Directors’ and officers’ (“D&O”) insurance coverage continues to represent a key element of corporate risk management. See memo of July 28 2009. A decision in the bankruptcy of commodities brokerage MF Global, In re MF Global Holdings Ltd., No. 11-15059 (S.D.N.Y. Sept. 4, 2014), provides a recent illustration of how D&O insurance may be treated upon the bankruptcy of the insured company, depending on the specific structure and terms of the insurance at issue.
Posts Tagged ‘Insurance’
The number, severity, and sophistication of cyber attacks—whether on our retail economy, our healthcare sector, our educational sector or, in fact, our government and defense systems—grows worse by the day. 
Among the most notable cyber breaches in the public company sphere was that hitting Target Corporation (40 million estimated credit and debit cards allegedly stolen, 70 million or more pieces of personal data also stolen, and a total estimated cost of the attack to date of approximately $300 million).  Justified or not, ISS has just issued a voting recommendation against the election of all members of Target’s audit and corporate responsibility committees—seven of its ten directors—at the upcoming annual meeting. ISS’s reasoning is that, in light of the importance to Target of customer credit cards and online retailing, “these committees should have been aware of, and more closely monitoring, the possibility of theft of sensitive information.” 
We consider below how advancement of legal fees, indemnification, and insurance operate when officers and directors become involved in regulatory investigations and proceedings. Part I addresses the enhanced risk officers and directors face today in an Age of Accountability. Part II addresses advancement of legal fees, which may be discretionary or mandatory depending on a company’s by-laws. Part III covers indemnification, which generally requires at least a conclusion that the officers and directors acted in good faith and reasonably believed that their conduct was in, or at least not contrary to, the best interests of the corporation. Part IV examines insurance coverage, which varies from carrier to carrier and may or may not provide meaningful protection. Finally, Part V summarizes the principal lessons from the analysis. Although there is significant overlap with similar principles that apply to private litigation, we limit our discussion here to advancement, indemnification, and insurance for regulatory investigations and proceedings.
Worker participation in corporate governance varies across countries. While employees are rarely represented on corporate boards in most countries, Botero et al. (2004) state “workers, or unions, or both have a right to appoint members to the Board of Directors” in Austria, China, Czech Republic, Denmark, Egypt, Germany, Norway, Slovenia, and Sweden. Such board representation gives labor a means to influence corporate policies, which may affect productivity, risk sharing, and how the economic pie is shared between providers of capital and labor.
Private equity funds are increasingly using representations and warranties (R&W) insurance and related products (such as tax, specific litigation and other contingent liability insurance) in connection with acquisitions as they become more familiar with the product and its advantages.  Acquirors considering R&W insurance frequently raise concerns about the claims process and claims experience. A recent claim against a policy issued by Concord Specialty Risk (Concord) both provides an example of an insured’s positive claims experience and highlights the possibility for a buyer to recover multiple-based damages under R&W insurance.
R&W Insurance Advantages
Under an acquisition-oriented R&W policy, the insurance company agrees to insure the buyer against loss arising out of breaches of the seller’s representations and warranties. The insurer’s assumption of representation and warranty risk can result in better contract terms for both buyer and seller. For example, the seller may agree to make broader representations and warranties if buyer’s primary recourse for breach is against the insurance policy, and the buyer may agree to a lower cap on seller’s post-closing indemnification exposure as it will have recourse against the insurance policy. In addition, R&W insurance often simplifies negotiations between buyer and seller, resulting in a more amicable, cost-effective and efficient process.
The FDIC last week issued a Financial Institution Letter advising financial institutions and their directors and officers of the increased use of exclusionary terms or provisions in D&O policies, and the resulting increased risk of uninsured personal civil liability for directors and officers. (FIL-47-2013, October 10, 2013).
The FDIC Letter urges the directors of financial institutions to make well-informed choices about D&O coverage, including consideration of costs and benefits, exclusions and other restrictive terms in proposed policies, and the implications for personal financial liability for directors and officers.
D&O insurance is a critical asset for financial institutions and their directors and officers, and the FDIC Letter expressly affirms that the purchase of D&O insurance serves a valid business purpose. The FDIC’s Letter is also a timely reminder that the D&O insurance market is in constant flux and that—in addition to seeking advice from insurance brokers—directors should consider seeking advice from experienced coverage counsel to gain a better understanding of the potential impact of restrictive provisions in proposed policies.
Since the New York State Department of Financial Services (“DFS”) began operations in late 2011, the agency appears to have lived up to its billing as an activist regulator of insurers and financial institutions. DFS has taken on several novel issues and will likely continue to do so. Insurers and financial institutions doing business in New York should keep DFS on their radar given the scope of its regulatory mandate and its initial enforcement activities since inception. Institutions outside New York may also want to monitor DFS’s initiatives, which may pique the interest of federal or state law enforcement and regulatory agencies in other jurisdictions and lead to similar or parallel initiatives.
DFS’s Actions Since Inception
On October 3, 2011, the former New York State Banking and Insurance Departments were combined to create DFS. The 4,400 entities DFS supervises have about $6.2 trillion in assets and include all insurance companies in New York, all depository institutions chartered in New York, the majority of United States-based branches and agencies of foreign banking institutions, mortgage brokers in New York, and other financial service providers.
No less than two years ago, had one tried to initiate a conversation with a Private Equity Sponsor or an M&A lawyer regarding M&A “reps and warranties” insurance (i.e., insurance designed to expressly provide insurance coverage for the breach of a representation or a warranty contained in a Purchase and Sale Agreement, in addition to or as a replacement for a contractual indemnity), one might have gotten a shrug of the shoulders or a polite response to the effect of “let’s try to negotiate around the problem instead.” Perhaps because it was misunderstood or perhaps because it had not yet hit its stride in terms of breadth of coverage, reps and warranties insurance was hardly ever used to close deals. Like Harry Potter, it was the poor stepchild often left in the closet.
Today that is no longer the case. One global insurance broker with whom we work notes that over $4 billion in reps and warranties insurance worldwide was bound last year, of which $1.4 billion thereof was bound in the US and $2.1 billion thereof was bound in the EU. Such broker’s US-based reps and warranties writings nearly doubled from 2011 and 2012. Reps and warranties insurance has become an important tool to close deals that might not otherwise get done. This post is meant to highlight how reps and warranties insurance may be of use to you in winning bids and finding means of closing deals in today’s challenging environment.
These are uncertain times for our nation’s investors and for those who issue and sell investment products, including variable insurance. A positive sign is that assets in variable annuities, at almost $1.6 trillion, remain near their all-time high.  In addition, the retirement income solutions offered by the industry are designed to address the needs of the many investors moving toward retirement in today’s uncertain market environment. However, there are significant challenges facing the business, particularly those presented by the persistent low interest rate environment and by volatile equity markets both here and abroad.
The Division has observed the industry undertaking several initiatives to address these challenges and curtail risk exposure in the contracts being offered. In addition, some insurers have chosen to exit the business. An industry on solid financial footing is important for investors, who rely on insurers’ ability to pay promised benefits. At the same time, some contract changes are not good for investors. For example, many recent changes have reduced benefits for new investors. Other changes have limited the ability of existing contract owners to make additional payments into their contracts in order to take advantage of the benefits of those contracts.
On September 7, 2012, the Supreme Court of Delaware, applying California law, ruled that an excess insurer of Intel had no payment obligation even after Intel’s out-of-pocket defense costs, combined with Intel’s prior settlement with an underlying insurer, exceeded the underlying insurer’s policy limits — notwithstanding a provision in the excess insurer’s policy providing that coverage would apply when “the insured or the insured’s underlying insurance has paid or is obligated to pay the full amount” of the underlying insurer’s policy limits. Intel Corp. v. Am. Guar. & Liab. Ins. Co., et al., No. 692, 2011 (Del. Sept. 7, 2012).
This dispute arose from antitrust litigation that was brought against Intel and for which Intel sought reimbursement for defense costs from its insurers. A small primary policy was quickly exhausted and Intel then entered into coverage litigation with XL, its first excess insurer, that was ultimately settled for $27.5 million of XL’s $50 million policy limits. Having incurred significantly more than $50 million in defense costs, Intel then turned to its second excess insurer, American Guarantee & Liability Insurance Company (“AGLI”), for reimbursements for defense costs in excess of XL’s policy limits. AGLI refused coverage and litigation followed.