TheCorporateCounsel.net

A guest post over on The D&O Diary by two Nelson Mullins lawyers provides a checklist of 10 key policy terms that boards should assess when reviewing D&O coverage. Here’s an excerpt addressing three of those policy terms:

Policy Limits and Order of Payments. In addition to selecting the right overall policy limit, it’s also important to understand how that limit works. A $15 million policy does not necessarily provide $15 million of protection to directors personally. Multiple claims or claims against the company itself may erode the available limit.

Directors should understand how the Side A, B, and C coverages interact and whether the limits available under one coverage section can be eroded by claims under another. Strong Side A protection can also be particularly important when indemnification is unavailable because of insolvency, legal restrictions, or other circumstances. For example, policies can prioritize individual Side A protection first if policy limits begin to erode rapidly due to heavy defense costs or corporate entity-level (Side C) claims.

Prompt Advancement of Defense Costs. Defense costs can become substantial long before a case reaches settlement or judgment, and directors should avoid having to fund years of defense expenses personally while waiting for the ultimate resolution of a suit or coverage dispute. Some policies may not provide for prompt advancement or include terms that may hold up the process, such as requiring allocation disputes to be resolved or other conditions. Boards should therefore review for advancement terms that provide prompt, mandatory advancement of legal fees and defense expenses before the final disposition of a claim or suit.

Severability. A strong severability provision generally prevents one insured person’s knowledge, conduct, or misrepresentation from automatically being attributed to another insured. Boards should assess the policy for severability terms, including related application representations, knowledge of circumstances, and policy exclusions. Directors should not necessarily lose coverage because another insured director or officer allegedly made a misrepresentation or engaged in misconduct. Boards can avoid issue that by ensuring one insured’s misconduct cannot be imputed to or used to deny coverage to any other “innocent” director or officer.

Other policy terms covered by the checklist include Side A “difference in conditions” coverage, favorable exceptions to the “insured v. insured” exclusion, regulatory investigations coverage, prior acts, continuity and retroactive dates, related claims and interrelated wrongful acts, non-rescission clauses, and jurisdiction and choice of law.

– John Jenkins