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Until proven guilty.

Director Liability
By Stephen J. Weiss

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D&O INSURANCE UPDATE Until proven guilty Ensuring that your D&O policy covers the costs of defending a criminal prosecution. BY STEPHEN J. WEISS A LTHOUGH NO IMAGES Can pOS- sibly sear and scar like those from September 2001, during the month of September 2002 America was confronted by another set of jarring, almost unthinkable stories and pictures: indictments ofa string of top executives from Enron, Tyco, World- Com, and other once-admired compa- nies and, on the evening news, images of some of these executives, in handcuffs, being escorted by FBI agents. With all this highly visible prosecuto- rial activity, some executives of public companies are nat- urally wondering — and worrying — about whether their D&O insurance would pay the staggering defense costs ofa criminal proceed- ing. The short answer is that most do cover defense costs, as long as the director or offi- cer is ultimately found not guilty. However, some do not. It all depends on the language of the policy you buy. D&O insurance policy forms vary greatly from one insurance company to the next. Even policies bought from the same insurance company, using the same pol- icy form, might end up being quite different because, un- like an auto policy, D&O Stephen J. Weiss is a partner in the law firm of Holland & Knight LLP, Washing- ton, D.C, and is one of the nation’s leading authorities on D&D insurance and employment practices liability insurance. proceedings to ensure that there will be money available to adequately defend the officers and directors against crim- inal charges. Your search should not be too difficult because the vast majority of D&O policies in the market today cover criminal proceedings. If you happen to like most of the terms of a policy that does not cover such proceedings, don’t worry: Many times you can successful- ly negotiate a change in the definition of a covered claim to include criminal pro- ceedings. But keep in mind that all D&O policies have an exclu- sion for criminal or fraudu- lent conduct. In other words, if the insured is convicted, the insurance company has no obligation whatsoever to pay for defense costs. In fact, if the insurance company al- ready paid defense costs when a guilty verdict is hand- ed down, the insured will have to repay every cent. This is not unreasonable. No in- surance policy is intended to shield the guilty from the consequences of criminal be- havior. policies are negotiable. Well-advised companies will start with an off-the- shelf policy and then negotiate with the insurer for a series of enhancements. Goverage for Griminal Proceedings. All D&O insurance policies cover civil pro- ceedings, but not all cover criminal pro- ceedings. In buying a D&O policy, you should select one that covers criminal When Does Goverage Begin? Not all policies that cover criminal defense costs are created equal. Some cover costs beginning at the time an indict- ment is handed down. Others begin much earlier. Obviously, it is better to have coverage kick in as early as possi- ble. Indictments are often returned only after many months of investigation, dur- ing which time a prospective criminal defendant should have the benefit of wise counsel. How do you get coverage to begin well before an indictment? You can take one of two routes. First, you can find one of the standard policies that provides cov- erage from the time the insured person has received a “target letter” or “subject letter” or, in insurance jargon, from the time the insured person has been “iden- tified in writing by the investigating au- thority as a person against whom a criminal proceeding may be com- menced.” Second, you can negotiate for such coverage. An earlier coverage at- tachment point could shift hundreds of thousands of dollars in defense costs from the insureds to the insurance com- pany Repayment Undertaking. As stated earlier, D&O policies require an insured to agree to return defense costs advanced on his behalf if he is convicted. This re- quirement is known as a “repayment un- dertaking.” Some policies go one giant step further: They permit the insurance company to require the repayment un- dertaking to be guaranteed. As a result, the insurance company could require from the insured a guarantee in the form of a bank letter of credit. And if it does, the bank undoubtedly will require col- lateral to support its letter of credit. If the insured can’t post enough collater- al to support a guarantee of hundreds of thousands of dollars, he won’t get the letter of credit and thus will not be enti- tled to advancement of defense costs. The single word “guarantee” in the pol- icy could in effect nullify the insured’s right to advancement. The answer? Try to negotiate the elimination of the ref- erence to a guarantee of repayment. The Larger Point. I have just identified a mere three policy provisions where ne- gotiation can make a huge difference in the payout to the insureds if there is a claim. And this is just the tip of the ice- berg. There are dozens of additional provisions in a D&O policy that you should seek to add, subtract, or modi- f)’. With many things in life, you get what you pay for. With D&O insurance, it is more accurate to say that you get what you negotiate for. I FALL 2002 7
 

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