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Crain Communications, Incorporated May 19, 2008| [Headnote] |
| Insurers offer favorable terms, but buyers must ask for them |
As more companies negotiate enhanced directors and officers policy terms, buyers should be aware of key issues during the underwriting process.
Sixty-one percent of D&O buyers participating in an annual Towers Perrin survey reported an increase in the number of enhancements to their D&O policies during 2007, said Michael Turk, senior consultant at the Stamford, Conn.-based company, during the fourth annual National Directors and Officers Insurance ExecuSummit held in New York.
That is nearly double the 31% who reported coverage enhancements in Tower Perrin's 2006 Directors and Officers Liability Survey of Insurance Purchasing and Claims Trends.
"Right now, carriers are much more amenable to offering broader coverage terms, but the buyer has to ask for it," said Gordon Davenport III, a partner with law firm Foley & Lardner L.L.P. in Madison, Wis., who also spoke at the conference.
Because D&O policy forms are not standardized, many terms are open to negotiation, Mr. Davenport said. To obtain or renew the best possible D&O policy, companies should consider several key issues during the underwriting process.
One of the most important features would provide nonrescindable coverage, Mr. Davenport said. "It is increasingly possible to obtain policy language that makes D&O coverage nonrescindable," he said.
Buyers also "should try to obtain as close to full severability as possible," Mr. Davenport said.
The severability provision comes into play if the insurer rescinds coverage in the event of misrepresentations on the insurance application, and could result in a loss of coverage for all officers and directors. The rescission issue can be addressed by obtaining "full severability" language in the provision, which would secure coverage for those directors and offices considered "innocent" of making false statements, he said.
If using a particular law firm is important to the buyer, then the organization should negotiate coverage terms to pre-approve the law firm in the event defense counsel is needed. Approval would be likely if the company agrees to an insurer's rates and procedures, Mr. Davenport said. Companies should communicate their desire to use a particular firm during the underwriting process. "Don't wait until a claim arises," he said.
Another often negotiable feature is a provision for punitive damages. While some states, such as California, do not allow this coverage, buyers can obtain coverage for this prohibition by negotiating "most favorable jurisdiction" language into the D&O policy. This language broadens traditional language that says punitive damages are covered "where insurable," and would allow an insurer to offer coverage if they can find insurability in any state that has a relationship to the claim, Mr. Davenport said.
Another important consideration is the personal conduct exclusion, which would deny coverage for a director or officer in the event of fraud, dishonesty or other illegal behavior. The threshold for applying the exclusion often is negotiable, said Mr. Davenport. "Buyers should try to obtain strong final adjudication language for personal conduct exclusions, to ensure the exclusion is not triggered until a court decides the conduct has been fraudulent," he said.
Since most claims are settled well before an actual court judgment, Mr. Davenport said, "if you have this language, you can avoid the exclusion ever coming into play."
Buyers should form a strong relationship with the insurer and involve all parties, including brokers, in discussions about the policy terms. If the negotiation process is approached openly, then the insurer is likely to consider alternatives, he said.
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