D&O insurance basics (Part 2)

Directors’ and officers’ liability (D&O) insurance protects the personal assets of corporate directors and officers in the event of a lawsuit or other “claim” made against them for, among other things, an alleged breach of their duties in managing the organization.  D&O insurance directly covers individual directors and officers for their defense costs, judgments against them, and settlements when they cannot be indemnified by the company, and also covers the company to the extent it pays defense costs, judgments, and settlements as indemnification.  It may also cover the legal fees and other costs incurred by the company as a result of a securities claim made against the company as an entity.

The first installment of this blog series on D&O insurance addressed several “nuts and bolts” features of D&O insurance, including the key insuring agreements and definitions. This post discusses key exclusions, as well as common policyholder pitfalls, and new issues that are emerging in 2020.

Key D&O exclusions

All D&O insurance policies contain exclusions.  D&O insurance policies are not standardized, however, so the number and wording of the exclusions may vary from policy to policy and insurer to insurer.  Most traditional D&O insurance policies can be expected to contain the following exclusions:

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D&O insurance basics (Part 1)

This is the first of two posts discussing several major aspects of directors’ and officers’ liability (“D&O”) insurance coverage.  Companies approaching a policy renewal deadline, looking to place D&O insurance for the first time, considering increasing the size or structure of an existing D&O insurance program, or otherwise evaluating their overall risk management strategy may find it useful to review some basic features of D&O insurance and potential enhancements.

Why is D&O insurance important?

D&O insurance is an important risk management tool for any company.  It functions as a financial backstop for directors and officers by shielding these individuals from personal liability if the company is unable to indemnify them (usually due to a legal prohibition on indemnification or insolvency).  D&O insurance also adds value to and financial protection for the company by providing coverage for certain claims asserted against the company—most typically, securities claims—and its management.

Coverage basics

D&O policies typically provide coverage in several parts:

  • “Side A” or Insured Person Coverage directly covers Insured Persons—including directors, officers and other individuals defined under the policy—for non-indemnifiable claims made against them.
  • “Side B” or Corporate Reimbursement Coverage reimburses the company for amounts paid by the company as indemnification on behalf of Insured Persons for claims made against the Insured Persons.
  • “Side C” or Entity Securities Coverage applies in the case of securities claims made against the company as an entity.  Some D&O policies issued to private or non-profit companies may provide broader coverage for other types of claims made against the company.
  • Additionally, some policies may include “Inquiry” or “Interview” Coverage or other investigative costs coverage for certain non-routine document requests, interviews, and other pre-claim matters involving Insured Persons.

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COVID-19 event cancellation insurance – good news and bad news

A concert promoter cancels a sold-out show of a world-renowned recording artist, reimbursing millions of dollars in ticket sales as a result.  If the reason for the cancellation was COVID-19, does insurance cover that?

Event Cancellation Insurance Basics

Event cancellation insurance generally provides coverage only when there has been a triggering event under the policy.  Some policies are written, for example, to only cover cancellations caused by rain or bad weather.  Other event cancellation policies are all-risk policies, meaning that coverage may be triggered by any cause that is not specifically excluded.  For all types of event cancellation insurance, the triggering event must have been fortuitous, or outside of the policyholder’s control.

Good News for Policyholders

The good news for policyholders is that many all-risk event cancellation policies do cover cancellations caused by COVID-19 related shut-down orders.  For such policies, a shut-down order should qualify as a fortuitous triggering event.  Across the United States, nearly every jurisdiction has enacted some kind of order that caused the cancellation of large-scale events.

Notes of Caution

Policyholders should be cautious concerning the scope of exclusions in respect of viruses and communicable diseases.  Although these types of exclusions may bar coverage related to COVID-19, it is important to be mindful of variations in the exclusion language used.  Some exclusions apply to only specific named viruses, such as SARS and MERS.  Other exclusions contain carve-outs that may be applicable to COVID-19.

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Join us for an on-demand webinar “What policyholders really need to know about insurance for COVID-19”

Reed Smith Insurance Recovery partners John Shugrue, John Ellison, Amber Finch, Richard Lewis, and Matthew Weaver offer discussion and analysis on key issues relevant to businesses seeking, or evaluating whether to seek, coverage for COVID-19 losses. This webinar is available on demand and you can register here.

Here’s a brief summary of the topics addressed in the webinar:

  • Business interruption coverage and the physical loss/damage trigger (presented by Richard Lewis)

Business interruption insurance provides coverage when physical loss or damage adversely impacts a business, causing it loss.  This insurance covers lost profit and continuing expenses for the period needed to repair or replace damaged property and is designed to do for the business “what the business would have done had there been no loss or damage to property.”  For COVID-19, the key issue for business interruption coverage is: Can the known or suspected presence of a virus cause “physical loss or damage” to property?  For most businesses, it should generally be possible to make the requisite showing of physical loss or damage.

  • Contamination, virus, and microorganism exclusions (presented by John Ellison)

 In commentary, insurance companies have raised a variety of exclusions as potentially barring coverage for COVID-19 related losses.  Some of the exclusions raised include exclusions for virus, bacteria, contaminants, mold, and pollution.  Although there is significant diversity in exclusion wording across property policies, many policies contain standard virus exclusion language promulgated by the Insurance Services Office (ISO).  The ISO made demonstrably false statements to state regulators in seeking approval for this language.  Accordingly, virus exclusions may be vulnerable to challenge.  Additional information about insurers’ misrepresentations concerning virus exclusions is discussed in this article. Additionally, there are available challenges to the other forms of exclusion that insurers are raising that present viable responses to obtaining coverage even when they are asserted by your insurance company.

  • D&O coverage for shareholder claims (presented by John Shugrue)

Directors and officers liability insurance (D&O) coverage typically applies to liability claims made against individual directors for breach of fiduciary duty and to claims made against the business for securities law violations.  Potential claims implicating D&O coverage related to COVID-19 include shareholder claims for alleged failures to plan for, or respond to, the pandemic.

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Pollution exclusion should not preclude coverage for virus-related claims

Faced with mounting claims for insurance coverage as a result of the novel coronavirus (COVID-19) outbreak, commercial insurers are likely to search for any policy provision that they think will enable them to avoid paying virus-related claims.  One provision that insurers ultimately may invoke in an attempt to deny such claims is the so-called “pollution exclusion” – an exclusion that can be found in both commercial general liability (CGL) insurance policies and property insurance policies.  Policyholders should anticipate such an argument and should not walk away from insurance claims just because of it.  Although the exclusion is often broadly worded, there is generally good reason not to read it to preclude coverage for third-party claims and/or first-party losses involving viruses, including COVID-19.

While the exact language of the pollution exclusion may differ from one policy to another, it typically provides that there is no insurance for “bodily injury” and/or “property damage” that “would not have occurred in whole or in part but for the actual, alleged, or threatened discharge, dispersal, seepage, migration, release, or escape of ‘pollutants’ at any time.”  Again, while its precise definition can vary among policies, “pollutant” is typically defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste.”

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Are you covered? Cannabis industry must prepare for cyberattacks in 2020

Experian Data Breach Resolution (Experian) has identified its “top data breach trends of 2020,” and the cannabis industry should take note. In its “Data Breach Industry Forecast 2020,” Experian predicts that “we will see many burgeoning industries, such as cannabis retailers, cryptocurrency entities, and even some environmental organizations targeted for cyberattacks as a result of online activism or ‘hacktivism.’”

In recognition of this risk, cannabis retailers as well as other cannabis-related businesses should – in addition to taking other prudent risk-mitigation steps – ensure that they have procured insurance to protect against potential cyber-related losses and claims. While the cyber-insurance market available to cannabis-related businesses is still rather limited, such businesses generally still can – and should – obtain at least some cyber coverage today. Continue Reading

Raccoons as legal roadkill: The Western District of Pennsylvania denies coverage for damage caused by masked bandits

Reviewing philosopher Mark Rowlands’ 2012 work Can Animals Be Moral?, Jessica Pierce wrote in the Notre Dame Philosophical Reviews, “The question, ‘Can animals be moral?’ has suffered the worst kind of philosophical denial: an almost complete lack of interest by ‘serious’ philosophers.”

No longer.  In an effort to apply “general canon[s] of contract interpretation,” the U.S. District Court for the Western District of Pennsylvania – in a recent insurance-coverage opinion of all places – implicitly (if not explicitly) considered this timeless, vexing question and concluded that “[a]nimals do not have conscious agency and are not subject to human law.”

In the honorable pursuit of robust coverage law – really, is there a more noble pursuit? – the court rendered raccoons and their woodland “companions” as nothing more than legal roadkill.  Their demise, however, was not in vain.  The court’s decision serves as a good reminder to all that just because a term used in an insurance policy is not defined does not mean that it is ambiguous.

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Will your EPLI policy cover “wage and hour” claims in the wake of the California Court of Appeal’s decision in Southern California Pizza?

It has long been acknowledged that typical Employment Practices Liability Insurance (EPLI) policies exclude coverage for “wage and hour” claims.[1] [2]  However, a recent California Court of Appeal decision, Southern California Pizza Co., LLC v. Certain Underwriters at Lloyd’s, London Subscribing to Policy Number 11EPL-20208,[3] narrows the definition of what is a wage and hour claim, and improves the possibility of obtaining coverage for broad-brush wage and hour claims that tack on claims for failure to reimburse employees for business-related expenses.

In Southern California Pizza, the Court of Appeal held that claims brought under California Labor Code Sections 2800 and 2802 for failure to reimburse employee expenses did not fall within the wage and hour exclusion in a Lloyd’s of London EPLI policy that excluded coverage for claims “based upon, arising out of, directly or indirectly connected to or related to, or in any way alleging violations of any foreign, federal, state, or local, wage and hour or overtime law(s), including, without limitation, the Fair Labor Standards Act.”  In doing so, the Court reversed the lower court’s dismissal of the insured’s coverage case and rejected prior federal court decisions that had denied coverage for Labor Code Sections 2800 and 2802 claims under similar exclusionary language, stating that the California Courts of Appeal are “not bound by those federal decisions, nor do we find them persuasive.”[4]

Accordingly, policyholders who previously would not have had coverage for these types of reimbursement-related claims may now be able to trigger an insurer’s broad defense obligations and also obtain indemnification for some claims, depending on the language of their EPLI policy.

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In historic vote, U.S. House passes SAFE Banking Act; but, what will U.S. Senate do?

In a historic moment, the U.S. House of Representatives, yesterday, voted 321 to 103 in favor of H.R.1595, the Secure and Fair Enforcement Banking Act of 2019, also known as the “SAFE Banking Act.”  If ultimately enacted into law, this legislation would provide insurers, as well as banks and other institutions, a “safe harbor” to do business with “cannabis-related legitimate businesses” in the United States.

The SAFE Banking Act is intended to “create protections for depository institutions that provide financial services to cannabis-related legitimate businesses and service providers for such businesses.”  As Politico observed, though, “[t]he cannabis banking bill isn’t just about banks.”  It also affects insurance companies and the insurance market.

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Review state cannabis regulations for insurance requirements

Like any business, a business operating in the U.S. cannabis industry needs both first-party and third-party liability insurance.  Unlike other types of businesses, however, a cannabis-related business’ insurance needs may be dictated at least in part by state regulations.  Although not every state that has legalized cannabis for medical and/or adult use has promulgated specific insurance requirements for this industry, a number of states, via their cannabis regulations, have done so.  Accordingly, it is imperative for any cannabis-related business to carefully review the regulations in each jurisdiction in which it does business to ensure that it has obtained all required insurance. Continue Reading

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