Subject to the limits, attachment, terms, conditions and exclusions of the policy itself, typically, Directors and Officers liability insurance provides cover for the alleged wrongful acts of directors and officers of a company who qualify as insureds under the policy.
A claims made, claims reported policy requires the insured to give the insurer notice of any claims or circumstances of which it becomes aware during the policy period.
In a typical claims made, claims reported policy, a notice of circumstance or a claim should be reported in writing to the insurer as soon as practicable and during the policy period in order for the claim to be considered.
A notice of circumstance is not a claim, but rather a potential claim which is usually defined as circumstances or alleged wrongful acts that could reasonably give rise to a claim in the future. A claim is usually defined as 1) any written demand; or 2) any civil or arbitral proceeding; or 3) any criminal prosecution; or 4) any formal administrative or regulatory proceeding. In the event a claim is made after the expiration of the policy period, the policy would treat the claim as being made when it was first reported as a circumstance.
Companies, as policyholders, purchase D&O insurance which cover the alleged wrongful acts of the individual directors or officers, but not the company itself. If the company/entity indemnifies the individual directors or officers, then it may seek reimbursement under the D&O policy. It is possible for the policyholder to purchase entity cover for securities and/or employment practice claims and in such circumstances cover would be extended to the company as well.
Under the Laws of England & Wales, Section 205 of the Companies Act states that a company may in its bye-laws or in any contract arrangement between the company and any officer, indemnify its directors but such indemnification is subject to complex rules and conditions (for example, an amount paid by the company has to be repaid in the event of a finding of liability against the director). Under Elite IV, Insuring Agreement A provides that where a corporation is prohibited from or unable to indemnify its directors or officers for any loss incurred in connection with a claim, the policy will pay loss on behalf of the directors and officers. Under Insuring Agreement B, the insurer indemnifies the company for loss the company itself has paid on behalf of its directors and officers.
The policy does not cover the cost of bringing proceedings except where there is a third party claim against a director and that director brings contribution proceedings against a fellow director – the costs of bringing the contribution proceedings may be covered. The D&O policy should not be mistaken for a legal expenses policy.
A typical D&O policy does not require the insurer to assign its own law firm to represent the insured. Although the insured retains the responsibility to defend itself and instruct its own counsel, it must provide written details of the law firm it selects, their proposed billing rates and budget, and request the consent from the insurer. At the request of the insured, the insurer may provide suggestions regarding selection of a suitable defence firm.
Chubb Group and its affiliates have a physical presence in over 50 countries serving the insurance needs of commercial and individual customers in more than 170 countries. It is therefore able to tap into its network for local advice and assistance as required.
Typically, in complex cases, Chubb European Group Limted retains its own monitoring law firm based in either the UK or in other countries depending on where the action is filed and which jurisdiction governs the policy. This firm assists our understanding of the quantum and liability aspect of the claim, coverage analysis and monitors progress alongside the defending law firm. The costs of a monitoring law firm do not erode the available limit of indemnity.
The insurer establishes if costs are deemed reasonable by taking into account the complexity of the case and local law society billing guidelines. They would not typically include a success fee mark up or other loading. Since all costs should receive insurers’ consent prior to being incurred, it is wise to ensure such approval is obtained to avoid any later debate over what is reasonable.
It is possible but rarely desirable to have multiple law firms engaged in the defence of several directors. Since defence costs usually erode the limit of liability (in the UK – different rules may apply in other jurisdictions) it is preferable to limit the number of firms acting other than where true conflicts exist between the individuals. Also by retaining one law firm to represent all, a more united front is demonstrated to the claimant, which can offer a strategic advantage.
Unless there is an extension of coverage for the entity, there would need to be an allocation of costs between the entity and directors. Such an allocation may take into account multiple factors such as number of defendants, nature of claims and so on.