(left:  new Heller Ehrman shareholder Timothy W. Burns)

Thanks to PLI's All Star Briefing, we bring you excerpts from Timothy W. Burns: Negotiating D&O coverage requires awareness of everything that might go wrong in advance.

As I tell potential clients with coverage issues, because my husband (who is one of Burns' many new partners at Heller Ehrman) has represented policy holders for as long as he can recall, and I represented the carriers he was suing, I am deeply neutral.  

What we have both always agreed upon is this -- policy language is far too often vague and ambiguous and sometimes incomprehensible (I once offered my associates a $200 "prize" to diagram one of the lengthier sentences in a prolix and unwieldy pollution exclusion -- no one took me up on the offer).

If you want to protect your business, see your legal G.P., the transactional coverage attorney to avoid the visit with your legal cardiac surgeon, the coverage litigator.

That said, we give you a few hightlights of Burns' advice on purchasing D&O coverage: 

PLI: What do "real-life" D&O claims teach companies to keep in mind in purchasing D&O insurance?

TIMOTHY W. BURNS: Remember, D&O insurance is purchased to protect against securities fraud lawsuits. Securities fraud lawsuits typically ensue when a company restates its financials – the same financials that the company may have attached to its insurance policy application.

When a company announces that it is going to restate its financials, its D&O insurer may announce that it intends to rescind coverage – to seek a declaration that the policy is void ab initio. This is perhaps the last thing the company's directors want to hear.

To avoid this scenario, when purchasing D&O insurance, try to get the insurance company to agree not to consider the company's financials statements part of the application for insurance. This often does not fly.

What will work, at least for non-wrongdoing directors and officers, is to insist on "full severability." This means that the policy will include a provision specifying that the wrongdoing and representations of one director or officer will not be imputed to another. Beware, however, as some unfortunate companies have learned, there are many different flavors of severability and what one insurer calls "full severability" might be half empty.

The fraud exclusion: Insist on "final adjudication" language. Insurers will seek to provide something less and will seek to convince you that it is in the directors' and officers' interest to take it. The convincing usually runs along these lines: There are white hat directors and black hat directors; insurers need less than final adjudication language to ensure that black hat directors don't use up all of the white hat directors' policy proceeds. Beware! At the time of claim, if the corporation does not have "final adjudication" language, the insurer may seek to pay the corporation less to settle the claim by asserting that it can deny coverage altogether by proving fraud in the insurance coverage dispute. . . .

[What About Settlement with the Primary Carrier?]

[T]here are many areas of potential dispute between a corporate policyholder and its insurers. As a result, at the time of claim, a corporate policyholder may accept less than the full limits of an insurance policy to settle the disputes. Recently, however, excess insurers have contended that if the underlying insurers do not themselves pay their limits in full, the excess insurer has no obligation to pay at all. In other words, contrary to longstanding law, excess insurers argue that they have no coverage obligation, if the corporate policyholder compromises with the underlying insurers and pays a portion of the claim itself.

To avoid this dangerous claim situation, at the time of purchase, corporate policyholders should insist that their excess policies specifically state that the underlying limits of insurance may be paid by any combination of payments by the underlying insurers and the corporate policyholder or its directors and officers.

For the full article, click here.