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Reread Your Directors' & Officers' Liability Policy Before You Come Under Attack

By: Kurt W. Melchior

The demise of Lehman Brothers, Indy Mac, and Washington Mutual, the collapse of Fannie Mae and Freddie Mac, and the bailout of insurance giant AIG have set Congress on a mission to find and punish corporate wrongdoers. Last month, the Committee on Oversight and Government Reform, chaired by Representative Harold Waxman, held hearings on the collapse of Lehman Brothers and AIG. The Committee also held a hearing titled "Credit Rating Agencies and the Financial Crisis" to examine the actions of the three largest credit rating agencies leading up to the current financial crisis. "Lax oversight and reckless investments on Wall Street are causing massive disruption throughout our economy," said Chairman Waxman. "Our hearings will examine what went wrong and who should be held to account." Not only corporations, but also corporate executives, directors, managers, and advisors, will be questioned and perhaps held liable.

We would not be surprised if the current crisis results in a wave of class action lawsuits by shareholders alleging that lax corporate governance or outright fraud caused a corporation's stock price to plummet. Third party investors may file lawsuits alleging that they were defrauded.

This makes now a good time not only to reacquaint yourself with the terms of your Directors' and Officers' liability policy but to make any necessary adjustments as well, especially since signs point to a further tightening of the market for D&O coverage. Reread your policies in the light of the current financial and business crisis, re-evaluate the coverage your policies provide, and take steps to preserve and if necessary augment your coverage.

Know how your policy defines "claim" and whether it requires you to report potential claims. Some recent D&O policies have broadened the definition of "claim" to include "either (1) a written demand for monetary or nonmonetary relief made against any Insured, or (2) a civil, criminal, administrative or arbitration proceeding made against any Insured seeking monetary or nonmonetary relief." Some policies require you to report potential claims or "circumstances" potentially leading to a claim as well. Policyholders worry that premature reporting of claims might lead their insurers to raise premiums at renewal time or even to decline renewal. They also worry that a new insurer might deny coverage for any previously reported claim if a suit is filed during the following policy period. While these worries are not entirely unfounded, you should err on the side of caution. Know your policies' reporting requirements.

To avoid giving insurers an easy way to deny coverage, timely report claims. Be familiar with the claims reporting requirements under your policies and stay on top of developing claims. As we explained in an earlier e-alert ("A Day Late Will Leave You More Than A Dollar Short"), timely reporting is an absolutely critical pre-condition to coverage.

Know who is and is not covered. Some D&O policies list "Insured Persons" by name, while others provide coverage for designated positions. Your policy may or may not provide coverage for former directors and officers—those who were directors and officers when the alleged wrongful acts occurred but left before the claim was made.

Know how your policy defines "fraud." While all D&O policies cover director and officer negligence, most contain an exclusion for fraud. Don't assume fraud is not covered, however, because the language of those fraud exclusions varies. Some policies exclude coverage for conduct that is fraudulent "in fact"—a murky standard open to dispute. Others exclude coverage for "deliberately fraudulent" acts or omissions, or "willful" violation of laws, but only "if a judgment or other final adjudication establishes" that conduct.

Don't let employment practices claims erode or exhaust your D&O coverage. Employment practices lawsuits (wrongful termination, discrimination, harassment, and wage and hour issues) have in recent years made up more than half of D&O claims. A combined D&O and Employment Practices Liability policy can save you some premium dollars. But combining the two types of coverage in a single policy can—if your company is hit with a large EPL claim—have the unanticipated effect of diminishing your D&O coverage. To avoid this, consider buying separate D&O and EPL policies or at a minimum segregating your D&O and EPL coverage limits.

Don't overlook your other policies. If your company is the subject of a complaint that names your directors and officers, be sure to look beyond your D&O coverage. Financial institutions typically carry errors and omissions policies to protect against malfeasance claims. Comprehensive general liability policies include a broad duty to defend the entire lawsuit if even one claim is "potentially covered." If you are sued, make sure to review the complaint very carefully to see whether the policy "potentially" covers any of the allegations.

Nossaman's coverage counsel are available to help policyholders maximize their insurance coverage and to review claims and lawsuits from that perspective.

This is the third in a series of occasional reports about general principles relating to buying, owning, and dealing with insurance policies.

Kurt W. Melchior is a litigation partner with Nossaman in San Francisco, where he chairs the Firm's insurance coverage practice group. He has over 50 years' experience litigating complex commercial matters, including class actions, antitrust, insurance coverage, health care, and professional responsibility cases. He can be reached at (415) 438-7279 or

Thomas D. Long is a litigation partner with Nossaman in Los Angeles who focuses his practice on complex commercial disputes. He counsels private businesses and public entities on insurance issues and also represents them in coverage litigation under all types of insurance policies, including commercial general liability, property, employment practices liability, directors' and officers' and professional liability policies. He can be reached at (213) 612-7871 or

Deborah E. Beck is a senior litigation associate with Nossaman in San Francisco who focuses her practice on appellate, environmental, and insurance coverage issues. She counsels private businesses and public entities on insurance issues and also represents them in complex coverage litigation under all types of insurance policies, including commercial general liability, property, employment practices liability, directors' and officers' and professional liability policies. She can be reached at (415) 438-7254 or

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