The effects of the “credit crisis” have spread far beyond the financial sector, and cash flow problems have led to increased bankruptcy filings and related securities fraud suits. One example of this trend is the recent lawsuit against Idearc, pursuant to Rule 10b-5 (promulgated under the Securities Exchange Act of 1934). After the media company had to write off $47 million in receivables, it filed for bankruptcy protection and was hit with a 10b-5 suit for allegedly not disclosing lax credit policies. Other non-financial companies that recently entered Chapter 11 bankruptcies and whose directors and officers were then sued under Rule 10b-5 include MRU, Charter Communications, and Nortel Networks.
Perhaps even more significant, however, has been the handful of suits filed recently against non-financial companies whose proposed class period end-dates in 2007 suggest plaintiffs have been sitting on these cases until now because they have been so busy with credit-crisis-related filings. The targets of these “aged” suits include online auction company Bidz.com, Liz Claiborne, Coach, Rackable Systems, and Sprint Nextel (class period ending February 2008).
These cases suggest that some plaintiffs’ firms have a substantial backlog and that companies which experienced bad news within the last two years may not yet be out of the woods.
So, what should our clients, and the management liability insurance buyers’ market in general, take from this? First, directors and officers should not allow themselves to become complacent where their D&O insurance coverage is concerned. D&O policyholders need to understand the ins and outs of their coverage, both the primary policy and any and all excess policies, and especially the potential differences among the terms of these policies and the ways that different carriers handle claims.
These cases suggest that some plaintiffs’ firms have a substantial backlog and that companies which experienced bad news within the last two years may not yet be out of the woods.
Why is it important for clients to know their policy? Different carriers’ policies have significant differences in terms. One of the most troublesome of these terms is referred to as the “exhaustion provision,” which provides for what conditions must be met before the excess policy will pay for loss. It might make sense to expect that a policy with a $10 million limit excess of a $10 million primary limit (above a self-insured retention) would be exposed once $10 million (above the retention) had been paid on a claim. But some excess carriers’ exhaustion provisions require that the entire amount of the primary limit must be paid by the primary carrier before the excess policy is implicated. This can be a serious problem in a high-cost case in which the primary carrier might have cause to dispute coverage of all or part of the loss.
Some carriers are just not used to making D&O claim payments, and will use any excuse not to pay, whether it’s an onerous or obscure policy provision or an uninformed refusal to admit the seriousness of an exposure. Those who have lived through serious claims—whether insureds, brokers, or defense counsel—can frequently offer the most useful advice on carrier selection.
As exposures proliferate and the size of potential liabilities continues to grow, state-of-the-art policies and claims handling will be more important than ever. Pursuing commercially sensible resolutions to potential disputes whenever possible is a must. It’s up to the client and the broker to understand the terms of their policies and to know what to expect from their coverage and their claims service in the event that a significant claim occurs.
Lawrence Fine is SVP/chief technical officer for Complex D&O/Fiduciary Claims, and Mark Curley is SVP for D&O Claims, both in Financial Lines Claims, at Chartis. Contact them at Larry.Fine@chartisinsurance.com and Mark.Curley@chartisinsurance.com.