Top tips for bolstering your firm’s indemnification defenses
Directors’ and officers’ (D&O) insurance is an essential risk management tool in today’s business environment. When properly crafted, it will ‘backstop’ a company’s existing indemnification obligations and protect the personal assets of the company’s directors and officers, as well as the company’s balance sheet. Here, we share practical tips and key considerations for building a strong D&O program.
Broker
The company should always choose a well-regarded insurance broker with a deep bench of experience, expertise and focus on D&O insurance. Choosing the right broker sets the tone for the overall quality of the program, both during the policy negotiation and later in the event of a claim.
Policy limit
A common way to determine the policy limits is through the benchmarking process, whereby a broker will compare insurance limits of peer companies to generate a suggested range of limits. Company-specific factors such as the industry and market capitalization, as well as market trends such as recent settlement and judgment data, are typically considered in the analysis.
Insurance program structure
Typical D&O insurance covers the directors and officers as well as the entity, and all insured parties can access the entire insurance limit in most circumstances. Given this, companies often consider purchasing so-called Side A Difference in Condition (DIC) coverage for the dedicated benefit of the directors and officers, to sit on top of the traditional insurance coverage.
Side A DIC coverage is often described as insurance of last resort, triggered when all other available insurance and indemnification has been exhausted or becomes unavailable. Side A DIC policies have fewer policy exclusions and offer broader coverage than the underlying policies so they can ‘drop down’ to fill a gap caused by the failure of underlying insurance or indemnification to provide coverage.
Side A DIC coverage is also considered ‘bankruptcy remote’: removed from the risk that if the entity files for bankruptcy protection, its insurance policies may be deemed assets of the estate by a bankruptcy court and thus be unavailable to the directors and officers.
Carrier selection
The good news is that the D&O insurance market is competitive and there are numerous insurers competing on the basis of price, retention, coverage enhancements and other features. Although premiums are an important factor, the company should also ask its broker and coverage counsel about the carriers’ claims-handling reputation.
It is crucial that the insurance comes from well-rated and experienced carriers who are willing to partner with the company in the event of a claim. This is particularly true for the primary insurer, which has responsibility for the approval of the insured’s engagement of defense counsel and the payment of defense costs at the outset of a claim.
Policy negotiation
D&O insurance policies are heavily negotiated contracts, and starting the negotiation process early is key. Each insurer typically uses a standard policy form, often modified by various endorsements, which can improve the scope of coverage. The proposed policy materials should be carefully reviewed and negotiated by the broker and coverage counsel to ensure the policy language is market-competitive.
Periodic reassessment
D&O insurance coverage should be reassessed on an annual basis, generally in conjunction with the policy renewal cycle, to ensure market-competitive coverage tailored to the company’s needs. In a year’s time, policy enhancements, insurance markets, regulatory and litigation climates and the company’s business, geographic footprint and risk profile can all change.
Claim reporting
Once the policy is placed, the company should be on the lookout for any reportable claim. A typical definition of claim includes any written demand for relief (for example, a nasty email), not just the filing of a lawsuit. Because D&O policies are claims-made policies, timely claim reporting within the contractual window is usually a precondition for coverage. Late notice tends to be one of the most common ways an insured can jeopardize coverage rights.
Conclusion
Building, maintaining and effectively using D&O insurance requires specialized knowledge and collaboration between the company and its advisers. The bottom line, in our experience, is that there is simply no such thing as a one-size-fits-all policy that does not need to be reviewed and tailored to the company’s needs.
