YOUR D&O ROADMAP: How to Avoid Pitfalls, Potholes & Pileups

INS105 – Tuesday, April 17, 20128:45 AM – 10:00 AM

SPEAKERS

• Kathy Schroeder, Office Depot, Inc.Senior Director, Global Risk Management

• Heather Fox, Esq., ARC Excess & Surplus, LLCChief Brokerage Officer

• Lisa M. Cirando, Esq., Jones DayPolicyholder Attorney

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YOUR D&O ROADMAP

I. Navigation: Accurate Risk Assessment

II. Route Selection: Purchase the “Right” Policy

III. Fender Bender or Total Loss: Manage Claims Effectively to Maximize Recovery

IV. Summary/Questions & Answers 3

I. Navigation: Accurate Risk Assessment

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CASE STUDY

(Based on a True Story)

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CASE STUDY: RISK ASSESSMENT—Part I

Your Company receives a letter from the SEC:– “Conducting an inquiry” in order “to determine

whether there have been any violations of federal securities laws”

– Seeks certain information on a voluntary basis– Requests production of thirteen different

categories of documents—including “all tangible forms of information and expression” that are “in your care, custody and control”

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CASE STUDY: RISK ASSESSMENT—Part II

• You must:– Preserve all emails and phone records – Produce electronic records in their native form– Produce all records within 15 days– Certify, under penalty of perjury, that all

responsive documents have been produced

• Subject to fines and up to five years imprisonment for any false statements, misrepresentations or concealment

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CASE STUDY: RISK ASSESSMENT—Part III• The SEC expands the investigation and, over a period of 18 months,

sends five more letters seeking documents and sworn testimony• Several officers and employees provide testimony without insisting

on subpoenas• Soon after the SEC investigation commences, two shareholder class

actions and two derivative lawsuits are filed against the company and two insured persons

• The SEC issues a Formal Order of Private Investigation (six months after the first SEC letter) along with investigatory subpoenas

• Almost 30 months after the first SEC letter, the SEC issues “Wells Notices” for three individuals, recommending enforcement proceedings

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CASE STUDY: RISK ASSESSMENT—Part IV

• Your Company– Produces over a million pages of documents– Incurs over $25 million in attorneys fees/related costs– Ultimately settles with the SEC (along with two

persons who received Wells Notices)

• SEC Settlement– Requires agreement to the simultaneous filing of

complaint, consent judgment and administrative “cease and desist” orders

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CASE STUDY: THE D&O POLICY• “The term ‘Securities Claim’ shall include an

administrative or regulatory proceeding against an Organization, but only if and only during the time that such proceeding is also commenced and continuously maintained against an Insured Person.”– “Administrative or regulatory proceeding” is not defined

• No exclusion for pre-claim investigatory costs• Any subsequent related claims are “considered

made” as of the date of the notice of circumstances

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CASE STUDY: THE ARGUMENTSPolicyholder

• All investigatory costs incurred in connection with “administrative or regulatory proceeding”

• Timely filed Notice and Notice of Circumstances

• All costs related to the same circumstances

• Initial SEC letters identified Insured Persons against whom future proceedings were brought

• All costs related to the acknowledged claims

Insurance Company

• SEC letter/SEC Formal Order of Private Investigation did not constitute “administrative or regulatory proceeding”

• No pre-subpoena investigative costs coverage

• Acknowledged coverage only for each individual SEC subpoena and Wells Notices

• Shareholder lawsuits covered (but were dismissed before formal discovery commenced)

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ARE WE THERE YET?

12Source: http://www.siliconvalleywatcher.com/mt/archives/2006/01/you_cant_get_th.php

CASE STUDY: THE FINAL DESTINATION

• D&O coverage DENIED for all investigatory costs other than attorneys’ fees incurred after the dates on which Insured Persons received SEC subpoenas and Wells Notices

• After applying deductible and co-pay, insurer paid less than one percent of actual costs

• Florida District Court found in favor of insurer• 11th Circuit Court of Appeals affirmed

summary judgment for insurer 13

II. Route Selection:Purchase the “Right” Policy

14Source: http://southdakotapolitics.blogs.com/.a/6a00d8341c046f53ef0120a5bcbfc6970c-800wi

CURRENT TRENDS: D&O CLAIMSSummary of the Cornerstone Research Securities

Class Action Filings 2011 Year in Review

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TOP 100 SETTLEMENTS: TOP 100 SETTLEMENTS: 1996 - 20111996 - 2011

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D&O CLAIM TRENDS• M&A litigation: Dramatic increase

• Economic impact: Bankruptcies and employment exposure

• Regulatory Scrutiny:– Dodd-Frank Wall Street Reform and Consumer

Protection Act of 2010: Whistleblower “bounties”– “Neither admit nor deny”??? 17

MONETARY RISKS• Defense Costs• Settlements• Judgments• Penalties, Fines• Taxes• Disgorgement• Punitive, Exemplary, Special

or Multiplied Damages

– Are you covered?

– Are your limits adequate?

– Will the insurer pay?

– How much will the insurer pay?

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ADDITIONAL RISKS

• Grand Jury Investigation/Criminal Indictment

• Reputational Risks

• Corporate/Brand Survival

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THE APPLICATION

• May be possible to rely on prior Application, even if filed with different insurance company

• What else is incorporated into the Application?– Financial Statements– SEC Filings

Insurance Company may rely on restatement of financial statements to assert misrepresentation as basis for rescission

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THE APPLICATIONFull Severability: Application is deemed to be

separate as to each Insured and no knowledge of one Insured is imputed to any other insured.

Fully Non-rescindable Policy

NO warranties on renewal!!! Publicly-traded – shouldn’t even complete an application!

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D&O INSURING AGREEMENTS

• Side A: Individual Insured Person Reimbursement

• Side B: Entity Indemnification of Insured Persons

• Side C: Entity Liability

• Side A Only/DIC: Excess Individual Insured Person Reimbursement Only

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WHAT IS A CLAIM?• Written demands for

monetary or non-monetary relief

• Civil or criminal proceedings, including arbitration or mediation

• Administrative or regulatory proceedings

• Written request to toll or waive the SOL

• Investigations– Entity vs. Individuals– Formal vs. Informal– Subpoena/Search

Warrant– “Target” Letter– Wells Notice– Foreign Equivalent 23

III. Fender Bender or Total Loss:Manage Claims Effectively to

Maximize Recovery

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TIMELY NOTICE IS CRITICALKey Dates:• “Retro” or “Continuity” Date is the date of earliest negligent

act, error, etc. – May be different from the date of event/harm which sparks Claim

• Date of first notice to Insured– “Aware of facts or circumstances that a claim could be made”– Some policies may exclude Claim if reasonably foreseeable

• Date Claim made against Insured• Date Claim reported to Insurer

Prejudice usually will not excuse failure to report a claim25

WHAT MAY BE COVERED?

LOSS• Defense Costs – Attorneys’ fees,

experts fees, costs

• Damages• Judgments• Settlements

USUALLY NOT• Wages, salaries, fees of Insureds• Equitable or Injunctive relief• Fines, penalties, taxes• Punitive, exemplary, special

or multiplied damages• Amounts not insurableEXCEPT SOMETIMES Most Favorable Jurisdiction

“with substantial relationship” Sections 11, 12 and 15 of the

Securities Act of 1933

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RETENTION• Side A:

May be $0 or minimal

• Side B: Presumptive Indemnification may require Director or Officers to pay

• Side C: May be sizeable

Multiple Claims: “The sum of the

Retentions shall be deemed in no event to exceed the largest of the Retentions applicable.

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ALLOCATION Reasonably Related/ Larger

Settlement Reasonably related to the defense of the Insureds

• “Will use best efforts to agree upon a fair and reasonable allocation”

• Policy may be silent as to allocation

Relative ExposureTake into account the relative legal and financial exposures, and relative benefits

• Predetermined, or Minimum Percentage

Advance 100% of Side A or Non-Indemnifiable Loss

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ORDER OF PAYMENTS• Prioritize payment to Independent Directors • Prevent one Insured from depleting more than certain

percentage of policy limits without the consent of others• Prevent Company from depleting policy limits if claims

remain against Directors and Officers

Bankruptcy or insolvency of any Insured shall not relieve the obligation to prioritize payment

Avoid provisions that prioritize only as to loss incurred “simultaneously”

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WHAT MAY NOT BE COVERED?CONDUCT EXCLUSIONS

Illegal Profit or Advantage and Deliberate Fraudulent or Criminal Conduct

• “In fact” v. “Final adjudication” v. “Final non-appealable judgment”

Full Severability: No imputation of facts, knowledge, acts or omissions by any Insured to any other Insured

May explicitly deem guilty plea, consent order or written agreement with any federal or state prosecutorial authority or regulatory agency to be “established by final adjudication”

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WHAT MAY NOT BE COVERED?PRIOR OR PENDING EXCLUSION

• May apply only to prior or pending litigation

• May apply to prior or pending litigation, claims, demands, causes of action, proceedings, notice and/or notice of circumstances

May also apply to prior Wrongful Acts

May apply only if coverage is acknowledged under prior policy 31

DISPUTE RESOLUTION• Policy may require AAA Arbitration– Some limit to certain states, Bermuda or the U.K.– Allegedly expedites resolution of claim disputes– Allegedly reduces costs of settling claim disputes– Generally favors insurance companies

• Policy may allow policyholder to choose:– Binding Arbitration– Non-binding Mediation, file lawsuit 60-90 days after

mediation concludes

Policy may be silent 32

TEMPTED TO SWITCH?

• D&O insurance premiums are on the rise

• Minimize coverage gaps:– Negotiate removal of prior acts exclusion– Limit prior acts exclusion to pending claims – Negotiate same “retro date” as expiring policy– Give notice of circumstances under expiring policy

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IV. SUMMARY/Q & A

There are known knowns; these are things we know we know.

We also know there are known unknowns; that is to say we know

there are some things we do not know.

But there are also unknown unknowns – the ones we don't know we don't know.

—Former United States Secretary of Defense Donald Rumsfeld, February 12, 2002

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AUTO INSURANCE CLAIM QUOTES• Q: What warning was given by you? A: Horn. Q: What warning was given

by the other party? A: Moo. The claimant had collided with a cow.

• I pulled away from the side of the road, glanced at my mother-in-law and headed over the embankment.

• I collided with a stationary truck coming the other way.

• In an attempt to kill a fly, I drove into a telephone pole.

• I had been shopping for plants all day and was on my way home. As I reached an intersection a hedge sprang up obscuring my vision and I did not see the other car.

• I drove into the wrong house and collided with a tree I don't have.35