Published in Criminal Justice, Volume 25, Number 4, Winter 2011. © 2011 by the American Bar Association. Reproduced with permission.
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Let's say you're a white-collar defense lawyer and you've just been retained by a new client—a director or officer of a company facing an investigation, a lawsuit, or maybe an indictment. Before you go to work doing what you do best—getting your client out of whatever white-collar trouble he or she is facing— think about how directors and officers (D&O) insurance can help. You probably already know that D&O insurance can sometimes advance defense costs to enable your client to fund your work, and you probably know that D&O insurance will sometimes indemnify your client for a civil judgment. Beyond that, you may find figuring out D&O insurance a frustrating experience.

That's where I come in. I'm an insurance coverage lawyer. That last sentence is likely to make you go to sleep or turn the page, but if you stick with me, I'm going to share with you five steps that can help demystify insurance, and set you on the path to at least finding out if a D&O policy will advance costs for your client's defense or indemnify your client. Knowing if you have insurance coverage can help you better plan to do what you do best: Defend your client. So step into the world of insurance for a few minutes, and follow me through five steps to help you figure out what sort of coverage is available for whatever situation your client is in. A couple of caveats: First, the language of D&O insurance policies varies dramatically, so you have to review the policy each time you start a case with a new client (or a new matter with different facts for an old client).

Second, this article won't get into every possible permutation of insurance coverage, or look too deeply into the issues surrounding common exclusions in D&O contracts (which, again, will vary from policy to policy)— our focus will just be on trying to analyze the possibility of coverage and how to get started with the insurer. In short, these are general principles that can help organize your thinking and first actions on the possibility of insurance coverage, but every case and every policy is different.

With that in mind, let's look at five issues that you should think about when you're trying to obtain D&O insurance coverage for your client, and some things you can do to address those issues.

1. Get a Copy of the Applicable Policies—as Soon as You Can

This seems obvious, but there are two reasons why you need to make this a priority when you first start representing your white-collar client. First, the insurance policy (usually only one, but sometimes more than one type of coverage may apply) will define your client's relationship with the insurer—it's both the football field and the referee's rule book. It's critical to get the exact language of the policy. Unlike other types of insurance, the language used in D&O insurance policies can vary widely from insurer to insurer, and even between policies issued by the same insurer. For example, in Medical Care America, Inc. v. National Union Fire Ins. Co., 341 F.3d 415, 422 (5th Cir. 2003), an underwriter testified that one insurer had seven different types of wording of one common exclusion that the insurer's policies could contain.

Second, one of the rules provided by the insurance contract (discussed below) will govern how soon you have to tell the insurer about your client's situation, and you don't want to miss that deadline.

Start your search by thinking about the types of insurance coverage that might apply. If your client is a director or officer of a company, your first step will naturally be to think about D&O insurance. But other types of insurance contracts might supply coverage, and it can't hurt to investigate them. For example, if your client's company is a bank, it may have a special liability policy for "fiduciary institutions" that could apply. If your client was the general counsel of the company, a professional services liability policy could be applicable. In short, it never hurts to start by getting copies of all of the insurance policies that may cover your client.

Don't forget to ask about excess policies. Insurers and insureds frequently divide up coverage by the level of projected risk of liability. Think of these separate policies as a "tower" of insurance going from the first dollar of insurance coverage up to the limit of the policy at the top of the tower. As an example, a company could have a primary policy that covers its directors' and officers' liability up to $5 million. Above that $5 million, another $5 million in directors' and officers' liability risk could be transferred to another insurer writing a separate policy (this would be called a $5 million "excess" policy—it's in excess of the coverage in the first or "primary" policy). Over this $10 million in coverage available through these first two policies, there could be a second excess policy with coverage of another $10 million to $20 million in coverage. The tower could continue even higher. Each of these excess policies will typically adopt the wording of the primary policy, but each is an individual contract and can have its own limitations on coverage. In any event, it's good practice to discover how many policies are in the tower so you know the total dollar amount of available coverage (this is all the more important if other directors and officers will be seeking advancement of their own defense costs). And remember, if your client's company bought excess insurance coverage for its directors and officers, you need to give notice of your client's claim to all of those insurers as well as the primary insurer.

Now that you know what you're looking for, you've got to get the insurance contracts themselves. Your client may be your best lead, so ask some probing questions. If your client was a director of a company, did the board ever discuss insurance? Did anyone give presentations to the board about insurance for the board, and, if so, who gave the presentation? Were insurance policies or information about insurance ever distributed to the board, and does your client have copies in a file somewhere? If your client doesn't have copies of the company's policies, he or she might still be able to give you clues on where to look. Possible sources include the risk manager or general counsel at your client's company.

If you can't get the policies from the company, see if you can find the name of the broker who helped the company buy the insurance. Don't be afraid to approach the broker; the broker acts as the insured company's agent to buy and manage the company's insurance policies. The broker's job is to help the insured get insurance and make claims under it, so in almost every case, the broker will be on your side throughout the process of figuring out what coverage is available to you and how to make a claim. The broker can also be a helpful ally for you. He or she is a repeat customer for the insurers, so the broker's calls or letters to the insurer may be returned quicker than yours.

2. Stop Worrying About the Exclusions for Now

The response of many lawyers trying to get coverage under a D&O policy is often a three-step process: 1) pick up the policy, 2) flip right to the policy's exclusions, and 3) scream in anger about how the insurer will never provide coverage for what the client is facing. But remember, before the exclusions for coverage even come into play, you first must make sure your client has a claim that qualifies for coverage under the policy.

The first thing an insured has to do is demonstrate that coverage for a claim exists (if you want to sound like a cool insurance lawyer, you'd say that you need to show that you have a claim that "triggers coverage" under the policy). (See, e.g., KLN Steel Products Co. Ltd. v. CNA Ins. Co., 278 S.W.3d 429, 434 (Tex. App. 2008) (". . . the insured has the initial burden of establishing that its claim comes within the scope of coverage provided by the policy"); Ins. Co. N. Amer. v. Kayser-Roth Corp., 770 A.2d 403, 416-17 (R.I. 2001) ("It is well settled that the insured seeking to establish coverage bears the burden of proving a prima facie case, including but not limited to the existence and validity of a policy, the loss as within the policy coverage, and the insurer's refusal to make payments as required by the terms of the policy.") (internal quotations omitted).) This demonstration doesn't have to be elaborate to trigger the insurer's duty to advance defense costs. (See, e.g., KLN Steel Products Co. Ltd., supra at 435 ("The insured need only show that a reasonable reading of the plaintiff's allegations would allow evidence of a claim that is covered by the policy, not that the claim itself be clearly enunciated within the pleadings.").)

After you show that your client is an insured and explain why coverage exists, then it's the insurer's turn to point out exclusions or other limitations on coverage. As a general rule, the insurer will have to meet a heavier burden to deny coverage based on an exclusion than the insured's burden to establish coverage. (See, e.g., Sarinsky's Garage, Inc. v. Erie Ins. Co., 691 F. Supp. 2d 483, 486 (S.D.N.Y. 2010) ("Where an insurer seeks to negate coverage by virtue of an exclusion in the policy, a heavy burden is placed on the insurer to establish that the exclusion is stated in clear and unmistakable language, is subject to no other reasonable interpretation, and applies in the particular case.") (internal quotations omitted).) Your demonstration that your client has a covered claim doesn't have to answer every possible defense to coverage that the insurer has—that's the insurer's job, and there's no need for you to "lead with your chin" by trying to knock down the insurer's arguments before they are even raised.

Triggering the insurance coverage is pretty much a matter of unpacking the defined terms in the policy's coverage grant—usually a short paragraph or two at the beginning of the policy setting out the bundle of risks that the policy insures against—and trying to ensure that your client's situation meets those requirements to trigger coverage. D&O policy language can vary dramatically, so this is an important step to be considered individually in every case, but it usually comes down to comparing the basic who, what, and when of your client's situation with what the policy covers.

An example of how this works will illustrate the point. Let's start with a common scenario: Your client was the chief financial officer (CFO) of a company that has collapsed under allegations of fraud and mismanagement. Your client, along with other officers and directors, has just been indicted and is likely to be named as a defendant in regulatory proceedings and civil suits. The company is in bankruptcy.

You've obtained the company's D&O policy and it includes this typical coverage grant:

The Insurer will pay to or on behalf of the Insured Persons Loss arising from Claims first made during the Policy Period or Discovery Period against the Insured Persons for Wrongful Acts, except when and to the extent that the Company has paid such loss to or on behalf of the Insured Persons as indemnification or advancement.

Now it's a question of matching up the indictment against your client with the defined terms that are used in this coverage grant, and checking them off one by one. The policy's defined terms will usually appear right after the coverage grant. This policy defines "Insured Persons" as "any past, present, or future director or officer of the Company." Your client was the CFO, so he or she is an insured person. The policy defines "Claims" to include various civil and regulatory proceedings and "any criminal proceeding commenced by return of an indictment," so your client's indictment is a claim. Is the claim for "Wrongful Acts," defined as "any actual or alleged act, error, misstatement, misleading statement, omission or breach of duty by an Insured Person in his or her capacity?" The indictment is based on your client's alleged conduct (or failures) as CFO and the client's role in the collapse of the company, so you should have this one covered. Is the indictment (the claim) brought within the policy period or discovery period (usually a small number of years or months after the policy expires)? Let's say for our example that the indictment was returned during the discovery period, so you've met this requirement. Are you seeking loss from the insurer? Yes, you are, because "loss" is defined to include "reasonable defense costs," which is what your client will need in order for you to mount a vigorous defense. And with the company in bankruptcy, it is not yet able to indemnify or advance defense costs (if it will ever be able to, which raises an entirely separate set of issues).

So that's it. Using just the indictment and the policy, you have figured out that your client's situation should trigger coverage. The next section will cover how you communicate this to the insurer, but at this point you have sketched out your prima facie case.

It bears noting, though, that this is a straightforward example using a not uncommon situation and typical policy language. Certainly some situations will raise tougher questions that may or may not be covered given the language of the policy and variations in the insurance law from state to state. Some of these closer calls that will require more scrutiny of both the policy and applicable law include:

  • Coverage for an investigation: Some D&O policies only cover claims commenced by a written document (a civil complaint, criminal indictment, etc.) Under those policies, your client's defense costs to respond to an investigation would not be covered "loss" arising out of a "claim." Other policies expressly include coverage for investigations.
  • Coverage for costs to respond to a subpoena: Policies also vary on whether defense costs to respond to a subpoena will be covered. If your client's policy does not expressly provide coverage for responding to a subpoena, you may need to look to cases that have analyzed coverage for a subpoena under similar policy language. Courts in different states have reached different results, and the specific policy language at issue in each case is always at the center of the analysis, regardless of the result. (Compare Ace American Ins. Co. v. Ascend One Corp., 570 F. Supp. 2d 789, 796 (D. Md. 2008) (finding coverage for state agency subpoenas where the policy at issue covered any "civil, administrative, or regulatory investigation against any Insured commenced by the filing of a notice of charges, investigative order or similar document"), and Diamond Glass Companies, Inc. v. Twin City Fire Ins. Co., 2008 WL 4613170 (S.D.N.Y. Aug. 18, 2008) (holding no coverage for grand jury subpoenas where policy's coverage grant included "a written demand for monetary or non-monetary relief commenced by the receipt of such demand [or] a criminal proceeding, or formal administrative or regulatory proceeding commenced by the return of an indictment, filing of a notice of charges, or similar document.").)
  • Senior manager or employee, but not on the board: Is your client a high-level executive or manager of the company, but not an officer or member of the board of directors? While it's uncommon, some policies will extend coverage to include a nonboard member of the company.

The specific language (especially the defined terms) of the policy will help you answer all of these questions, and more. In some cases, you'll want to look to the law of the state that would govern the policy to see how courts have interpreted defined terms in similar policies that will impact your client's situation.

Meeting this initial showing—getting into the coverage of the policy—doesn't mean the exclusions don't matter. The exclusions are binding parts of the insurance contract, and they'll matter even more as the case develops. But they can only apply—if they do at all—after you've crossed the threshold of establishing a covered claim. More importantly, the most significant exclusions in a common D&O policy usually don't apply to allegations alone: They require established facts for an insurer to bar coverage based on them. The two most common exclusions in D&O policies raised by insurers responding to white-collar claims include an exclusion for criminal, fraudulent, or dishonest acts, and an exclusion for personal profits or improper gain that an insured was not entitled to receive. These exclusions are phrased in various ways by different insurers, but they almost always provide that they don't apply until it is proven "in fact" or by a "final adjudication" that the insured engaged in conduct barred by those exclusions. The practical impact of these exclusions, combined with the limitation on when the insurer can apply them, means that the insurer will often have a duty to advance defense costs up until the excluded conduct is definitively proven. (See, e.g., In re Enron Corp., 391 F. Supp. 2d 541, 574-75 (S.D. Tex. 2005) (insurer had a duty to advance defense costs up until there was a "final adjudication" of allegations that could fall within the dishonesty exclusion of the policy at issue).)

So, while you need to be mindful of the exclusions, don't put the cart full of exclusions before the horse of getting into the coverage of the policy. Picture the insurance coverage as a house: Before the insurer can use an exclusion to throw you out of the house, you have to go up to the front door, ring the bell, and show that your client's claim is supposed to come inside.

But now that you know the strategy of what you have to show the insurer, let's look at the tactics of how you actually do it.

3. Meet the Policy's Requirements for Notice

The policy will explain how and when your client needs to give the insurer notice of a claim, investigation, or even "circumstances that may give rise to a claim" in order for the claim to be covered. The requirements for doing this are usually not onerous. Often it's just a matter of sending a letter to the insurer at the address in the policy and enclosing any documents (subpoena, indictment, etc.) that serve as the basis for the claim.

While it can come with different requirements, the requirement to give notice of a claim is usually phrased something like this:

An Insured must, as a condition precedent to the obligations of the Insurer under this policy, give written notice, including full details, to the Insurer of any Claim as soon as practicable after it is made.

The critical part of the notice requirement is the time element. As in this example, notice usually has to be given within a certain amount of time or a time period that a court will consider relatively short ("as soon as practicable" in this case). An insurer can use a failure to provide timely notice to bar coverage, although the law on this point varies significantly from state to state. The law of some states will require an insurer to show that the late notice somehow prejudiced its handling of the claim. In other states, an insurer can decline to cover a claim without showing prejudice—simply because the notice was given too late. Sometimes there are ways around the insurer's reliance on the late-notice defense, but it's much easier if you meet the requirement of timely notice from the beginning.

What do you have to say to the insurer? While the notice to the insurer almost always has to be given in writing, you don't have to write War and Peace. A short letter addressed to the insurer at the address given in the policy is enough. Unless the policy directs you to do something else, your letter should: 1) give the policy number and name of the company that purchased it; 2) explain who your client is and why he or she is a named insured; 3) briefly explain the circumstances of the claim—is it an indictment, a civil lawsuit, an investigation, or something else?—and attach any relevant pleadings; 4) point out how the claim arises from an alleged wrongful act (your client's alleged conduct as an officer or director of the company); 5) tell the insurer what you and your client are going to do (file an answer, respond to the subpoena, etc.); and 6) tell the insurer what you want it to do—acknowledge coverage of the claim and agree to advance defense expenses.

Bear in mind that in many circumstances (outside the scope of this article) your communications with an insurer may not be protected from disclosure by the attorneyclient privilege or work-product doctrine, so as a general caution don't put anything in your letter that would be problematic if it showed up in the New York Times or in your adversary's file. Stick to the basic facts and if you have a pleading or other document that you're submitting to the insurer, stand on what that document says.

Send your letter in some way that you can track it. Most of the time, you'll receive a response from the insurer at least acknowledging your notice of a claim, but if your letter goes astray and the timeliness of your notice is questioned down the road, you'll want to be able to establish that you sent the letter to the address given in the policy and that someone at that address received it.

Very frequently, the broker who procured the policy will be willing and able to assist you with jumping the notice hurdle.

4. Keep the Pressure on the Insurer

So, you got the applicable policy, figured out your client has a claim, and sent in your notice. No response the next day? Don't be surprised. This doesn't mean the insurer is intentionally ignoring you, it just means that while your client's situation is uppermost on your mind, it's just one of many, many claims to the insurer. It's very likely the insurer won't respond as quickly as you would like.

It can't hurt to follow your first letter with a chaser letter (or more than one) to the insurer, stressing the need for your client to know about insurance coverage for defense expenses one way or the other, and offering to have a conversation with the assigned claim handler if that would help move things along. Another strategy here is to remember your friend the broker. If you've located the broker who helped place the policies, he or she may be a good source of pressure on the insurer to respond to you (once again, the brokers are repeat sources of business for insurers and are more likely to know what "buttons to push" inside the insurance company to get a faster response).

5. Cooperate, Plan, and Protect

Finally, the letter arrives: The insurer says your client's defense expenses are (at least provisionally) covered. That's great! But you aren't done securing coverage. If your client is in litigation, the insurer may want a litigation plan and budget from you. You also may need to consider carefully the insurer's response and understand any rights that the insurer reserves.

First, do you have to respond to the request for a litigation plan? The basis for the insurer's request for a litigation plan is the duty to cooperate contained in pretty much every insurance policy. The wording may differ, but this duty generally provides that an insured "agrees to provide the Insurer with such information, assistance and cooperation as the Insurer and/or its counsel may request. . . ." An insured's breach of this condition of coverage can allow the insurer to decline coverage, although in many states the insurer will have to show it was prejudiced by the lack of cooperation in order to sustain its denial of coverage. On the other hand, these provisions normally don't specifically require you to submit a litigation plan, and you should ask the insurer where this requirement originates. Additionally, the scope of privilege that applies to what you submit to the insurer will vary depending on the insurer's position on coverage (whether it has agreed to advance defense costs to your client with or without a reservation of rights) and applicable state law. So tread carefully. Should you choose to submit a litigation plan for your client's defense, you should get confirmation from the insurer—in writing—that it will not otherwise distribute the plan to other entities (such as the insurer's reinsurers). In the event of the insurer's inadvertent disclosure of the plan (and it happens), this will help establish your intent to protect the privilege.

There are also limits on other demands the insurer can require from you. Remember that your client's relationship to the insurer is governed by the insurance contract— that contract defines your client's relationship to the insurer, and outlines both side's rights and responsibilities. The insurer can't amend or add to the contract just because your client has now made a claim, and you shouldn't allow the insurer to do so. Sometimes, an insurer will ask an insured to sign a nonwaiver agreement or undertaking of reimbursement of defense expenses before it agrees to advance defense costs. This right of reimbursement is usually a right the insurer will already have in its policy: If, at the end of the case, the insurer has a valid defense to coverage (usually based on one of the exclusions in the policy that permits the insurer to decline coverage if the allegations of excluded conduct wind up being proven "in fact" or in a "final adjudication"), the insurer can seek to recover the defense costs it advanced. But D&O policies rarely give the insurer the right to demand an insured sign an undertaking or nonwaiver agreement acknowledging that the insurer has the right of reimbursement.

If the insurer asks you to have your client execute this type of an agreement, consider demanding that the insurer point to the provision in the contract that gives it the right to make your client sign anything as a condition of receiving the benefits of the policy to which your client is already entitled. Often, the insurer will drop this demand. If it doesn't do so, and your client needs to firm up his or her rights to defense costs and is unwilling to open up coverage litigation against the insurer, at least one insurance treatise recommends that your client should "confirm its disagreement [with the insurer's proposed undertaking of reimbursement] in writing and explain that it signed the agreement under economic duress." (Lorelie S. Masters et al., Insurance Coverage Litigation 5-116 (2d ed. Supp. 2010). That's not an unreasonable approach.

Ultimately, how much information you should provide to the insurer is up to you and your white-collar client, but bear in mind that if you're going to want the insurer's help down the road—maybe you'll want the insurer to indemnify your client for a mediated settlement.

It will pay to keep the insurer informed, to some degree, as the case proceeds, to avoid any allegation by the insurer that you didn't give it adequate notice and information before a settlement. For your internal case planning, you should also be mindful of the limits of liability of the policy. Most D&O policies are "burning limits" policies, meaning that defense costs erode the limits of liability. If you are one of many lawyers representing one of many individual defendants in a complex series of white-collar cases with many moving parts, those limits will erode away very quickly.

You should also carefully review the letter from the insurer accepting coverage. The insurer's letter may agree to advance defense costs now, subject to a reservation of its rights to deny coverage or seek reimbursement of defense costs at some point in the future. If the insurer is reserving its rights in line with the rights it has under the insurance contract, there's not too much you can or need to do, although a short reply to the insurer, noting that you have received its letter, acknowledging and confirming that the insurer has agreed to advance defense costs, and stating that your client reserves all client rights under the policy is not a bad strategy.

There are no guarantees that any particular D&O policy will provide coverage for the situation your client is facing. The possibility of insurance coverage is, however, always worth investigating. Thinking the policy through and following some basic steps will increase the likelihood that your client will have coverage or at least put the question of coverage to rest—freeing you to focus on the substance of your client's defense.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.