Take a Look at D&O Liabilities in Securities Litigation if You’re Tired of Getting a Good Night’s Sleep
By Tom Hagy
Claims-made insurance policies are suddenly hotter than ever due to the rise in D&O litigation, and come with numerous potential pitfalls for attorneys, brokers, insurers and policyholders who may not be familiar with the myriad thorny nuances associated with this alternative to occurrence-based contracts.
I interviewed the two chairs of our upcoming conference which they’ve designed specifically to address these policies: insurance company counsel Laura Foggan of Wiley Rein LLP and policyholder counsel Ann Kramer of Reed Smith LLP. Both attorneys are considered experts in the law surrounding complex insurance claims.
Foggan said the topic warrants “specific and different consideration” given the “numerous tricky threshold claims-made and timing issues posed,” matters that are often swallowed up by broader insurance programs. Foggan said people handling claims-made insurance need to understand the definition of a “claim,” claim reporting requirements, what constitutes timely submission of a claim and much more. As examples of the importance of these questions, she noted recent and “diametrically opposed” conclusions rendered in claims made late notice cases.
Out of the Texas Supreme Court came a March 27, 2009, opinion in Prodigy Communications v. Agricultural Excess & Surplus Insurance,?2009 Tex. LEXIS 111; 52 Tex. Sup. J. 475, where the court held that the insurer could not deny coverage due to the purported failure on the part of the policyholder to give its carrier notice “as soon as practicable” when the notice was still within the policy’s reporting period. It’s worth noting that the insurer admitted that it was not prejudiced by the alleged delay.
Out of the Pennsylvania Supreme Court came a simple affirmation of a Superior Court ruling in Ace v. Lloyds that the plaintiff failed to establish that its compliance with only the general reporting requirements under a claims made and reported policy was sufficient to effectuate coverage, where the notice did not meet more specific prompt notice provisions. Ace Am. Ins. Co. v. Underwriters at Lloyds & Cos., 2009 Pa. LEXIS 752 (Pa., Apr. 14, 2009).
With the courts split in this way it presents difficulties for insurers and policyholders alike. “The consequences of failing to meet the policy conditions could be tremendous, such as no coverage at all without regard to whether the insurer suffers prejudice,” Foggan said. “This issue has been increasingly significant in light of the increase in D&O and professional liability claims, the policies for which are written on a claims-made basis, as well as the use of claims made forms in other settings, such as environmental coverage endorsements and EIL coverages.”
‘Traps for the Unwary’
Foggan’s co-chair, Ann Kramer, said claims-made policies come with “traps for the unwary.”
“In connection with defense of claims under D&O policies, there arise very important questions particularly when claims start out with the receipt of investigative subpoenas and grand jury demands. When a claim arises in that context it is ‘fraught with peril,’” she said. Questions arise around when defense costs are covered. Does a subpoena trigger defense coverage or is it a mere investigative tool? Clients can spend huge amounts of money responding at the investigative stage, she explained, so the answer to that question is important. “Unless sophisticated people are involved in the process of presenting the claim to the insurer there is a good chance of losing out on a substantial claim for coverage,” Kramer said.
She said potential liability can arise for professionals such as risk management consultants, brokers and lawyers themselves advising policyholders ; ironically, sparking additional allegations under their own claims-made professional liability policies.
“The trickiness thickens when a policy period draws to a close,” Kramer said, “particularly when the policyholder is switching carriers.” That is when policyholders go through the “laundry list” process of sifting and surveying their organization for any potential claims that may fall within the expiring policy. “If you laundry list a potential claim into the expiring policy, the expiring carrier will reserve its rights to disclaim as premature,” she explained, “ while, the subsequent carrier may disclaim because it says the claim has already been reported to a prior carrier.”
An employee might add to the laundry list the fact that “a customer yelled at me on the phone,” so is that “reportable”? Is that a wrongful act that may give rise to a claim? What if the unhappy person sues two years later? “If it was reported to the expiring carrier, the later carrier may refuse to accept it,” Kramer said, “and the expiring carrier may say it was not properly reported, that the matter was raised too soon.”
The policyholder is both too early and too late. At that point is the policyholder out of luck? Kramer said she has had success “clawing our way back” even when a client has made missteps, but that’s not the position the policyholder wants to be in the first place.
Tremendous consequences, traps for the unwary, or whatever you want to call it, the facts in another recent case involving a CEO hit with a $2.8 BILLION judgment in a securities fraud case, show just how much can be at stake. In that case, In Re HealthSouth Corporation Securities Litigation, 2009 U.S. App. Lexis 13199 (11th Cir. 2009), the Eleventh Circuit held that a securities settlement can eliminate the former CEO’s right to defense or indemnity.