An increasing number of directors and officers' liability insurers are claiming improperly that their policies exclude coverage against securities lawsuits, an attorney specializing in policyholder cases said.
Writing in the Summer 2006 edition of Anderson Kill & Olick Executive Insurance Advisor, William Passannante wrote that "D&O insurers are playing a high stakes game of 'catch-me-if-you-can.'"
"Unbeknownst to policyholders, when faced with a securities claim, many insurers have been taking the improper position that the most common forms of damages sought in securities class actions are not covered under the D&O policies," Mr. Passannante wrote.
Of the estimated 40 cases under his supervision today, Mr. Passannante estimates that about three-fourths of them deal with such claims by insurers--a figure that has doubled over the past three years, he said.
Mr. Passannante said D&O insurers often do not rely on any language found in the exclusions section of their D&O policies, but rather the general statement, "Loss shall not include matters which are uninsurable under the law."
"This coverage position contradicts the explicit promise in the D&O policy to cover all loss as a result of securities claims, including settlements, and renders the coverage illusory," he said. "The position amounts to selling sham insurance."
The potential big issue D&O insurers face today stems from claims from companies practicing the back-dating of stock option grants to executives in order to ensure their dollar value.
Insurance companies will likely raise a variety of exclusions to limit or deny coverage for back-dated option claims, including gaining of unlawful profit, Mr. Passannante said.
"None of these purported exclusions should apply to prevent coverage for defense costs or settlements, and may apply only potentially to limit coverage for damages in very limited circumstances," he said.
Options back-dating is a typical example of behavior that may well have been permissible at one time and prohibited later. "The insurance which likely applies was sold before this 'new awareness,' and should apply to cover instant option claims," he said.
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