2. THE FOUR HORSEMEN OF RESCISSION MODERATOR: JOSEPH P. MONTELEONE DUANE MORRIS, LLP PANELISTS: HARVEY WEINER PEABODY & ARNOLD, LLP JANICE RIZZO ST. PAUL TRAVELERS, INC. R. DAMIAN BREW MARSH FINPRO KIERAN MURRAY LEXINGTON INSURANCE

3. Finally – A successful rescission litigation victory after 86 years!!

4. There is a material misrepresentation in this application for the insurance policy.

5. Things Boston Fans Would Like to See Rescinded

9. THE FOUR HORSEMEN OF RESCISSION 1. The Broker 2. The Underwriter 3. The Claims Handler 4. The Litigator

11. RESCISSION  Elements Vary From State To State  Can Be Either Statutory Or Common Law  Usually Governed By Law Of State Where Policy Is Issued  Policy Is Void (ab initio) And Not Voidable

12. LEGAL ELEMENTS OF RESCISSION  There Must Be A Representation.  The Representation Must Be False.  The Misrepresentation Must Be Material.  The Insurer Must Have Relied On The Misrepresentation.  In Some Jurisdictions, The Insured Must Know The Falsity Of The Representation.

13. SEVERABILITY  Full Severability In Re Healthsouth Corporation Insurance Litigation, 308 Supp. 2d 1253 (N.D. Ala. 2004)  Limited Severability Cutter & Buck, Inc. v. Genesis Insurance Company, 306 F. Supp. 2d 988 (W.D. WA 2004), aff’d 2005 WL1799397 (9 th Cir.)

14. Understanding Rescission and the Application of Rescission from a Claims Prospective Janice M. Rizzo, Esq. St. Paul Travelers, Inc. Director of Field Operations Professional E&O Claims

15. THE FOUR HORSEMEN OF RESCISSION WHEN TO RESCIND Material Misrepresentation/Fraud In The Application Inaccurate Financials Failure To Cooperate

16. THE FOUR HORSEMEN OF RESCISSION STEPS TO TAKE WHEN CONSIDERING RESCISSION Conduct A Prompt And Appropriate Investigation Review All Controlling Statutes Regarding Duties And Chance of Prevailing Preserve The Right to Rescind / Avoid Exposing Your Company To Extra-Contractual Liability Issue A Reservation of Rights Letter / Enter Into A Negotiated Non-Waiver Agreement Regarding Rights And Duties Of All

17. THE FOUR HORSEMEN OF RESCISSION THE APPLICATION AND WARRANTY Concurrent Submission Of Application And Policy Fact-Based Response (Affirmative Information) To A Given Question Has The Warranty Been Breached? Update Of Material Information Between Application Submission And Policy Issuance Severability Clause Renewal Applications And/Or Proving Actual Fraud

18. THE FOUR HORSEMEN OF RESCISSION CLAIMS PERSONNEL Upon Initial Indication Of A Potential For Rescission, Act Immediately Appropriately Reserve All Rights Or Obtain A Non-Waiver Agreement Alert Underwriting And All Involved Regarding Renewals And/Or Confirming Validity Of Policy Review And Analyze All Discovery Material That May Impact Rescission Rights

19. THE FOUR HORSEMEN OF RESCISSION UNDERWRITING Do Not Renew Potentially Invalid Policy Without Properly Protecting Rescission Rights Duty Of Inquiry Rests With the Underwriter When In Receipt of Information That May Raise A Concern, Underwriter Has The Duty Of Further Inquiry Underwriter Should Be Able To Testify That, Had He/She Known The Truth, The Policy Would Not Have Been Issued As Written Or At All

20. THE FOUR HORSEMEN OF RESCISSION INVESTIGATION Insurer Must Act Timely And Appropriately In its Investigation Make A Material Determination Whether It Was Underwriting Intent To Issue Policy Commence An Underwriting Investigation Confirming Rescission Rights While Investigating Underlying Claim Delay In Declaring Rescission Based On Evidentiary Information Could Serve To Defeat Your Rescission Rights

21. THE FOUR HORSEMEN OF RESCISSION DEFENSES TO RESCISSION Even If The Right To Rescind Appears To Be Valid, There Are Certain Defenses That Could Apply Ratification: Rescission is an equitable remedy meaning that one who seeks equity must do equity. Do not take any action that may indicate to the policyholder that the policy is viewed as valid. Waiver: Dependent upon evidence of the intentional relinquishment of a known right (did the insurer know of facts giving rise to the right to rescind, yet did not properly rescind?) Estoppel: Insured must prove prejudice since estoppel requires proof that the insured relied to its detriment upon either the insurer’s actions or failure to act

22. THE FOUR HORSEMEN OF RESCISSION OTHER REMEDIES Policy’s Prior Knowledge Exclusion Policy’s Warranty Language Misrepresentation Common Law Fortuity Known Loss Doctrine

23. Client Perspective on Rescission R. Damian Brew/Managing Director/FINPRO Claims

24. ENRON AND WORLDCOM OUTSIDE DIRECTOR SETTLEMENTS Enron:$168 M  $145 M - Insurance  $13 M - Personal Assets WorldCom:$55 M  $36 M - Insurance  $19 M - Personal Assets  $5.5 M - Bert Roberts

25. FACTORS LEADING TO PERSONAL LIABILITY Dearth of insurance limits Bankrupt issuers Egregious fraud Liability under Section 11 Coverage issues Regulatory considerations High-profile defendants Outside analysis

26. Challenges for Clients/Brokers on Rescission Renewal Strategy/Pre-Renewal Meetings Late Breaking Information Application Questions Warranty Letters Subjectivities to Binding Renewals/Run-Off Coverage

27. D&O INSURANCE PROGRAM — COVERAGE CONSIDERATIONS Order of payments Severability of the “Application” for insurance Conduct exclusions  When do they apply?  Are they severable? Program limits / structure

28. Traditional D&O Program Structure — How It Works… Nil RetentionRetention ($) Coverage A Personal Asset Protection for Directors & Officers Insurance for covered Non-Indemnifiable Claims Statute Bankruptcy Company’s refusal Coverage B Corporate Asset Protection Insurance Reimbursement for covered Indemnifiable Claims Coverage C Corporate Asset Protection Insurance for Corporate Liability when Company is a defendant in covered Securities Claims Single Aggregate Limit

29. Excess Limits: Underlying limits are eroded / exhausted Difference in Conditions (“DIC”) Limits: Insurer of Underlying: – Wrongfully refuses – Is financially unable – Rescinds Underlying insurers are not liable Bankruptcy; proceeds of underlying insurance are stayed Traditional D&O Program Structure Plus Side A Only Coverage — How It Works… Nil RetentionRetention ($) Coverage A Personal Asset Protection for Directors & Officers Insurance for covered Non-Indemnifiable Claims Statute Bankruptcy Company’s refusal Coverage B Corporate Asset Protection Insurance Reimbursement for covered Indemnifiable Claims Coverage C Corporate Asset Protection Insurance for Corporate Liability when Company is a defendant in covered Securities Claims Coverage A Excess / DIC Additional Personal Asset Protection for Directors & Officers Single Aggregate Limit

30. Traditional D&O Program Structure Plus Side A Only & IDL Coverage — How It Works… Nil RetentionRetention ($) Coverage A Personal Asset Protection for Directors & Officers Insurance for covered Non-Indemnifiable Claims Statute Bankruptcy Company’s refusal Coverage B Corporate Asset Protection Insurance Reimbursement for covered Indemnifiable Claims Coverage C Corporate Asset Protection Insurance for Corporate Liability when Company is a defendant in covered Securities Claims Coverage A Excess / DIC Additional Personal Asset Protection for Directors & Officers Single Aggregate Limit Excess Limits: Underlying limits are eroded / exhausted Difference in Conditions (“DIC”) Limits: Insurer of Underlying: – Wrongfully refuses – Is financially unable – Rescinds Underlying insurers are not liable Bankruptcy; proceeds of underlying insurance are stayed IDL Coverage Additional Personal Asset Protection for only Independent Directors Similar policy features as Coverage A Excess / DIC policies

31. Underwriting Perspective Kieran Murray Lexington Insurance Company National Branch Manager- Employment Practices Liability

32. UNDERWRITING PERSPECTIVE Obligatory Disclaimer- Views being expressed are my views and not the views of Lexington Insurance Company or AIG. In addition, as D&O coverage is not my expertise, EPLI is, I disclaim any knowledge in this area.

33. Underwriting Process Submission / Application Received From Broker Client Meeting Quote Presented Negotiation (could be before or after quoting) Subjectivities to Binding Policy Issuance

34. Submission / Application Application - Carrier or Market Application Loss Runs Financials Miscellaneous Information Missing Information Necessary to Quote

35. Client Meeting / Additional Information Additional Information Received Through Client Meeting or From Broker. Can be Verbal or in Writing. Late-Breaking Information Received. Underwriter Is Now Prepared to Analyze Complete Submission and Quote Based on All Information Received.

36. Quote Presented Quote Based on and Relying On Information Received. All Coverages and Options Requested May or May Not be Offered in Quote. Subjectivities

37. Negotiations Terms and Conditions  Including Severability Subjectivities  Application Warranty Question Other Subjectivities

38. Subjectivities Can be Received Prior to or After Binding. Are They What Were Expected? Never Want Surprises at This Stage.

39. Avoid Unwanted Results Throughout Quoted / Underwriting Process Numerous Areas Where Process Can Head In the Wrong Direction. Important to:  Submit as Complete a Submission / Renewal Submission As Possible at Outset.  Be As Clear and Precise as Possible - Minimize Surprises.  Put In Writing if Possible.  Satisfy Subjectivities ASAP.