What to Do When Faced With a Potential Claim Under Your D&O Insurance Policy

When in Doubt, Notice the Claim!

As a general matter, coverage under a D&O insurance policy may be triggered by receipt of any written notice alleging a so-called wrongful act. Even a counterclaim in a lawsuit in which you are the plaintiff qualifies as a claim. Notice provisions do vary from policy to policy, and it is important to be aware of the specific requirements of your policy. That said, if you receive anything in writing alleging that your company or one of its directors, officers, or employees may have behaved improperly (even in an email, for example) and regardless of the perceived merit of the allegation, always make sure to provide prompt notice of the matter under your policy. Along those lines, be aware of the renewal dates of your policy so you have time to put in any notice before the policy expires.

If you are unsure about whether notice is warranted, reach out to your insurance broker or outside counsel to evaluate the matter. But when in doubt, consider noticing the claim. Failure to provide a timely claim may lead an insurer to deny coverage for the claim (and even other future claims that have some relationship to the claim that was not noticed). Remember that coverage for individuals can be broader than coverage for the entity.

Before Engaging Defense Counsel … Check, Check, and Check Again

Be sure to check your policy before engaging defense counsel. Typical defense provisions in policies may require insurer preapproval of the insured’s choice of counsel (sometimes at rates that are less than the full rates the firm typically charges) or to use one of the insurer’s panel counsel law firms (“duty to defend” coverage). Further, in certain situations in which a duty to defend exists, the insurer may nonetheless be required by law to appoint “independent” defense counsel for the insured’s benefit; outside counsel should be consulted to determine whether a right to independent counsel exists.

Failure to understand and adhere to your policy’s defense provision may result in at least one of the following:

• The insurer refusing to pay for a portion of the defense costs you incur
• The difference in your counsel’s rates and the insurer’s approved rates being your responsibility
• The need to switch counsel to ensure full reimbursement of defense costs

Taking the time to understand your policy’s defense provisions will ensure that you can make an informed decision regarding defense costs under the policy.

Keep the Insurer in the Loop

Noticing the claim to your insurer is only the start of the process. Be sure that you (or your counsel) keep the insurer up to date on significant claim developments. Such cooperation is generally required under D&O policies.

Among other things, the insurer’s prior consent should be secured prior to the initiation of any settlement discussions or proposal of mediation. Seeking to settle, or settling a claim without the insurer’s prior consent, could give the insurer the right to disclaim coverage with respect to the settlement or the further defense of the claim.

It is also important to keep the insurer in the loop about the status of the claim, such as with respect to material litigation developments, and regularly apprise the insurer as legal costs are incurred. Defense counsel’s invoices should be submitted to the insurer on a regular basis, which will help ensure that you are reimbursed as soon as you meet the insurance deductible or retention (if any) and that your costs are reimbursed on a timely basis thereafter.

Be Aware of the Insurer’s Litigation Guidelines

Insurers often request that defense counsel adhere to so-called litigation guidelines — a set of requirements regarding claim reporting and billing practices. Those guidelines often have specific requirements that are not necessarily intuitive. The insurer will often reduce the amount of your reimbursement for your counsel’s failure to comply with the billing guidelines. Being aware of (and ensuring your counsel complies with) the insurer’s billing guidelines from the outset will help avoid that headache and will help to maximize the reimbursement you receive from the insurer.

Is It Covered or Not Covered?

A claim can sometimes include certain matters covered by an insurance policy and other matters that are not. For example, in a litigation or arbitration, there may be counterclaims against the plaintiff, which are “offensive” in nature and thus may not be covered under the policy (which is primarily intended to cover claims filed against you). Alternatively, your counsel may be representing both you and other parties who are not covered by your policy.

In these situations, the insurer may seek to allocate defense costs between covered and uncovered parties or claims. If it is practical to draw a bright line between covered and uncovered claims from the start, consider asking your defense counsel to separate these claims in their invoices. For example, your counsel might set up a new matter specifically for covered claims or have counsel clearly delineate covered matters from uncovered matters in their time entries. Making such an arrangement early can help simplify the insurer’s invoice review process and ensure that the insurer processes and pays your invoices more quickly and efficiently.

As detailed above, missteps in the claims process could have potentially large (and cascading) consequences. However, a quick check-in with your policy and experienced counsel — one apprised of the intricacies of navigating the claims process — could save the insured a lot of unanticipated financial outlay and frustration down the road.

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.