1. New York - February 8-9, 2012 2012 PLUS D&O Symposium Developments in D&O Coverage February 9, 2012 9:00AM to 10:30AM

2. Developments in D&O Coverage MODERATOR: Susanne Mast Murray, Alliant Insurance Services – Insurance Broker PANELISTS: Matthew Shulman, Arch Insurance Company – Insurance Company Underwriting Executive Carolyn Rosenberg, Reed Smith – Policy holder counsel

3. Agenda Investigations as covered claims Loss includes coverage for fines and penalties In-Fill for denial of indemnification Waiver of subrogation rights Deletion of the “Prior Notice” exclusion Deletion of the “Pollution” exclusion 3

4. 4 Coverage for Investigations The definition of Claim in a typical D&O policy provides coverage for administrative and regulatory proceedings brought “against” Insureds (among other things). Some also provide coverage for regulatory or other external investigations as well: when the investigations are “formal”; and when the investigation targets an Insured Person (and not the entity).

5. Coverage for Investigations How does investigations coverage differ between Insured Persons and the Insured Entity? Is there an allocation issue? In the most recent D&O policies, third party investigations coverage has been further broadened: – Example: informal investigations involving Insured Persons prior to being identified as a target 5

6. Coverage for Internal Investigations Internal investigations have not been considered claims under a D&O policy because they are not done in defense of an actual claim, but instead are generally conducted by the company to determine whether wrongdoing was / is occurring and whether to bring a claim based on the findings of the investigation (prosecuting rather than defending a claim) D&O policies have been evolving in this area as well. Coverage has been extended to include coverage for certain internal investigations: 6

7. Coverage for Internal Investigations Shareholder derivative demands Special litigation committees Preliminary investigations or inquiries – into whistleblower allegations – Based on internal audit results Do these expansions unduly water down the product? 7

8. Fines and Penalties Coverage The definition of Loss generally includes damages, judgments, settlements and defense costs. Over time this has been expanded to also include coverage for punitive, exemplary and multiplied damages, coverage for pre and post judgment interest, and other discrete elements of out of pocket costs. The definition of Loss on most D&O policies historically had a much more detailed listing of what Loss did not include, and this always listed fines, penalties and taxes. 8

9. Fines and Penalties Coverage Coverage for fines and penalties has evolved to include specific portions of the Foreign Corrupt Practices Act (but not all sections) and to include coverage for fines and penalties outside the U.S. if such damages would have been covered loss if brought in the U.S. Now it can include broader coverage (not limited to any particular law or regulation): – If insurable by law – If neither intentional nor willful – If a personal obligation of an Insured Person 9

10. Coverage for Other Types of Damages Is there coverage under most D&O policies for disgorgement or the return of monies from an Insured Person? – Example: 304A Claw back scenario Where does public policy come into play?

11. 11 What happens when indemnification is denied? Traditional D&O policies include coverage for non-indemnifiable loss (generally referred to as Side A), indemnifiable loss (generally referred to as Side B), and entity coverage (generally referred to as Side C). Self Insured Retentions apply to indemnifiable loss and entity coverage and D&O policies typically include a “presumption of indemnification”.

12. 12 What happens when indemnification is denied? D&O insurance has evolved to include coverage for wrongful denial of indemnification and to delete the presumption of indemnification – Failure or refusal for any reason (not just financial insolvency) – Insurer will pay within retention with "express corporate obligation to repay“ – Insurer will recognize payment as eroding the retention How does this mesh with Side A DIC coverage offering the same protection?

13. 13 Subrogation Rights – Can the Insurer seek repayment from an Insured? Subrogation clauses in D&O policies provide that in the event of a payment under the policy, the Insurer shall be subrogated to the Insured’s right of recovery from any person or entity who may be potentially responsible for the loss. Does this leave an Insured Person vulnerable to a claim by the Insurer for recovery of amounts paid out under the policy? Should an Insurer ever subrogate against an Insured?

14. 14 Partial or Complete Waiver of Subrogation Rights The Subrogation Clause has been modified in several alternative ways: – limit or even to eliminate their rights to subrogate against Insureds under the policy. – waive all right of subrogation against Insured Persons. – limit their subrogation rights as against Insureds to be available only in the event that a conduct exclusion is triggered. How does subrogation differ from recoupment of advanced defense costs?

15. Narrowing or Deleting Exclusions There are certain exclusions that are standard on D&O policies, but that have been eroded and recently even deleted entirely in some instances. Three examples are the following: Prior Notice exclusion Pollution exclusion Conduct exclusion(s) 15

16. Narrowing or Deleting Exclusions Prior Notice exclusion: – This exclusion is intended to eliminate coverage for claims made during the pendency of the current policy that are related to claims made prior to the inception date of the current policy. Related claims are considered a single claim and date back to the first such claim. Problems: Was the previously noticed claim a D&O claim? Was it covered or accepted for coverage when previously noticed? 16

17. Narrowing or Deleting Exclusions Pollution exclusion: D&O policies have historically had an absolute pollution exclusion, with a very broad preamble (“alleging, arising out of, based upon or attributable to, directly or indirectly“) but this absolute exclusion meant that even securities claims were excluded. Exceptions have evolved, including: Side A non-indemnifiable loss carve back Securities claim carve back Independent directors carve back Insured Persons carve back Deletion of the exclusion entirely 17

18. Narrowing or Deleting Exclusions Conduct exclusion(s) D&O policies traditional include one or more conduct exclusions, that eliminate coverage for some of the following wrongful conduct: fraudulent, dishonest, criminal, malicious acts, willful violation of statute, illegal personal profit, remuneration or advantage. The standard necessary to trigger the exclusion(s) has been continually narrowed, from “in fact”, to “final adjudication” to “final adjudication in the underlying proceeding” to “final adjudication in the underlying proceeding, but even then not applying to defense costs, indemnifiable loss or independent directors. 18

19. Change in Control When there is a change in control of an Insured Entity (such as a merger into another, or sale of substantially all assets), D&O policies typically trip into run off for the remainder of the policy period (covering acts up to the change in control but not afterwards) Insurance considerations with a change in control generally focus on ensuring coverage (somewhere) for past acts, and ensuring coverage (somewhere) for acts going forward.

20. Change in Control Generally, Insureds purchase a separate tail or run off policy for 3-6 years to insure all prior acts, and a separate policy with no prior acts coverage going forward (so they are starting with a clean slate). Are there potential gaps between the tail and the go forward? Interplay between the prior acts exclusion on one and the go forward exclusion on the other.

21. D&O Coverage Evolution Is coverage too broad? Limits are stretched to pay for this expanded coverage Does the board or the officers (or the shareholders) expect coverage for fines and penalties or for pollution, under their D&O policy What’s next? 21

22. Questions? Submit questions for this panel to: question@plusweb.org 22