The current economic climate is challenging for all businesses, but none face as many obstacles as financial institutions. Not only do they face the ordinary business pressures of a declining economy, they are popular scapegoats in trying times, making them a natural target for opportunistic trial lawyers. Claims may be asserted not only against the financial institutions themselves, but also personally against their directors and officers. Directors & Officers ("D&O") Insurance is supposed to step in and respond to these claims (and indeed, the presumptive presence of such coverage makes corporate officials an attractive target). But, it is possible that there are provisions in a D&O Policy that might limit coverage for these claims. It makes sense for financial institutions to conduct a thorough review of their D&O Policies now, and minimize any nasty surprises regarding the extent of their coverage in the face of a serious D&O claim.
In this e-bulletin, we will identify a few key areas to focus on in reviewing a financial institution’s D&O Policy.
What happens to coverage if there was a mistake in the application?
Typically, a D&O Policy, like most other insurance policies, will contain a clause whereby a material misrepresentation in the application for insurance excuses the insurer from its duty to defend and indemnify a claim. The scope of this exclusion varies. Some policies provide that a misrepresentation in the application may jeopardize coverage for all insureds, even those directors and officers who had no role in filing the application. In other policies, only the insured making the misrepresentation would be in jeopardy of losing their coverage, and coverage would remain in place for all of the innocent insureds. Many insurance companies, when faced with the prospect of defending a complex and costly lawsuit, will scour an application for misrepresentations, in hopes of defeating coverage for the claim. Therefore, it is crucial that financial institutions understand the importance of their application, and how it could limit coverage for a future claim, so that they can devote the necessary time and resources to that process.
What happens when there is a change of control at the Institution?
These days, changes in the control of financial institutions are not uncommon, either through private equity transactions, acquisitions or government intervention. Most D&O Policies have a specific “change of control” provision that may be implicated by such transactions. Commonly, these clauses provide that the existing D&O Policy applies to claims arising from acts that occurred prior to the change in control, but not to any claims arising from acts that occurred after that change in control. D&O Policies, however, vary substantially in precisely what constitutes a change in control, and the coverage that is available both before and after a change in control. Thus, it makes sense for a financial institution to analyze these provisions, so that it has a clear understanding of what transactions may constitute a change in control, and can take appropriate actions to ensure that a change in control does not result in a gap in coverage for its directors and officers. The specific terms of a D&O Policy’s change of control provision will also influence whether, and what type, of additional insurance (often referred to as “tail” coverage) will be needed in conjunction with a change in control to ensure that institutions directors and officers are adequately protected. An understanding of those change of control provisions will allow a financial institution to make contingency plans to obtain adequate tail coverage in a timely and cost-efficient manner.
How does an allegation of fraud or other misconduct effect the Policy?
Insurance companies are not in the business of underwriting fraud or intentional misconduct. D&O Policies, like many other types of insurance, contain “conduct” exclusions which eliminate coverage for deliberate wrongful acts. Again, the scope of these “conduct” exclusions varies between policies. Some cover a wide range of actions, including non-criminal violations of statutes and regulations, while others pertain only to criminal or fraudulent acts. Additionally, policies differ as to when these exclusions are triggered. In some policies, the exclusion is triggered by the mere allegation that an insured committed the excluded wrongful act, while other policies do not exclude coverage until there has been a final adjudication that the insured in fact committed the conduct in question. Also, policies vary in their treatment of innocent directors and officers. In some cases, the exclusion may be broad enough to exclude coverage for claims arising out of the wrongful acts of any insured, even insureds not accused of malfeasance (for instance, under a negligent supervision theory). In other policies, only the bad actor would be barred from coverage. Reviewing this exclusion will allow a financial institution to ensure that its coverage meets the expectations of its directors and officers.
These are just a few of the key issues related to a financial institution’s D&O Policy. Of course, each particular financial institution is unique and has its own set of risks and considerations. It is important that each institution have the coverage that meets its individual expectations and needs. Warner Norcross & Judd LLP’s Insurance Practice Group has extensive experience reviewing the terms and conditions of D&O Policies for various financial institutions, as well as responding to coverage disputes arising out of these policies.
Jason Byrne is a litigator specializing in insurance coverage, and has successfully represented numerous policyholders in resolving coverage disputes with major insurance carriers in a wide variety of cases. He also devotes a significant amount of time to advising clients, including financial institutions, about the nature and extent of their insurance coverage. He can be reached at 616.752.2263, or via e-mail at firstname.lastname@example.org.
Joe Sadler is an insurance coverage litigator with considerable experience advising both insurance carriers and policyholders. Mr. Sadler spent many years advising and representing insurers in coverage and bad faith litigation across the country. He now puts that "behind-the-scenes" knowledge and experience to use in advising policyholder clients in disputes with their insurance carriers. He can be reached at 616.752.2271, or via e-mail at email@example.com.