Maybe it’s part of the globalization process; maybe it’s due to the increasing sophistication of private investors and fund managers, or maybe it’s the legal profession prospecting for additional income sources. Whatever the reason, the directors and officers of large non-U.S. corporations are becoming increasingly concerned that their positions make them prime targets for lawsuits. The rest of the world may have not yet adopted the “open season” approach pioneered by U.S. lawyers, but the European Union and its individual members are hardening accountability standards to more closely accord with those in the U.S.
It’s no surprise then that the Professional Liability Underwriting Society (PLUS) held a one day conference in October, at the Grange City Hotel in London. Although the organization will host its 19th annual convention in Chicago, Nov. 8-10, this is the first “European D&O Liability Forum” PLUS has held across the Atlantic.
The 210 people who attended the meeting were mainly European, but the discussions had a decidedly American flavor, particularly given the appearance of one of corporate America’s principal antagonists, William Lerach. The San Diego-based lawyer, a master of the class action lawsuit (as well as the 30-second sound bite), explained succinctly some of the intricacies of U.S. securities law, alerting the European legal and insurance community on what they may have to look forward to.
What the attendees got for their money was a crash course on the current state of U.S. D&O litigation and some insights as to where it might be headed, not just in Europe, but across the international spectrum.
D&O coverage, placement and claims
The opening session, chaired by Marsh’s Paris-based D&O practice leader Cristiana Baez, focused on how far D&O coverage had progressed in Europe, and what the emerging concerns of its clients are. Class actions are still rare in the E.U., but they are becoming more frequent, as are shareholders derivative actions. In this context, both Richard Reddaway of Glaxo Smith Kline and Pierre Ollivier, General Counsel of ST Microelectronics, summed up the client’s view pretty well. “The insurers seem to focus more on what they think the client needs, rather than listening” to what they may actually want, Reddaway said. Ollivier added that directors and officers “want to be able to sleep at night.”
The entire panel agreed that more communication between brokers and their clients was necessary. This is true not only when coverage is placed, but also when it comes to handling claims. “What happens when there’s a claim?” was a leitmotif that ran through the entire conference. One solution: Meet the people who will be handling those claims while you’re negotiating the contract; i.e., address the problem before it becomes one.
Meeting claims people, however, doesn’t solve another problem the panel discussed — how to handle the claims process once it’s underway. As D&O cases were developed and honed in the U.S., they tend to overflow with the side issues, jurisdictional disputes, legal roadblocks, obscurantism and other litigation techniques that have made the U.S. the world’s most litigious society.
A major stumbling block is the “reservation of rights,” i.e., if the carrier finds something wrong with the claim or in the representations made incident to the issuance of the underlying policy, they may deny coverage — in whole or in part. Upon receiving a claim, many D&O insurers have their lawyers write 20-page letters to their insureds detailing all the rights they have reserved, which could void the coverage. Such declarations don’t go down particularly well in the U.S., and even less so in Europe.
Even if the carrier agrees to defend against the claim or lawsuit, they inevitably hand it over to a team of lawyers, and take no active part thereafter. “Saving all their rights, means no one [from the carrier] is willing to sit down and talk about the case, let alone try to settle it,” said Jurand Honisch, Corporate Risk and Insurance Manager for Germany’s Bertelsmann AG. “Innovation in insurance is an oxymoron,” Honisch said.
The problem of jurisdiction
The U.S. is one big legal market with the same language and a common frame of legal reference, if not exactly the same laws. Other countries have developed their own legal procedures, which differ more profoundly than the differences between U.S. jurisdictions. “Some countries will accept only local coverage [Japan and Brazil for example],” said Paul Schiavone, chief D&O underwriting officer for Zurich in London. “You need global coverage, backed with local coverage. There are also problems on policy limits, and it involves a big amount of work to ascertain what’s needed in each country.”
Ollivier noted that while the insurance industry may be increasingly global, “D&O claims can happen anywhere” not necessarily where the policy has been written. Brokers, however, are usually more familiar with local laws and regulations, and may lack “global vision.”
Honisch suggested to “write individual policies” for each officer and director, and then pay them more money in order to acquire them wherever they may exercise their functions.
Global expansion exacerbates the problem. “Company general managers are feeling increasingly exposed, and are asking for more protection,” Reddaway said. He indicated that as a result some carriers — he mentioned AIG and ACE — now offer local policies in addition to global corporate coverage.
When do policies pay? The broker’s role
The second session of the PLUS conference expanded on the claims problem by asking the question of when a policy pays. The initial focus concerns coverage, which opens the door as to whether or not full disclosure has been made by the client/policyholder. Anthony Baldwin from AIG’s London office stressed that with the “big expansion of D&O coverage in the last five to 10 years,” the need for “due diligence” has increased accordingly. “Communication is very important,” he continued. “The policy should cover what the client needs, and the underwriters should meet with senior management to see what’s going on.”
“You can have recission for non-disclosure, and you might lose coverage due to ‘one bad apple,'” explained Boston-based lawyer Scott S. Spearing. “Therefore you have to pay attention to what the policy says, and you should have counsel look at it.” However, such detailed attention and drawn out discussion could make the process more complicated before the policy is even written. The more complicated it gets the harder it is for anyone but the lawyers and risk managers to understand what it says and why it’s necessary. Also, as Steve Shappell, legal counsel of Aon Risk Services in Denver, observed, “the attempts of the insurance community to communicate in simple English are failing miserably.” One can only image the added difficulty of trying to explain it in German, Portuguese or Finnish.
Nevertheless in such a complicated field, making sure everyone knows what’s going on is vital. “D&O is an abnormal situation,” Shappell continued. “It’s not like regular claims procedures. The broker’s job is to get involved and to assure the type of ‘deep communication’ necessary.”
International D&O coverage overwhelmingly concerns big international public companies. They have lots of officers, down to division managers, who want to be covered. This leads to a series of policies and excess policies, all of which cover a certain amount of the risk. They are usually written by different underwriters, with one main carrier taking the lead. Defense costs, which can run up over $20 million, trigger secondary coverage quickly. Therefore all the carriers have to be brought into the process at the first instance. Each of them may have different policy wordings.
The panelists agreed that the broker, who placed the coverage, or who’s handling it when the claim hits, has a vital role to play in keeping his client advised of what’s going on.
Was this article valuable?
Here are more articles you may enjoy.