Chapter 7- D&0 ins

What is a "Wrongful Act"

"Any error, misstatement, misleading statement, act, omission, neglect or breach of duty actually or allegedly committed or attempted by the directors and officers, individually or collectively, in their respective capacities as such, or any matter claimed against them solely by reason of their status as directors and officers" -all claims arising out of the same or any related wrongful act will be treated as a single claim. Which means only one deductible applies

What is a "Claim" (3)

- any of these actions taken against a director or an officer for a wrongful act: 1. A written demand for monetary or nonmonetary relief 2. A civil proceeding commenced by serving a complaint or similar pleading 3. A formal administrative or regulatory proceeding commenced by filing a notice of charges, formal investigative order, or similar document

Sexual Harrassment Claims (Must prove 4 facts )

-"Unwelcome sexual advances...when submission to such conduct is made either explicitly or implicitly a term or condition of an individual's employment" Generally must prove: 1.EE is a member of a protected class 2.EE was subjected to unwelcome harassment based on the protected characteristic 3.The harassment affected a term or condition of employment 4.The ER knew or should have known about the harassment and failed to take prompt remedial action

Claims Made Provision "Extended Reporting Period"

-"called tail coverage" -AUTOMATIC 30-60 day tail coverage -option to add 1-5 years after automatic tail -possible separate limit for tail coverage, greater, less than, or the same -Optional 1-5 year tail should be purchased only when the renewal policy will not cover claims for wrongful acts that occurred during the ERP.

EPL Persons and Organizations Insured

-Always include the named employer as an insured May differ with a D&O policy -Also includes directors, officers, partners, members of an LLC, etc. -EEs and former EEs -Cover newly formed or newly acquired organizations (time limit)

Fiduciary Loss Exposures

-Bene-ficiaries of an EE benefit plan may make a claim against the plan officials (or fiduciaries) for breach of their fiduciary duties -The Employee Retirement Income Security Act (ERISA) -The Health Insurance Portability and Accountability Act (HIPAA)

FLI Wrongful Acts (3)

-Breach of the responsibilities, obligations, or duties imposed on fiduciaries of an insured plan by ERISA or by the common or statutory law of the US or another jurisdiction -Any other matter claimed against insureds solely because of their service as fiduciaries of any insured plan -A negligent act, error, or omission solely in the administration of any insured plan

FLI HIPPA Endorsement

-Broaden the definition of sponsored plans to include those subject to HIPAA -Can cover civil fines that HIPAA can impose if ER does not properly protect EE medical information

Enhanced Side-A Only DIC (5 DIC's)

-Broader wording and fewer exclusions -No ERISA exclusion; no pollution exclusion; no previous litigation exclusion; broader definition of "claim"; no exclusion for some securities lawsuits; more limited exclusion of BI and PD claims

Employment Practices Liability Insurance

-CGL and WC exclude EPL -Includes indemnity and defense costs -can be a separate policy, included in a D&O policy, or added to a businessowners policy (BOP) -Generally agree to pay, on behalf of the insured, loss resulting from claims first made during the policy period for a wrongful act "Loss" and "claim" often defined similar to D&O policy

EPL Definition of Employee

-Can include any natural person who was, now is, or will become a full-time, part-time, seasonal, or temporary EE of the insured -May also include leased EEs -May or may not cover independent contractors

Indemnification of Directors and Officers

-Corporate directors and officers who have successfully defended against a derivative suit have the right to indemnification from the corporation to reimburse them for expenses they have paid to defend against the suit -Can depend on state laws and corporate bylaws -Most states allow corporations to include provisions in bylaws for advancing expenses (may need to be refunded)

Reputation Management Costs

-Could stipulate that coverage is triggered when a governmental agency commences proceedings or the insured is named in a class action or another lawsuit based on wrongful employment practices. -Expenses to retain an approved PR firm, crisis management firm, or law firm to counsel the insured on how to mitigate the damage to its reputation

D&O Insuring Agreements (2)

-Coverage A (Side A) -Coverage B (Side B)

D&O Insurance

-Covers a corporation's directors and officers against liability for their wrongful acts covered by the policy and also covers the sums that the insured corporation is required or permitted by law to pay to the directors and officers as indemnification -Typically agrees to pay for the amount of loss the individual directors and officers sustain because of a claim or to reimburse the corporation for its loss when it indemnifies the directors and officers -Directors and Officers also have some coverage under the CGL and the Business Auto Coverage Form. Generally provide coverage only for BI and PD (also personal injury and advertising injury) -D&O insurance is typically purchased by the corporation Policies are NOT standardized

EPL Wrongful Acts (Broad Form Approach)

-Covers employment related claims with either a general description and no specific listing of offenses or with some examples of offenses followed by "or similar acts" or like wording

D&O/EPL Combo Policies (pros and cons )

-D&O policies do not cover claims against persons who are not directors and officers, and they do not cover the corporation unless the policy include entity coverage Combo policy -Advantages include: Lower cost Avoidance of conflicts regarding coverage -Disadvantages include: EPL coverage in D&O policies not as broad as in stand-alone EPL policies May have only one set of limits

Deductibles and Coinsurance

-Deductible generally applies to both defense costs and judgments/settlements; may also include an aggregate deductible -Coverage A is generally significantly lower than Coverage B -Coinsurance is like a percentage deductible

Duty of Disclosure

-Disclose material facts to all persons who have a right to know such facts (stockholders, bondholders, potential investors) and would not otherwise be able to obtain them -Cannot act as a spokesman or release confidential matters

Claims Made Provisoin "Reporting of Known Wrongful Acts"

-Discovery Provision - if the insured becomes aware of a wrongful act that is reasonably expected to result in a covered claim and provides written information on the act to the insurer during the policy period, then any subsequent claim arising out of that wrongful act will be covered -Independent of tail coverage

Third-Party Dirscrimination

-Discrimination claims made by third parties (not EEs) -Can increase premiums by 10 to 15%

ERISA

-Employee Retirement Income Security Act -Governs retirement and other benefit plans -Applies to everyone involved with the employee benefit plans of ERs engaged in interstate commerce or subject to federal minimum wage laws -Violations can result in fines and loss of favorable tax status

Coverage C

-Entity Coverage -Looked as a third insuring agreement or endorsement -Provides coverage for the corp. unlike the Side A and B which indemnify for D&Os -shares limits with A&B

HIPPA

-Health Insurance Portability and Accountability -Amends ERISA - affects plans with more than 50 EEs Four major objectives: 1.Provides credit against pre-existing condition exclusion periods for prior health coverage 2.Limits exclusions for pre-existing medical conditions 3.Prohibits discrimination in enrollment and premiums charged to EEs and their dependents based on health-related factors 4.Improves disclosure about group health plans ERs and fiduciaries can be penalized if EE medical information is not adequately protected.

Coverage B (Side B)

-Indemnification coverage for the corporation for amounts that is lawfully permitted/required to pay to defend or settle claims against directors and officers -if the loss is caused by a covered act and the is lawfully able to pay they will always use Coverage B over A -Typically Claims made basis -"Corporate Reimbursement Coverage" -"Indemnification Coverage"

Independent Directors

-Independent Directors = not otherwise affiliated with the corp. (not officers and no other pre-existing relationship with the corp.) -Triggered when corp. does not indemnify the named director for a loss or the corps. D&O policy is inadequate, invalid, or nonexistent

Duty to Defend

-Insured typically selects and pays defense lawyers and other defense expenses. -most policies require the insurer to make defense expense payments as they are incurred

Definition of "Loss"

-Loss = all damages that the directors and officers become legally obligated to pay, subject to certain exclusions and limitations -Includes defense costs - this means that defense costs can reduce the limits (i.e. defense costs "within the limits") -Often does not include: taxes, criminal or civil fines or penalties, punitive or exemplary damages, or the multiplied portion of

Claims Made Provision "Retroactive Date Provision and Prior Acts Coverage"

-Many D&O policies cover claims made during the policy period for wrongful acts that occurred either during the policy period or at any time before the policy period (i.e., prior acts coverage) -Warranty: None of the directors or officers knows of any circumstances that might result in a claim

Consent to Settle Claims

-Many policies give named insured the right to participate in the decision to settle a claim -Absolute consent-to-settle provision - insurer cannot settle a claim without the insured's consent -Hammer clause - when insured does not consent to settle, the insured must take over the defense and pay any further defense expenses once the limits have been exhausted, plus the part of any judgment or settlement that exceeds the amount for which the insurer could have settled the claim

Nonderivative Suits (5 Examples)

-Not made in the name of the corporation (e.g., customers, competitors, EEs, creditors, governmental entities, etc.) EXAMPLES- 1.providing false/inadequate disclosure in connection with stock issuance; 2. making or permitting false entries in corporate books/records; 3.preparing and signing false documents with regulatory authorities; 4. failing to correct inaccurate statements within a prospectus issued by the corporation; 5. missing an opportunity for expansion, acquisition, or sale of the corporation

Class Actions (3 Common Allegations)

-One person or a small group of people represent the interests of an entire class of people in litigation. Examples: 1. public statements contained material misrepresentations or omissions; 2. misrepresentations or omissions artificially inflated the corporation's stock price; 3. while stock price was inflated, insiders profited from selling the stock

Role of Directors and Officers

-Owned by stockholders -Controlled by Board of Directors (trustees), which can be made up of stockholders, outside business leaders, social leaders. -BOD establishes corporate policy, make major business and fin. decisions, and appoint executive officers. -Other employees other than the BOD can be considered officers

Side-A Only Coverage

-Provides Side-A coverage only -Not a substitute for normal D&O coverage b/c the corp. is not reimbursed b/c of the lack of Side-B coverage. -Often applies on the excess basis -Can "drop down" if corp's D&O policy is frozen by bankruptcy

Retaliation Claims

-Retaliate for getting fired for lashing out. about any type of discrimination

Exclusions

-Similar to D&O policies - Differences include: -Will cover fines and penalties imposed by ERISA -Exclude any loss resulting from an insured's failure to collect required EE contributions or to properly fund the plan -Will cover claims arising out of the Consolidated Omnibus Budget Reconciliation Act (COBRA) -Excludes personal profit-taking, fraud and criminal acts

Workplace Violence Coverage

-Some courts state that workplace violence is not covered under WC -Covers indirect costs (lost productivity, increased security costs, loss of reputation, etc.)

Outside Directors Liability Policies (2 approaches)

-Sometimes a corporation encourages or requests its directors or officers to serve as outside directors for an unaffiliated organization. -Provides D&O coverage while serving with the unaffiliated organization -2 approaches: 1.Can cover on the insured corporation's own D&O policy 2.Use an Outside Directors Liability Policy

Who is an Insured for Coverage B?

-The insured corporation or corporations named in the declarations -May automatically extend to unnamed subsidiaries -May provide automatic coverage for new entities resulting from mergers and acquisitions by the insured corporation. If new corps. assets are above a certain % then the insurer should be notified and may add additional premium

FLI Insureds

-The sponsor organization and its subsidiaries -The insured plans -Anyone who is, was, or becomes a director, officer ,or EE, but only in his/her capacity as a fiduciary or trustee of the plan -Anyone administering the plan -Generally gives automatic cover to new plans (time limit

Insured's Duties to Report Claims

-Written notice immediately, as soon as practicable, or as soon as possible -May include a number of days

Derivative Suits

-a lawsuit brought by one or more shareholders in the name of the corporation -any damages recovered go directly to the corporation, not to the plaintiff

Occupation-Specific D&O Policies

-a specialty D&O policy -school boards, municipalities, not-for-profits -include coverage specific to the particular occupation i.e. school board policies include special education due process hearings

Problem and Solution to Coverage C

-if the entity goes bankrupt and is sued for it, Coverage C could exhaust the limits of the policy therefore leaving nothing for Side A&B. -Solutions- using specific language in the policy such as "who gets paid first" and also creating a separate D&O policy with Side A limits and difference in conditions (DIC) which apples even before the original D&O is exhausted.

Allocation of Loss

-insurer must defend entire claim as long as any part of it potentially falls within the policy's coverage(duty to defend is broad than the duty to indemnify) -Must allocate loss expenses between covered and non-covered elements

Claims Made Provision

-is claims made b/c some many of the D&O loss exposures cannot be pin pointed to the exact date of occurrence

Explain the Failure to effect or maintain exclusion

-the directors might negligently decide that the corporation should retain its liability product liability losses, and subsequently the corp. experiences severe fin. problems, and a stockholders sues for not purchasing the products liability insurance, the D&Os are not covered

Explain Insured vs. Insured Exclusions

-typically excludes a director's suit against another director, or against the insured firm.

Duty of Loyalty

-undivided loyalty to the company -cannot own or operate businesses that compete with the corp. -cannot use "insider information" for stock exchanges

Types of Suits Made Against D&Os (3)

1. Derivative Suits 2. Nonderivative Suits 3. Class Action Suits

Major Types of EPL Claims (5)

1. Discrimination Claim 2. Wrongful termination claims 3. Sexual Harassment Claims 4. Retalitation Claims 5. Other types of claims

Fiduciary Duties (4)

1. Duty of Care 2. Duty of Loyalty 3. Duty of Disclosure 4. Duty of Obidience

Other D&O Provisions (7)

1. Duty to Defend 2. Allocation of Loss 3. Consent to Settle Claims 4. Severability of Interests 5. Deductibles and Coinsurance 6. Insured's Duties to Report Claims 7. Arbitration

Other Exclusions (2)

1. Fraudulent or Dishonest Acts 2. Violations of Securities Acts -exception for #2 :unless it is a very large company

Exclusion Categories (5)

1. Loss exposures better covered by other insurance 2. Claims covered or reported under prior policies 3. Failure to effect or maintain insurance 4. Insured-versus-insured exclusion 5. Loss exposures that are difficult to insure

Specialty D&O Coverages (2)

1. Occupation-Specific D&O Policies 2. Outside Directors Liability Policies

Additional EPL Coverages and Services (3)

1. Third-Party Discrimination Coverage 2. Workplace Violence Coverage 3. Reputation Management Costs

Explain the Insured vs. Insured Exceptions (4)

1. an action brought on behalf of the corp., by someone who is not an insured D&O 2. A D&O is wrongfully terminated 3. An insured D&O seeks indemnity or contribution from another D&O for a claim covered under the policy 4. Actions against the D&Os made by the bankruptcy trustees in the event of the firm's insolvency

EPL Common Exclusions (7)

1.Claims arising out of circumstances reported under a prior EPL policy 2.Deliberate fraud or intentional violation of statutes, rules, or regulations 3.Liability assumed under a contract or agreement, other than an employment contract 4.BI or PD other than emotional distress, metal anguish, or humiliation 5.Actual or alleged violation of ERISA, Fair Labor Standards Act, Worker Adjustment and Retraining Notification Act, COBRA, Occupational Safety and Health Act 6.Obligations under WC, disability benefits, unemployment, SS and similar laws 7.Costs incurred to provide accommodations required with the ADA or other similar federal, state or local statutes 7. (cont) Back pay and front pay Back pay - income that the EE lost before a judgment was awarded or a settlement was made Front pay - income a plaintiff would have earned between the time of judgment and reinstatement or an award to compensate the EE for lost future income

Directors and Officers Responsibilities (8)

1.Establish corporation's basic goals / broad policies 2. Elect / appoint corporate officers, advise them, approve actions, and audit their performance 3. Safeguard and approve changes in corporation's assets 4. Approve important financial matters and ensure that proper annual and interim reports are given to stockholders 5. Delegate special powers to others to sign contracts, open bank accounts, sign checks, issue stock, obtain loans, and conduct any activities that may require board approval 6. Maintain, revise, and enforce the corporate charter and bylaws 7. Conduct regular elections and fill interim vacancies with qualified persons 8. Fulfill fiduciary duties to the corporation and its stockholders (i.e., act in best interest of others)

Other Coverage for FLI (2)

1.Fidelity bond coverage (employee dishonesty) -Required by ERISA for employee benefit plan fiduciaries -Provide coverage only in the event of dishonesty 2.Employee benefits liability coverage -Can be added to CGL for small ERs -Provides coverage for administrative errors or omissions

Discrimination Claims (3)

1.Overt Discrimination - intentional discrimination. i.e no interview b/c of race 2. Disparate Treatment - unfair class treatment i.e. females are reprimanded for long lunches, males are not 3. Disparate impact- i.e. you have to be 5'10 to work here, b/c many more men than women are taller than 5'10

Business Judgement Rule

A legal rule that states that directors and officers are not liable for honest mistakes of judgement even if the result is a fin. loss, provided they acted reasonably

ERISA Standards

Breach a duty and breach causes a loss to a benefit plan fiduciary is personally liable for the full amount of the loss ER can be vicariously liable for breaches

EPL Wrongful Acts ( Named Perils Approach)

Definition can range from brief listing of a few offenses to exhaustive lists that appear to provide coverage equal to the broad forms Common examples include: -Wrongful refusal to employ -Wrongful termination, whether active or constructive -Wrongful demotion, reassignment, discipline, or failure to promote -Wrongful negative evaluation -Breach of employment contract -Employment-related retaliatory action -Workplace harassment; unwelcome sexual advances; or other verbal, visual, or physical conduct of a sexual nature -Employment-related libel, slander, invasion of privacy, defamation, or humiliation -Employment discrimination of any kind in violation of federal, state, or local law

Coverage A (Side A)

Direct coverage for Directors and Officers only when such indemnification is not permitted by law, or is financially prohibited because a lack of funds or bankruptcy -Used when the corp does not or cannot provide indemnification -Typically Claims-made basis -"Individual Coverage" or "Direct Coverage"

Explain the exclusion category "Loss exposures better covered by other insurance"

Excludes claims of BI, PD, Personal Injury, advertising injury, and fiduciary liability under ERISA, mental anguish, emotional distress, pollution

Who the Fiduciary is their Duties for ERISA

Fiduciary - anyone whose role in EE benefits involves discretionary control or judgment in the design, administration, funding, or management of a benefit plan or in the management of its assets Fiduciary duties associated with EE benefit plans include: Loyalty Prudence - care, skill, prudence, and diligence; prudent person rule Diversification Adherence - law and plan documents

Who is an Insured for Coverage A?

Individual Directors and Officers -their spouse may be covered

Arbirtation

It is a resolution technique in which a third party reviews the evidence in the case and imposes a decision that is legally binding for both sides and enforceable

How does one meet their Duty of Care (duty of diligence)

Met if meet these standards: Act in good faith and in a manner they reasonably believe to be in the corporation's best interests (Business Judgment Rule) Discharge their responsibilities with informed judgment and a degree of care that a person in a similar position would believe to be reasonable under similar circumstances -Some BOD get paid to attend board meetings

Severability of Interests

Misrepresentations in the application will not defeat coverage for directors and officers who did not sign the application and were unaware of the true facts

Duty of Obidience

Obedience to the federal/state laws

Employment Practices Liability Loss Exposures

Protected Classes (as defined by the Equal Employment Opportunity Commission) -Sex -Race -Religion -Color -National Origin -People over 40 -People with physical / mental handicaps

Fiduciary Liability Insurance

Similar to D&O and EPLI Generally claims-made basis Covered defense expenses usually included within the overall limit (not in addition to limits) Generally subject to deductible

Separate Coverage for Directors and Officers (3) Why do they need it in the first place though (4 reasons)

Why? 1. Cost of defending the claim has depleted the policy limits 2. Aggregate limits are used up in defending/paying other claims 3. Court freezes corp. D&O policy as part of bankruptcy proceedings 4. Insurer rescinds policy due to material misrepresentation Types 1. Side A- Only Coverage 2. Enhanced Side- A Only DIC 3. Independent Directors

Wrongful Termination

includes 'constructive discharge" which means an employee resigns due to unendurable conditions towards their class such as blatenetly making it uncomfortable for a black person to work