Churchwell Insurance Advisory: Ensuring Your D&O Coverage Is Best-in-Class
Understanding Policy Language Issues
Throughout the past nine quarters, D&O insurance premiums have dropped by around 54%. Yet, carriers remain profitable. How? They quietly carve out coverages and add exclusions to reduce their exposure. Key protections are often omitted unless specifically requested by an informed agent. Unfortunately, many agents are unaware of these nuances or prioritize sales volume over thorough policy review.
Insights from Michael Rossi and the Need for Auditing
Top D&O coverage attorney Michael Rossi is trusted by 30 Fortune 500 Companies to run their D&O audits. He warns about a concerning trend: “Primary insurers are quietly cutting coverage in half or worse for certain claims.” This underscores the urgent need for companies to audit their D&O policies to ensure robust protection.
Historical Background and Significance
Previously, when D&O policies were silent on allocation, disputes arose over how to split defense and settlement costs for claims involving both covered and non-covered issues. Insureds advocated for inclusive coverage standards, while insurers leaned towards more restrictive interpretations.
Rossi’s article shows the long standing precedent by referencing three pivotal cases in the 1990s—*Nordstrom vs. Chubb*, Safeway Stores vs. National Union, and Raychem vs. Federal Ins. Co.—set pro-coverage precedents. Courts ruled in favor of the “reasonably related rule” for defense costs and the “larger settlement rule” for settlements. According to Cornerstone Research, favorable allocation standards resulted in near 100% coverage for defense and settlement costs in 80% of studied cases.
However, many insurers now favor “relative legal exposures” language, significantly reducing coverage. This change can cut the allocated defense and settlement costs by half or more.
Churchwell Insurance Agency’s Commitment
Every Fortune 1,000 Company audits the D&O coverage protecting their top leaders and the organization, but for Small Cap and MicroCap public companies this never happens. Churchwell Insurance Agency offers to cover 100% of the cost of a complete audit of select public companies D&O program by a leading D&O coverage attorney. This audit ensures coverage for your leadership and organization is best-in-class. Should deficiencies be found, we can often work with insurers to rectify these issues at no extra cost to you.
Real-World Examples of Allocation Issues
Two key cases highlight the impact of proper allocation rules:
1. In Nordstrom vs. Chubb, the court applied the “reasonably related rule,” ensuring the insurer covered almost all defense costs.
2. In Safeway Stores vs. National Union, the “larger settlement rule” led to broader settlement cost coverage.
Action Steps
When comparing D&O policies, the allocation language is critical. Policies with “pure best efforts” language generally offer better long-term value despite higher premiums.
For example:
– Quote 1: $400,000 premium with “relative legal exposures” language.
– Quote 2: $500,000 premium with “pure best efforts” language.
While Quote 1 appears cheaper, it may lead to significant uncovered costs in the millions, making Quote 2 a better long-term risk management solution.
Uncooperative Insured Exclusion
The uncooperative insured exclusion in D&O insurance policies serves as a clause that can impact coverage if the insured does not comply with specific conditions outlined in the policy. This exclusion allows insurers to deny coverage if a policyholder:
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Fails to Participate: Does not cooperate in the defense or settlement of a claim.
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Withholds Information: Does not provide necessary documents or information.
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Ignores Obligations: Fails to abide by the policy’s reporting requirements or other terms.
Why is it Important for Public Companies?
For public companies, the uncooperative insured exclusion can be particularly significant. Here’s why:
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Legal and Financial Risks: Non-cooperation by any covered party involved in the claim can lead to substantial legal and financial repercussions. For instance, if a covered party refused to engage in the defense process it could result in a judgment against the company and it’s directors and officers, which the insurer would then likely refuse to cover.
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Directors and Officers at Risk: Since D&O policies protect the personal assets of directors and officers, their individual assets could be at stake if the exclusion is triggered.
Practical Examples
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Withholding Information: Suppose a company’s officer fails to disclose crucial information during a lawsuit. The insurer could invoke the uncooperative insured exclusion, potentially leaving the company responsible for the entire defense and any settlement costs.
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Lack of Participation: If a director refuses to participate in settlement discussions or court proceedings, this exclusion might come into play, jeopardizing the coverage.
Conclusion
Allocation wording and the uncooperative insured exclusion mentioned here are just two examples of the many ways carriers are cutting back on the things they will say “yes” to paying for. Proper wording in D&O policies is crucial. Proper initial placement, review, and renewal of D&O programs can ensure robust coverage for your directors and officers.
Contact Churchwell Insurance Agency today to schedule a comprehensive audit and secure the most effective D&O coverage for your organization. 844.604.1357 | Chaz@ChurchwellAgency.com
