The illusory nature of D&O insurance
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Volume 3 Number 3
The illusory nature of D&O insurance Mark E. Miller Received: 18th July 2006 Greenberg Traurig, L.L.P., 800 Connecticut Avenue, N.W. Suite 500, Washington, D.C. 20006; Tel: +1 202-331-3175; Fax: +1 202 261 0175; E-mail: [email protected]
Mark E. Miller is a shareholder at the Washington, DC o$ces of the international law firm Greenberg Traurig, LLP where he counsels clients on the procurement of D&O insurance and litigates coverage disputes on behalf of policyholders. Mr Miller is a leading authority on insurance coverage issues, having written and been quoted extensively by leading publications including Business Insurance, The National Law Journal, Forbes, CFO Magazine, and others. Mr Miller’s views do not represent the views of his firm or of any firm client.
ABSTRACT KEYWORDS: director and officer liability insurance for securities claims, rescission, D&O fraud exclusion, D&O restitution claims, insurance coverage for Section 11 and 12 securities claims, D&O restitution claims This paper discusses a number of problematic areas in D&O insurance which threaten the breadth and scope of securities coverage policyholders expect when purchasing D&O insurance coverage. Arguments made by a number of D&O insurance underwriters related to financial restatements and rescission, securities claims alleging fraud, and coverage for Section 11 and 12 securities claims are discussed and analysed.
INTRODUCTION Corporate policyholders purchase insurance to manage unknown risk. In the context of directors and officers (D&O) insurance, corporations, directors and officers annually spend hundreds of millions of dollars on D&O insurance premiums to protect
themselves and their organisations against securities-related lawsuits. The effectiveness of this D&O marketplace is based on the clarity of coverage provided, and the trust that the promise to cover will be fulfilled by the insurer underwriting coverage. Recent litigation by some insurance carriers seeking to narrow commonly accepted areas of securities-related coverage afforded under D&O insurance policies, though, has drastically diminished trust and certainty, making D&O renewal decisions more difficult than ever. The risks associated with securities litigation are well documented. Each year, over the past ten years, a minimum of 150 new securities-related lawsuits have been filed annually against US publicly traded companies. Each of these non-current securities-related lawsuits was settled. The majority of these lawsuits settled for less than $20m, but a handful of these settlements, each year, typically exceed $100m. Funding for these settlements, at least in part, was provided through the contribution of D&O insurance proceeds. But, many settlements required contribution from individual directors and officers, and/or the organisation, a trend best exemplified by WorldCom, Inc. Securities Class Action Settlements, where individual directors and officers reportedly contributed in excess of $60m towards a $6bn plus total settlement. In the last several years, consid
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