SPEAKERS:
Tony Tatum
Tony Tatum
Mark Maloney
Mark Maloney
Scott Wallace, Marsh USA
Scott Wallace, Marsh USA
Tuesday, May 19, 2009 12:30 – 1:30 p.m. Eastern TimeBankruptcy and Directors
Bankruptcy and Directors
’
’
&
&
Officers
Officers
’
’
(D&O) Liability Insurance
(D&O) Liability Insurance
–
–
Considerations for Protecting and Accessing
Considerations for Protecting and Accessing
the Insurance Policy and Proceeds
the Insurance Policy and Proceeds
If you have not downloaded the program materials,
please do so now at –
www.kslaw.com/e
www.kslaw.com/e
-
-
learn/handout
learn/handout
To connect to the audio part of the program, please call:
1
1
-
-
888
888
-
-
291
291
-
-
5971
5971
A customer service representative will
connect you to the seminar.
For technical assistance at any time
during the presentation, please call:
Tony Tatum ttatum@kslaw.com
404-572-3519
Speaker Biography
Speaker Biography
Tony Tatumis a partner in King & Spalding's Atlanta office and a member of the firm’s Business Litigation Practice. Mr. Tatum’s practice focuses on complex commercial litigation, with an emphasis in insurance coverage and recovery litigation, arbitration, and consultation, as well as securities and shareholder litigation.
Mr. Tatum represents leading companies such as AFC Enterprises, Inc, Central Georgia Health Systems, Inc., Harbert Management Corporation, Kelly Services, Inc., Kimberly-Clark Corporation, and The Coca-Cola Company, and has litigation experience in state and federal courts at both the trial and appellate levels.
In his insurance coverage practice, Mr. Tatum regularly represents policyholders in all aspects of insurance coverage disputes, including complex litigation and arbitration relating to property damage, business interruption, directors and officers liability (D&O), environmental and pollution, advertising injury and intellectual property, political risk, employment practices liability, fiduciary liability, errors and omissions, fidelity and crime coverage, and other manuscripted lines of coverage. Mr. Tatum regularly advises clients and their directors and officers regarding D&O indemnification and insurance issues related to these matters, and in negotiating best in class terms and conditions for clients with U.S. and international insurers for D&O and many other lines of insurance coverage.
Mr. Tatum obtained his undergraduate degree in Risk Management and Insurance from The University of Georgia. Subsequently, Mr. Tatum worked as a senior analyst with two leading financial services companies in the areas of regulatory insurance compliance. Mr. Tatum graduated, cum laude, from Georgia State University College of Law. He was a law clerk for the U.S. Attorneys Office, Department of Justice and an extern for former Georgia Congressman Ed Jenkins. In both 2006 and 2007, Mr. Tatum was named a "Georgia Rising Star" byAtlanta Magazine.
Speaker Biography
Speaker Biography
Mark M. Maloney mmaloneyr@kslaw.com
404-572-4857
Mark Maloneyis a partner in the Atlanta office of King & Spalding and a member of the Financial Restructuring Practice Group. Mr. Maloney’s practice includes representation of a broad range of clients in litigation matters involving creditors’ rights, bankruptcy, lender liability and other financial and commercial disputes. He has represented debtors, official committees, secured and unsecured creditors, and other parties in interest in major Chapter 11 bankruptcy cases and other insolvency proceedings in over 20 states and the District of Columbia. From 2003 through 2007 he has been listed as one of the top bankruptcy attorneys in the country by The Deal Magazine. In addition, Mr. Maloney has been selected by his peers as a Georgia Super Lawyer, as published in Atlanta Magazine, and as a member of the Georgia Legal Elite, as published in GeorgiaTrendmagazine. Mr. Maloney also serves as Co-Chairman of the American Bankruptcy Institute’s Litigation Committee.
In recent years Mr. Maloney’s practice has focused on representing litigants in contested matters, adversary proceedings and other litigation in significant Chapter 11 bankruptcy cases and insolvency proceedings. Mr. Maloney also has experience in general commercial litigation and tax litigation and is admitted in both the United States Court of Federal Claims and the United States Tax Court. Mr. Maloney is a frequent lecturer on bankruptcy topics and serves as Co-Chairman and faculty member for the Litigation Skills Symposium sponsored by the American Bankruptcy Institute. His publications include "Orix Credit Alliance, Inc. v. Delta Resources, Inc.- Poor Losers," in the Annual Survey of Bankruptcy Law, "At Your Service: Deciphering the Amendments to the Service Rules," in
Bankruptcy Litigation, "Specific Personal Jurisdiction and the 'Arise From or Related To' Requirement…What Does It Mean?" in the Washington & Lee Law Review. Mr. Maloney is also a co-author of the Aspatore Books publication Inside the Minds: The Roles and Motivations of Key Players in Bankruptcy Cases, and co-author of the West Group treatise Successful Partnering Between Inside and Outside Counsel. He has served previously as co-editor ofBankruptcy Litigationand as a member of the Advisory Board for the Annual Survey of Bankruptcy Law.
Speaker Biography
Speaker Biography
Scott Wallace, Esq. Marsh, USA Senior Vice President FINPRO Claims Advocacy Scott.A.Wallace@marsh.com
404-995-2766
Scott serves as Marsh’s FINPRO Claims Advocate for the South Zone, specializing in directors and officers, employment practices and other professional liability claims. Prior to joining Marsh in 2007, Scott was associated with the Chicago law firm of Kerns, Pitrof, Frost & Pearlman, where he represented insurance carriers in the U.S. and Bermuda markets regarding directors and officers liability, professional liability, employment practices liability and errors & omissions coverages. He handled insurance coverage issues in the areas of securities, employment, corporate and health care law and counseled domestic and foreign insurers and reinsurers on policy interpretation, policy drafting and claim exposure. Scott began his legal career practicing in Atlanta with the law firm Kitchens Kelley Gaynes, where he specialized in commercial defense and policyholder litigation.
SPEAKERS:
Tony Tatum
Tony Tatum
Mark Maloney
Mark Maloney
Scott Wallace, Marsh USA
Scott Wallace, Marsh USA
Tuesday, May 19, 2009Bankruptcy and Directors
Bankruptcy and Directors
’
’
&
&
Officers
Officers
’
’
(D&O) Liability Insurance
(D&O) Liability Insurance
–
–
Considerations for Protecting and Accessing
Considerations for Protecting and Accessing
the Insurance Policy and Proceeds
Topics For Discussion
Topics For Discussion
Overview of the D&O insurance policy -- who are the “insureds” and what are some key provisions and issues relevant in the bankruptcy context?
Bankruptcy -- overview of the process, the trustee, creditors committee, and potential impact of the “automatic stay” on the use of the D&O insurance policy proceeds
Amendments a company should seek to its D&O policy to help ensure that the D&O insurance policy and its proceeds will be available post-bankruptcy for claims
Does the company need an extended D&O run-off policy and a separate D&O policy post-bankruptcy, and how should company management address potential bankruptcy with its D&O insurers?
7
Overview of the D&O Policy
Overview of the D&O Policy
Who Are The Insureds?
Who Are The Insureds?
Traditional D&O Coverage
Traditionally, directors’ and officers’ liability policies provided two
types of coverage:
• Insuring Agreement A (or “Side A Coverage”): Liability coverage payable directly to the Ds&Os for claims for wrongful acts when indemnification is not permitted or not available due to insolvency; and
• Insuring Agreement B (or “Side B Coverage”): Coverage payable to the corporation/insured entity to reimburse it for indemnification provided to their Ds&Os and officers for claims for wrongful acts against them.
9
Who Are The Insureds? (cont.)
Who Are The Insureds? (cont.)
Entity Coverage
• Insuring Agreement C (or “Entity Coverage”): liability coverage payable directly to an insured entity for its wrongful acts.
• This type of coverage is typically limited to securities claims in policies issued to publicly-traded companies, but it may be broader in other types of private company policies.
How Do Claims Trigger the D&O Policy?
How Do Claims Trigger the D&O Policy?
Direct payment of loss by insurer No self-insured retention Personal asset protection Reimbursement of indemnified loss Applicable self insured
retention
Balance sheet protection
Reimbursement of paid loss to corporate entity
Applicable self insured retention
Balance sheet protection NO
Non-Indemnifiable “Side A” D&O coverage
Corporate Reimbursement “Side B” D&O Coverage
Entity Liability “Side C” D&O Coverage
Claims Against Directors & Officers Claims Against
Corporate Entity
YES Indemnification?
Aggregate Limit of Liability
11
Some Key D&O Coverage Issues in the
Some Key D&O Coverage Issues in the
Bankruptcy Context
Bankruptcy Context
If a Company becomes subject to a bankruptcy proceeding, the
Company will likely be unable to fund its D&O indemnification
obligation.
• Will the filing of bankruptcy convert the underlying Side B claim to a
“non-indemnifiable” Side A claim under the policy?
If the D&O policy also provides entity coverage (Side C), it may be
considered by the courts as an asset of the bankruptcy estate.
• If the policy is an asset of the bankruptcy estate, are the “proceeds”
frozen so that the insurer cannot pay Side A claims to the Ds&Os?
• What provisions can be included in a D&O policy to help ensure that
Ds&Os are indemnified under the policy if the Company is in bankruptcy?
D&O Coverage Issues Resulting From A Bankruptcy (cont.)
D&O Coverage Issues Resulting From A Bankruptcy (cont.)
D&O policies typically contain a “change in control” provision.
• Will a bankruptcy filing trigger a change in control, causing the
policy to go into run-off?
Trustees often bring claims against former directors and officers of
the Company.
• Does the D&O policy cover claims brought by the bankruptcy
trustee against the Ds&Os?
Defense costs alone for numerous post-bankruptcy claims can
quickly deplete the limits of insurance.
• Are there other insurance solutions for Ds&Os if the Company’s
D&O policy has Side C coverage?
13
Bankruptcy
Bankruptcy --
--
Overview of the Process and Impact of
Overview of the Process and Impact of
the
the “
“Automatic Stay
Automatic Stay”
”
on the D&O Policy
on the D&O Policy
The Bankruptcy Process and the Parties
The Bankruptcy Process and the Parties
Purpose of Bankruptcy
Chapter 7 Liquidation
Chapter 11 Reorganization
Creditors Committee and Trustee
15
Current Trends and New Filings in Bankruptcy
Current Trends and New Filings in Bankruptcy
This economic cycle generally is
producing two types of bankruptcy cases
for businesses:
•
Quick, prepackaged or prearranged cases,
and
The Bankruptcy Court
The Bankruptcy Court’
’s Automatic Stay
s Automatic Stay
Section 362(a) of the Bankruptcy Code
•
The automatic stay under Section 362(a) of the
Bankruptcy Code provides that the filing of a petition in
bankruptcy automatically stays certain actions directed
against the debtor’s property. The automatic stay
generally does not extend to actions pending against the
debtor’s Ds&Os unless it amounts to an “act to obtain
possession of property of the estate” or “to exercise
control over property” of the estate.”
See
Steyr-Daimler-Puch of America Corp. v. Pappas,
852 F.2d 132 (4
thCir.
1988). Accordingly, in cases where the debtor and its
Ds&Os are defendants, the lawsuit will likely be
automatically stayed as to the debtor
only
.
17
The Bankruptcy Court
The Bankruptcy Court
’
’
s Automatic Stay (cont.)
s Automatic Stay (cont.)
Extension of the Automatic Stay to Pending Litigation Against
the Debtor’s Ds&Os
•
Ds&Os often seek to enjoin litigation pending against them
arguing that (1) an adverse judgment would increase the
debtor’s indemnification exposure if the debtor’s insurer refused
to advance defense costs or if the costs exceed policy limits; (2)
the litigation would be disruptive to the management of the
debtor or interfere with the reorganization of the debtor; (3) the
continued litigation is an attempt to circumvent the automatic
stay; or (4) that a judgment against the non-debtor creates
collateral estoppel issues for the debtor.
The Bankruptcy Court
The Bankruptcy Court
’
’
s Automatic Stay (cont
s Automatic Stay (cont
.)
.)
•
Exception Applied - A few courts have accepted these
arguments although largely in the products liability arena where
the argument of circumvention of the automatic stay is arguably
stronger than in the securities fraud space
.
See, e.g., Lomas
Fin. Corp. v. N. Trust Co. (In re Lomas Fin. Corp.),
117 B.R. 65,
68 (S.D.N.Y. 1990);
A.H. Robins Co. v. Piccinin
, 788 F.2d 994,
1001 (4th Cir. 1986).
19
The Bankruptcy Court
The Bankruptcy Court
’
’
s Automatic Stay (cont.)
s Automatic Stay (cont.)
•
Exception Inapplicable - However, most courts have refused to
extend the automatic stay to actions against a debtor’s Ds&Os,
finding that the requisite “unusual circumstances” do not exist
because the underlying litigation typically does not interfere with
the debtor’s reorganization, the litigation is based on
independent torts or breaches by the Ds&Os, and/or the
defendants’ indemnification claims, if any, are not absolute.
See, e.g.
,
Primavera Familienstiftung Tag Assocs. (In re Granite
Partners, L.P.),
194 B.R. 318, 337-38 (Bankr. S.D.N.Y. 1996).
D&O Policies and Proceeds
D&O Policies and Proceeds
--
--
Assets of the
Assets of the
Bankruptcy Estate?
Bankruptcy Estate?
If the automatic stay does not apply to pending litigation,
the Ds&Os will want the policy to fund defense costs
that otherwise would have been advanced by the
debtor.
D&O “Policies” vs. “Proceeds”
•
Many courts consider the D&O policy and its proceeds
separately in determining whether they are the property of
the insured debtor’s bankruptcy estate.
21
D&O Policies and Proceeds
D&O Policies and Proceeds
--
--
Assets of the Bankruptcy Estate? (cont.)
Assets of the Bankruptcy Estate? (cont.)
•
D&O “Policies” - Most courts consider D&O policies property of
the debtor’s estate.
See, e.g., La. World Exposition, Inc. v. Fed.
Ins. Co. (In re La. World Esposition, Inc.)
, 832 F.2d 1391, 1399
(5
thCir. 1987) (“There are a great many bankruptcy cases
holding that liability insurance
policies
that provide coverage for
the bankrupt’s liability belong to the estate.”);
MacArthur v.
Johns-Manville Corp
., 837 F.2d 89 (2d. Cir. 1988)
•
The more critical issue is whether the D&O policy proceeds are
the property of the estate. This issue typically arises when an
insurer is asked to advance defense costs to Ds&Os or make
other payments under the policy when the company is in
bankruptcy.
D&O Policies and Proceeds
D&O Policies and Proceeds
--
--
Assets of the Bankruptcy Estate? (cont.)
Assets of the Bankruptcy Estate? (cont.)
D&O “Proceeds - Recent Authority Addressing “Proceeds”
•
If Debtor Has No Direct Interest in Policy “Proceeds
”
» Many courts have held that where the debtor does not have a “direct interest” in the proceeds of a D&O policy, the proceeds are not property of the bankruptcy estate. See, e.g., La. World Exposition, Inc. v. Fed. Ins. Co. (In re La. World Exposition, Inc.), 832 F.2d 1391 (5th
Cir. 1987); In re MCSi, Inc., Secs. Litig., No. C-3-015 (S.D. Ohio Feb. 26, 2004).
» These courts reason that the D&O policy benefited only the Ds&Os by providing either direct coverage for claims made against them or indirect coverage by reimbursing the corporation for its indemnification of the Ds&Os. See also In Re Edgeworth, 993 F.2d 51 (5thCir. 1993).
23
D&O Policies and Proceeds
D&O Policies and Proceeds
--
--
Assets of the Bankruptcy Estate? (cont.)
Assets of the Bankruptcy Estate? (cont.)
•
If The Debtor Has Made Indemnification Claims
» Other courts have held that where there are claims for indemnification coverage under Insuring Agreement B, the D&O policy proceeds may be property of the bankruptcy estate. See In re Allied Digital Techs. Corp., 306 B.R. 505 (Bankr. D. Del. 2004); In re Tom’s Foods, Inc., 2006 Bankr. LEXIS 3319 (Bankr. M.D. Ga. Dec. 7, 2006).
» These courts reason that payments to the Ds&Os for defense costs would deplete the policy limits, thereby increasing the debtor’s exposure to indemnification claims in other litigation. The debtor’s interest in being reimbursed by the insurer for the amounts it must indemnify its Ds&Os is sufficient to hold that the policy’s proceeds are an asset of the bankruptcy estate.
D&O Policies and Proceeds
D&O Policies and Proceeds
--
--
Assets of the Bankruptcy Estate? (cont.)
Assets of the Bankruptcy Estate? (cont.)
•
Where the D&O Policy Provides “Side C” Entity Coverage
» Some courts have held that D&O policies that provide entity coverage are the property of the bankruptcy estate. See Homsy v. Floyd (In re Vitek, Inc.), 51 F.3d 530 (5thCir. 1995); In re Metropolitan Mortgage &
Secs. Co., 325 B.R. 851 (Bankr. E.D. Wash. 2005).
» These courts reason that the existence of direct coverage for the entity makes the policy a vehicle for both individual andcorporate protection. Because the proceeds of the policy are “commingled,” the debtor’s interest in the policy proceeds is sufficient to bring the entirety of the policy proceeds into the estate.
» However, some courts have held that the proceeds of a D&O policy are not the property of the bankruptcy estate even though the policy included Side C entity coverage. See First Central Financial Corp. (The “mere appendage of entity coverage [for securities claims] to [the] Policy by way of a rider . . . does not provide sufficient predicate, per se, to metamorphose the proceeds into estate property.”)
25
D&O Policies and Proceeds
D&O Policies and Proceeds
--
--
Assets of the Bankruptcy Estate? (cont.)
Assets of the Bankruptcy Estate? (cont.)
General Principles Regarding Policy “Proceeds”
• Typically, a bankruptcy court will treat “proceeds” as owned by the Ds&Os if it’s a Side A only policy. If the policy has Side C entity coverage, there is greater likelihood of the proceeds being tied up in the estate, although some courts have held even if the policy contains entity coverage, the policy proceeds are not part of the estate because the main purpose of the policy is to protect Ds&Os.
• The murkier arena is when considering a policy with both Side A and B coverages v. a policy with A/B/C coverages, but generally speaking an A/B only policy is safe from becoming part of the bankruptcy estate under most situations. The concern arises where Side C coverage is present.
D&O Policy Terms That May Help Ensure
D&O Policy Terms That May Help Ensure
“
“
Proceeds
Proceeds
”
”
Are Paid to the Ds&Os
Are Paid to the Ds&Os
Key D&O Policy Provisions to Consider
•
Change in Control Provision
•
Definition of “Financial Insolvency”
and “Presumptive
Indemnification”
•
“Insured v. Insured” Exclusion
•
“Priority of Payments” Provision
•
“Waiver of Automatic Stay” Provision
•
Advancement of Defense Costs
•
Dedicated Side A Limits
•
Excess Policy Considerations
27
Key D&O Policy Provisions to Consider
Key D&O Policy Provisions to Consider
Change in Control Provisions
•
Typical Provision:
» If, during the Policy Period, there is a Change in Control, the coverage provided under this Policy shall continue to apply but only with respect to a Claim against an Insured for a Wrongful Act committed or allegedly committed up to the time of the Change in Control; and
(a) coverage will cease with respect to any Claim for a Wrongful Act committed subsequent to the Change in Control; and
(b)The entire premium for the Policy will be deemed to be fully earned immediately upon the consummation of a Change in Control.
» “Change in Control” means . . . “the appointment of a Receiver, Conservator, Liquidator, Trustee, Rehabilitator, or any comparable authority, with respect to the Parent Company.”
Key D&O Policy Provisions to Consider (cont.)
Key D&O Policy Provisions to Consider (cont.)
•
Implication for Insureds:
» Policy goes into run-off for remainder of policy term
» No coverage for acts after effective date of transaction
» Premium is fully earned
•
Options:
» During policy renewal, request removal of bankruptcy event as triggering the change in control provision
» If event occurs during the policy period with a bankruptcy trigger in the provision, seek waiver of the change in control
» Otherwise, work with broker and counsel to secure new D&O coverage as necessary for post-filing “wrongful acts”
29
Key D&O Policy Provisions to Consider (cont.)
Key D&O Policy Provisions to Consider (cont.)
•
Definition of “Financial Insolvency” and “Presumptive Indemnification”
» D&O policies usually contain two separate retention provisions for Side A
coverage (direct coverage for non-indemnifiable loss) and Side B coverage (corporate reimbursement for indemnifiable loss). Typically, there is no retention for Side A coverage. In contrast, the retention applicable to Side B or C coverage is much larger (e.g., up to or exceeding $1 million for large publicly traded corporations).
» D&O policies generally contain “presumptive indemnification” provisions that
provide if the corporation is required or permitted to indemnify its Ds&Os, then the larger retention applicable to Side B coverage will apply. Thus, irrespective of whether the company actually indemnifies its Ds&Os, if indemnification is permissible, the larger Side B retention will apply.
» Presumptive indemnification provisions typically do not apply when the insured
entity is unable to indemnify its Ds&Os as a result of “financial insolvency” or “financial impairment.”
Key D&O Policy Provisions to Consider (cont.)
Key D&O Policy Provisions to Consider (cont.)
» Other D&O policies define financial insolvency or impairment as the inability financially to advance defense costs under applicable law. In addition, some policies do not define the terms “financial insolvency” or “financial impairment.”
•
Implication:
» Unless the policy defines “financial insolvency” to include a debtor-in-possession, D&O insurer may argue that a debtor-in-possession is or could be required, or permitted, by the Court to indemnify its Ds&Os. The insurer may withhold first dollar coverage for defense costs leaving the Ds&Os to pay the Side B retention which is often substantial.
•
Options:
» Request inclusion in the D&O policy of a specific definition of “financial insolvency” that includes debtor-in-possession or other bankruptcy filing event.
» Dedicated Side A excess limits to “drop down” if the primary D&O insurer denies advancement of defense costs.
31
Key D&O Policy Provisions to Consider (cont.)
Key D&O Policy Provisions to Consider (cont.)
“Insured v. Insured” (“I v. I”) Exclusion
•
The terms of the I v. I exclusion vary. Generally, the I v. I
exclusion bars coverage for claims “brought by” or claims
“brought by or on behalf of” one insured against another
insured.
•
The main issue in the bankruptcy context is whether a
bankruptcy trustee, creditors committee or assignee of the
debtors’ or creditor’ rights constitutes an “Insured” under
the policy such that claims brought by them against the
debtor’s Ds&Os trigger the I v. I exclusion.
Key D&O Policy Provisions to Consider (cont.)
Key D&O Policy Provisions to Consider (cont.)
•
Insurers argue that because a bankruptcy trustee stands
in the debtor’s shoes for purposes of asserting claims
against its Ds&Os, the I v. I exclusion bars coverage for
the trustee’s claims just as it would bar coverage for
claims brought in the name of or by the debtor itself.
•
Trustees and creditors committees (and Ds&Os) argue,
however, that the debtor and the trustee are legally
separate entities and that the purpose of the I v. I
exclusion is not implicated in the bankruptcy context
because the actions by trustees or creditors committees
are not collusive.
33
Key D&O Policy Provisions to Consider (cont.)
Key D&O Policy Provisions to Consider (cont.)
•
Options:
»
Most insurers will grant a carveback to the “I v. I”
exclusion for claims brought by the trustee:
»
Exclusion applies unless the claim:
•
is brought by the Bankruptcy Trustee or Examiner of the
Company or any assignee of such Trustee or Examiner;
or any Receiver, Conservator, Rehabilitator, Liquidator,
Custodian, or comparable authority of the Company.
Key D&O Policy Provisions to Consider (cont.)
Key D&O Policy Provisions to Consider (cont.)
•
Priority of Payments Provision
» If there is a single limit of liability and claims are brought that trigger coverage provided to both the corporate entity (Side C) and to its Ds&Os (Side A), a bankruptcy trustee or creditor will argue that the policy and its proceeds should be considered an asset of the bankruptcy estate and as a result the policy proceeds cannot be used to pay costs of Ds&Os.
•
Options:
» Include an order of payments provision that specifies that the Ds&Os have first claim to the policy proceeds. This should provide a basis for the bankruptcy court to allow the Ds&Os access to the proceeds of the policy to pay for defense expenses and potential liabilities.
35
KSU # 18516
Key D&O Policy Provisions to Consider (cont.)
Key D&O Policy Provisions to Consider (cont.)
Sample Policy Language
: “It is understood and agreed that if
Loss, including Defense Expenses, shall be payable under more
than one of the INSURING AGREEMENTS, then the Insurer shall,
to the maximum extent practicable pay such Loss as follows:
• first, the insurer shall pay that Loss, if any, which the Insurer may be liable to pay on behalf of the Insured Persons under INSURING AGREEMENT (A);
• second, the Insurer shall pay that Loss, if any, which the Insurer may be liable to pay on behalf of the Company under INSURING AGREEMENT (B); and
• third, the Insurer shall make such other payments which the Insurer may be liable to make under INSURING AGREEMENT (C) or otherwise.”
Key D&O Policy Provisions to Consider (cont.)
Key D&O Policy Provisions to Consider (cont.)
Waiver of Automatic Stay Provision
•
Typical language
: If a liquidation or reorganization is
commenced by the Parent Company under Title ll of the United
States Code, then with respect to a covered Claim, the insureds
hereby:
» (a) waive and release any automatic stay or injunction to the extent it may apply in such proceeding to the proceeds of this Policy under such Bankruptcy Law; and
» (b) agree not to oppose or object to any efforts by the Insurer or any Insured to obtain relief from any stay or Injunction applicable to the proceeds of this Policy as a result of the commencement of such liquidation or reorganization proceeding.
•
Benefit
: Insurer should be able to cover Ds&Os despite the
bankruptcy of the company. Enforceability of provision has not
been meaningfully tested yet in the courts.
37
Key D&O Policy Provisions to Consider (cont.)
Key D&O Policy Provisions to Consider (cont.)
Advancement of Defense Costs
•
The D&O policy should have a provision stating that the insurer
will pay covered Defense Costs on an as-incurred basis. If the
D&O policy does not specify that an insurer must pay defense
costs as they are incurred, then the Ds&Os may find themselves
in a situation where they are obligated to pay millions of dollars
of defense costs out of their own pockets until a claim is finally
resolved and the insurer is obligated to pay the covered defense
costs and the damages.
•
A typical D&O policy that has an advancement of defense costs
provision will also provide that if it is finally determined that any
defense costs paid by the Insurer are not covered under this
Policy, the Insureds agree to repay those non-covered Defense
Costs to the Insurer. Many carriers will agree to delete this latter
Key D&O Policy Provisions to Consider (cont.)
Key D&O Policy Provisions to Consider (cont.)
Dedicated Side A Limits
•
Typical Benefits
:
» No “presumptive indemnification;”
» Specifically non-rescindable;
» Full severability of the application and conduct exclusions;
» Policy drops down as primary in the event of insolvency of the underlying carrier;
» Less restrictive fraud exclusion;
» Less restrictive I v. I exclusion;
» Covers Ds&Os where company refuses to indemnify; and
» Covers where primary policy has been deemed an asset of the debtor’s estate in bankruptcy.
39
Key D&O Policy Provisions to Consider (cont.)
Key D&O Policy Provisions to Consider (cont.)
Other Excess Policy Considerations
•
Several recent decisions suggest an excess D&O insurer is not
obligated to pay covered claims or defense costs unless the
underlying D&O insurer itself has fully paid the limits of its policy.
See Qualcomm, Inc. v. Certain Underwriters at Lloyd’s,
161 Cal.
App. 4
th184 (2008).
•
If the D&O policy does not contain flexible exhaustion language that
reduces restrictions on payments of loss, there is a possibility that
the insurer will argue that the excess D&O policy's payment
obligations will never be triggered if the underlying D&O insurer
settles with the policyholder for anything less than full policy limits.
Key D&O Policy Provisions to Consider (cont.)
Key D&O Policy Provisions to Consider (cont.)
Options:
•
An excess D&O insurance policy should have a provision that
specifically states that payment of the underlying policy limits for
covered claims, by either the insurer or the policyholder, or a
combination of both, is sufficient to exhaust the underlying
coverage.
•
All D&O excess coverage should also include clear “follow form”
provisions that state precisely the underlying policies that
govern the application of D&O coverage in the program. A
policyholder purchases follow form excess D&O insurance in
order to obtain seamless coverage for the same set of potential
losses.
41
Bankruptcy and Directors & Officers
Bankruptcy and Directors & Officers
Liability Insurance
Liability Insurance
Considerations for Protecting and Accessing the Insurance
Considerations for Protecting and Accessing the Insurance
Policy and Proceeds
Policy and Proceeds
Scott Wallace, Atlanta
Scott Wallace, Atlanta
Marsh USA
Run
Run
-
-
off Coverage Triggers
off Coverage Triggers
Coverage is automatically triggered by the ‘change of control’
provision in the policy:
Policy goes into run-off for remainder of policy term
• No coverage for acts after effective date of transaction
• The entire premium is fully earned
All Excess policies follow form of the primary policy. Excess D&O
Clause 12 Organizational Changes: If the Named Entity shall consolidate with, merge into, or sell all or substantially all of its assets to any other person or entity or group of person or entities acting in concert; or any person or entity or group of persons or entities acting in concert shall acquire management control of the named entity…coverage converts to prior acts only.Clause 10 Discovery: The Insurer shall offer such discovery period pursuant to such terms, conditions, exclusions and additional premium as the Insurer may reasonably decide.
Primary D&O (AIG example language)
43
Run
Run
-
-
off Coverage Triggers
off Coverage Triggers
Clause 12 Organizational Changes: If the Named Entity shall consolidate with, merge into, or sell all or substantially all of its assets to any other person or entity or group of person or entities acting in concert; or any person or entity or group of persons or entities acting in concert shall acquire management control of the named entity…coverage converts to prior acts only. Clause 10 Discovery: The Insurer shall offer such discovery period pursuant to such terms, conditions, exclusions and additional premium as the Insurer may reasonably decide. Employment
Practices (Travelers example language)
Excess policy follows form of the primary policy. Excess Fiduciary
Clause 16 Acquisition by another Organization: If the Parent Organization merges into or consolidates with another organization and the Parent Organization is not the surviving entity; or another organization or person or group of organizations and/or persons acting in concert acquires securities or voting rights which result in ownership or voting control by the other organization or person of more than fifty percent (50%) of the outstanding securities or voting rights representing the present right to vote for the election of or to appoint directors or manager of the Parent Organization…coverage converts to prior acts only. Upon notice…and at the request of the Parent Organization, the Company shall provide to the Parent a quotation for an extension of coverage….Any coverage extension pursuant to such quotation shall be subject to such additional or different terms, conditions and limitations of coverage and payment of such additional premium, as the Company in its sole discretion may require.
Fiduciary (Chubb example language)
Run
Run-
-Off Option plus Ongoing Coverage
Off Option plus Ongoing Coverage
Features
Separate dedicated run-off limits for incumbent D&Os.
Non-cancelable term assures run-off duration.
“Clean sheet” program with separate limits for post bankruptcy company.
*Day Zero is determined when the insured emerges from bankruptcy.
Stand alone pre-bankruptcy run-off program plus stand alone post-bankruptcy program.
Pre-Bankruptcy6-Year Run-Off Program
Post BankruptcyProgram
*Day Zero
45
Run
Run--Off Option plus Ongoing Coverage for Subsidiary BankruptcyOff Option plus Ongoing Coverage for Subsidiary Bankruptcy
Features
Single limit for Parent, inclusive of Subsidiary’s pre-bankruptcy exposure.
“Clean sheet” program with separate limits for post bankruptcy Subsidiary company.
Continuous pre-bankruptcy program for Parent plus Stand alone post-bankruptcy program for Subisidiary.
Pre-BankruptcyProgram
(Parent and Subsidiary)
Post BankruptcyProgram continues
(Parent with prior acts coverage for Subsidiary)
Renewal Date
Post BankruptcyProgram
(Subsidiary)
Day Zero*
A-B-C limits are shared by entity and directors and officers
Potential limit dilution issue
Greater likelihood of primary policy becoming an asset of bankruptcy estate
Corporate Protection via corporate reimbursement and entity coverage
No disruption to Parent policy
Considerations Benefits
Run
Run
-
-
Off Option plus Ongoing Coverage
Off Option plus Ongoing Coverage
Features
Single limit for Parent, exclusive of Subsidiary’s pre-bankruptcy exposure.
Separate limit for Subsidiary run-off program.
“Clean sheet” program with separate limits for post bankruptcy Subsidiary company.
* Day Zero is determined when Subsidiary emerges from Bankruptcy
Continuous pre-bankruptcy program for Parent plus stand alone run-off and on-going program for Subsidiary.
Pre-BankruptcyProgram
(Parent with Subsidiary exclusion)
Post BankruptcyProgram continues
(Parent with Subsidiary exclusion)
Post BankruptcyProgram
(Subsidiary)
Day Zero*
Expensive
Claims administration may be complex / Other Insurance issues.
May have difficulty securing similar size and scope of program for the run-off policy.
Corporate Protection via corporate reimbursement and entity coverage for Parent
Minimal disruption to Parent policy
Flexibility on program structure for Subsidiary run-off coverage
Considerations Benefits
Pre-Bankruptcy6-year run-off Program (Subsidiary only)
47
Securing Run
Securing Run
-
-
off Coverage
off Coverage
Incumbent markets may have a competitive advantage in placing thiscoverage
• They know the existing board, management, operations and history of company – good or bad
• Depending on timing of the deal to the expiration date, there may be “unearned” premium at play
If close to the renewal date, will seek to ensure that the existing policy provisions are competitive with what would have been received at renewal – enhancements for the run-off period can usually be negotiated.
Outstanding claims – most run-offs are extensions of existing limit in place as opposed to a fresh aggregate. Outstanding claims can be an issue if the existing limits are being eroded.
An alternative would be to seek competitive quotes from non-incumbent markets.
Immediate Strategy Activities
Immediate Strategy Activities –
–
Run-
Run
-Off
Off
Confirm Timeline and Due Dates
Submission information needed
Confirm lines of coverage and limits desired
Request run-off quotes from existing carriers
– Unearned premium to be applied to run-off premium
– Premiums to include commission
– Target range 1X - 1.5X rating
Request run-off quotes from non-incumbent carriers, if needed
Arrange for underwriting conference calls, if needed
51
Questions
Questions
Self Study Code:
Self Study Code:
18516
18516