement Coverage D&O Insurance Policy “Side A” “Side B” “Side C”

9 99 Typical D&O Program $1M RETENTION NO RETENTION Broad Form A-Side DIC Coverage  Drops down to primary if:  underlying insurance or the company refuses to indemnify  underlying is financially unable to indemnify  underlying insurance is rescinded  underlying insurance is subject to automatic stay under the U.S. Bankruptcy Code  underlying exclusions are broader than DIC exclusions  Is non-rescindable for any reason BROAD FORM DIC (Difference in Conditions) EXCESS A-SIDE COVERAGE A-SIDE COVERAGE EXECUTIVES’ PERSONAL ASSETS PROTECTION B-SIDE COVERAGE CORPORATE BALANCE SHEET PROTECTION C-SIDE COVERAGE CORPORATE ENTITY PROTECTION (Securities Claims only) Annual, Aggregate Limit + $10 Mil e.g., $10m - $50 Mil Excess Independent Director Side-A Coverage

10 10 Typical Key Definitions Insured Persons: Past, present or future duly elected or appointed director or officer Wrongful Act: Any error, misstatement, misleading statement, act or omission or neglect or breach of duty in their capacity as such Claim: Written demand; civil, criminal or administrative proceeding; may include formal investigation (Note: writing does not need to be a lawsuit to qualify as a “claim”) Loss: Defense costs, damages, settlements, judgments, punitives (if insurable). No coverage for fines, penalties or taxes

11 11 D&O Coverage – In the Boardroom Coverage is a “must have” Outside Directors insist on it Issues to watch for Priority of Payments Excess or Separate Side-A Coverage Not all Insurers are the same Allocation of Defense Costs Ability to select counsel of choice

12 12 D&O Coverage – In the Boardroom Mergers, acquisitions, spin-offs create issues for D&O coverage Duty to report Liabilities that stay or go Liabilities that arise from conduct prior to separation or merger Run-off insurance – protection for claims made after for conduct that occurs before transaction

13 13 Notice of Claims “Claims–made” coverage Policy responds to claims first made during policy period May also require claims to be reported in writing during policy period or within specified time after policy period – “Claims Made and Reported” coverage 

14 14 Timely Notice Is Critical 1. Notice frequently stated as a condition precedent to coverage 2. Failure to adhere to notice provisions can void coverage in certain jurisdictions even if the insurer wasn’t prejudiced 3. Insurer may refuse to pay defense costs incurred prior to time Claim is reported

15 Developments in Notice Law Two Texas cases setting trend in “claims- made” notice Financial Indus. Corp. v. XL Specialty Ins. Co.: Insurer must show prejudice when denial is based upon breach of prompt-notice provision, where notice is given during the policy’s coverage period. Prodigy Communications Corp. v. Agricultural Excess & Surplus Ins. Co.: When insured gave notice within specified reporting period, the failure to provide prompt-notice will not defeat coverage absent prejudice to the insurer.

16 16 Considerations in Bankruptcy Likelihood of claims being filed Bankruptcy Trustee Creditors’ Committee Litigation Committee Stockholders seeking recovery for elimination or reduction in the value of their holdings Consumers/attorneys’ general Government agencies

17 17 Issue: Who Owns the Policy, and Who Has a Right to the Proceeds? The filing of a bankruptcy petition operates as a stay of “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” 11 U.S.C. §362(a)(3) Property of the estate is defined to include “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. §541(a)

18 18 Issue: Who Owns the Policy, and Who Has a Right to the Proceeds? Purchased by Company Owned by Company (even though the directors and officers may be the intended beneficiaries) Policies typically property of the estate, but proceeds of policies may not be. Key: What claims are being asserted, against whom, by whom?

19 19 Issue: Who Owns the Policy, and Who Has a Right to the Proceeds? In the event of a Loss arising from a Claim or Claims for which payment is due under the provisions of this policy, then the Underwriter shall: first, pay such non-indemnifiable Loss for which coverage is provided under the Directors & Officers Liability (Individual) Section of this policy, and then, with respect to whatever remaining amount of the Limit of Liability is available after payment of such non- indemnifiable Loss, at the written request of the chief executive officer of the Entity, either pay or withhold payment of such other Loss for which coverage is provided under this policy…

20 20 Rescission of D&O Policy Insurer argues that the policy is void ab initio, or from the beginning. Conceptually, the policy never existed. CONTEXT: Where insured knowingly in bad faith made a false representation or omission that was material to the insured risk in the application for coverage.

21 21 Common bases for rescission: False statements submitted in or in conjunction with the application, especially with respect to financial statements. e.g., “Cooking the books” Failure to disclose knowledge of potential claims.

22 22 Obligation to Disclose Generally, the insured has no affirmative obligation to volunteer information not requested by the insurer. The insured should not, however, withhold responsive information -- it can be argued that it was done in bad faith with the intent to deceive.

23 23 Severability Tip to avoid rescission: The insurer’s ability to avoid a policy ab initio may or may not be limited by language in the policy providing that knowledge of a material misrepresentation or omission will not be imputed to innocent Directors or Officers It is important to negotiate a severability clause

24 24 Top Ten Take-Aways 1. Make sure your team understands policy notice requirements and has a plan in place to meet them, early! 2. When you make a recommendation to place D&O insurance, know your audience in the boardroom and have your data ready. 3. Always compare current operations versus limits—too little coverage can create problems.

25 25 Top Ten Take-Aways 4. Anticipate and plan against coverage gaps that might occur as a result of corporate transactions. 5. Make sure that your excess exhaustion language gives you flexibility in settling cases. 6. Make sure that your broker understands the risks and coverage needs.

26 26 Top Ten Take-Aways 7. Customize your coverage as much as possible and select your carriers strategically. 8. Carefully review the application materials and make sure disclosures are accurate. 9. Protect the policy with good severability language – try to prevent one “bad apple” from spoiling the whole bunch.

27 27 Top Ten Take-Aways 10. D&O insurance is an asset that should be used; don’t treat it like a collectible not to be touched!

28 28 QUESTIONS?

29 29 Douglas Rawles, Reed Smith LLP Kit Chaskin, Reed Smith LLP Chris Crawford, Willis Executive Risks Practice Mickey Green, Vitesse Semiconductor Corporation Monika McCarthy, New Century Liquidating Trust Ron Morrison, Impac Mortgage Holdings, Inc Contact Information


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