This article is excerpted from the August 2014 Edition of Financier Worldwide and was reprinted with permission from the author. You can also find the full article here.
A director or officer being sued or investigated for allegations of mismanagement is facing one of his or her worst nightmares. Their reputation is at stake, and because a director’s or officer’s liability is a personal liability, such a claim can be a financial nightmare as well. The situation is made all the worse when a director receives notification that their D&O insurer might be denying coverage. But all is not lost – a director can still take control in this situation. Ty Sagalow, President of Innovation Insurance Group LLC, offers these top ten tips to follow when facing a D&O insurance denial letter.
Step 1: Don’t panic
If you have been sued or investigated as a director or officer, your company’s D&O carrier has sent a coverage analysis letter back to the company’s risk manager or general counsel. Get the letter and if the letter is denying or reserving rights on coverage, know this response is not all that uncommon. Usually there is nothing to fear.
Step 2: Know that not every denial letter is a real denial letter
The most common response from a D&O carrier is a ‘reservations of rights’ letter. This letter will generally indicate that coverage is initially being provided under your policy but that such coverage may be removed in the future if certain things occur. While this sounds scary, in most instances it is nothing to lose sleep over. It is best to consult with an expert on the exact wording of your policy (see Step 5).
Step 3: Look at your other insurance policies
It is not uncommon for a D&O carrier to either deny coverage or reserve its rights on coverage because there might be another insurance policy that should be the policy to cover the claim. Common clauses pointing the finger at other insurance policies include: bodily injury/property damage (go to General Liability policy), pollution (go to environmental policy), ERISA (go to Fiduciary Liability policy) and, a bit more problematic, the general ‘Other Insurance’ clause. Of course, at this point, it might be a good idea to actually read the policy.
Step 4: Read the policy
While we always recommend reading the insurance policy before there is a claim, if this hasn’t occurred, it is a good idea to do so now. This also might be a good time to read the company’s by-laws on director indemnification and obtain a commitment from the general counsel that your legal fees, settlements and adverse judgments will be paid by the company, especially in the event the D&O insurer doesn’t pick up the tab.
Step 5: Talk with an independent industry expert that you hire
It is best to personally retain an insurance expert to review your situation. Preferably the individual should be someone with a D&O insurance carrier background, whether in underwriting or claims. Remember, your company’s fundamental obligation is to its own interests rather than yours, so don’t be afraid to hire your own expert.
For tips 6 – 10, be sure to check out our full article here.
Ty Sagalow is the former Chief Underwriting Officer for one of the world’s largest D&O insurance companies and is currently president of Innovation Insurance Group, LLC, an insurance consultant. He can be contacted at (212) 909-2244 or via email: tysagalow@innovationinsurance group.com.