CAC Specialty was honored to be a part of the recent TechGC 2021 Public Company Forum. Our colleague, Jacalyn Kroupa, participated on a lively panel discussion about Directors and Officers Liability Insurance. One theme running through the presentation was the importance of choice of counsel when defending a D&O claim.
D&O claims are unique in that they are not just a “corporate problem”. Instead they involve high level executives and board members who have the potential of being held personally liable for their actions/inactions. As a result, these claims are heavily scrutinized. As general counsel or outside legal advisor, it is important that you do everything you can before a claim happens to ensure that, at least from an insurance perspective, the claims process goes as smoothly as possible.
Once triggered, a D&O policy should pay, excess of a self-insured retention, for defendants’ defense costs and any indemnity owed as a result of a judgment or settlement. Sounds pretty easy, right? But not all D&O policies are written the same way.
Insurer Duty to Defend
Some policies give the insurer the right and duty to defend a claim. What this means is that the insurer gets to appoint counsel that will serve on behalf of the company’s directors and officers (and company if the company is named in the lawsuit). Although it is never the intent of the insurer to hire “bad” counsel for its insureds, we can assure you that individuals who are worried about their personal assets being at stake often want nothing to do with counsel that they do not know and trust. If your D&O policy gives the insurer the right and duty to defend, consider your options at the time of your annual insurance renewal. These include:
We would be remiss if we did not point out that there are two benefits to policies in which the insurer has the right and duty to defend. The first is that, in most instances, the insurer will not allocate between covered and uncovered defense costs. For example, if a claim includes one cause of action that falls squarely within the terms and conditions of the policy and two that do not, the insurer will not allocate away the defense costs expended for those two “uncovered” causes of action. When the insured have the right and duty to defend, defense costs associated with uncovered causes of action are allocated out of covered Loss. The second benefit of a policy where insurer has the right and duty to defend is that the attorney-client privilege usually extends to the insurer. This is not the case in an insured duty to defend policy.
If you, the insured, have the right and duty to defend a claim, all may not be “clear sailing”. Some D&O policies give you the right and duty to defend your claim, but require that you choose your counsel from the insurer’s panel of attorneys. Most of these panels are fulsome and include very qualified counsel. That said, make sure you review the panel on an annual basis and are comfortable that counsel you would like to use is on that panel. If not, the time to request a change is during the negotiation for your annual renewal, not at the time of the claim. There is little to no leverage to make changes once a claim is in the door.
Insured Duty to Defend (Still Need Insurer Approval)
Finally, even if you have the right and duty to defend a claim and there is no panel requirement, keep in mind that all defense counsel must be approved by the insurer at the time the claim is noticed. The insurer will pay reasonable defense costs. What this means is that the insurer can legitimately question whether or not the counsel you choose is qualified (we rarely see that, but we have!) and why his or her rate is so high (and keeps going higher!).
The LAST thing you want to be worried about when a claim is brought against your directors and officers is whether or not your D&O insurer is going to cause a problem. Think ahead. Work with a qualified broker who understands both the underwriting and claims sides of insurance. Get it right up front so that you can focus on working with defense counsel to handle the merits of the case as quickly and as efficiently as possible.