June 2009

Summary: This article analyzes ISO's Financial Institutions Executive Liability Side A Coverage Form, MP 00 09 05 09, a claims-made policy that covers directors and officers in the event the organization refuses to pay for loss or is financially insolvent and unable to indemnify the directors and officers; the coverage under the executive liability policy has been rescinded or precluded by a restatement exclusion or breach of a non-severable warranty; or, the limit of liability of the executive liability has been exhausted by the payment of losses.

Topics covered: Insuring agreement Extensions Exclusions Limit of liability Defense and settlement Conditions Definitions Endorsements

Insuring Agreement

Since this is a claims-made policy, the claim must first be made against the insureds during the policy period or during the extended reporting period that usually accompanies a claims-made policy. The wrongful act must occur during the policy period.

The insuring agreement list four scenarios for which coverage will be paid: (1) if the organization that is permitted or required to pay, advance, or indemnify losses for which the insured person becomes legally obligated to pay has refused to pay, advance, indemnify for the loss; (2) the organization that is permitted or required to pay, advance, or indemnify losses for which the insured person becomes legally obligated to pay is financially insolvent; (3) no coverage exists for the insured person under any valid executive liability policy because coverage has been rescinded, coverage is precluded by a restatement exclusion, or coverage is precluded by an application of a nonseverable warranty; or (4) the limit of liability under valid executive liability policies has been exhausted.

The insurance applies only to claims arising out of wrongful acts that an insured person commits. The acts must occur on or after the retroactive date and before the end of the policy period.

Extensions

MP 00 09 also has two coverage extensions—one for spousal liability and the other for estates, heirs, and legal representatives.

If a claim against any insured person includes a claim against the insured person's spouse solely by reason of such spousal status or because of the spouse's ownership interest in property or assets that are sought as recovery for the wrongful act committed by the insured person, MP 00 09 provides coverage for the spouse. All loss that the spouse becomes legally obligated to pay is treated as a loss that the insured person is obligated to pay, but the loss to the spouse is covered only if and to the extent that loss would be covered if incurred by the insured person.

This extension of coverage does not apply to a claim arising out of any wrongful act committed by the spouse. MP 00 09 is not meant to apply to a spouse's direct wrongful acts; this point is reinforced by the fact that the definition of insured person does not include a spouse.

This policy affords coverage for claims arising out of the wrongful acts of the insured persons made against the estate, heirs, or legal representatives of a deceased insured person. Also covered are claims made against the legal representative of an insured person in the event of incompetency, insolvency, or bankruptcy. This extension of coverage will afford coverage only if and to the extent that claims would have been covered by the policy. Coverage is provided only for claims arising out of the wrongful acts of the insured person.

Exclusions

MP 00 09 contains sixteen exclusions. And, note that the wrongful act of any insured person is not imputed to any other insured person for the purpose of applying these exclusions.

Dishonest or Criminal Act. MP 00 09 will not pay for any loss resulting from a claim based upon or arising out of any dishonest, malicious, fraudulent, or deliberately criminal act or any willful violation of any statute or regulation.

Bodily Injury, Personal Injury, Property Damage. Loss resulting from any claim arising out of bodily injury, mental or emotional distress, personal injury, and property damage.

Illegal Gains. A claim based on, attributable to, or arising out of the gaining of any profit, remuneration, or advantage to which insured persons were not legally entitled is not a covered claim.

Accounting of Profits. This exclusion is referred to as the “short swing” profits exclusion. MP 00 09 does not cover claims based on accounting of profits in fact made from the purchase or sale by any insured person of securities of the organization within the meaning of the SEC Act of 1934 or similar provisions or laws.

Retroactive Date. MP 00 09 is a claims-made policy and so, it may have a retroactive date shown on the declarations page. This exclusion states that no coverage is granted to claims that are based on, attributable to, or arising out of a wrongful act that occurs before the retroactive date, that is, before the policy period begins.

Previous Policies. As a complementary exclusion to the previous one, this exclusion declares that this policy does not apply to claims that are based on, attributable to, or arising out of wrongful acts—or even facts—contained in any claim that has been reported, or in any circumstances of which notice has been given, under any insurance policy of which this policy is a renewal or replacement. In other words, a renewal policy will not apply to claims made during the previous policy based on acts committed during that previous policy period; there is no coverage spill-over from one policy to another.

Pre-Existent Claim. The form does not apply to any claim based upon, attributable to, or arising out of any demand, suit, or other proceeding against any insured person or the organization that was pending on or existed prior to the applicable pending or prior litigation date shown in the declarations.

Service in Another Company. The policy does not apply to claims based on any wrongful act by any insured person serving in any position or capacity in any organization other than the organization named in this policy. This exclusion applies even if the organization directed or requested the insured person to serve in that other organization. This exclusion is referred to as the “outside directorship” liability exclusion.

Subsidiaries. MP 00 09 does not apply to claims based upon, attributable to, or arising out of any actual or alleged act or omission of an officer or director of any organization that becomes a subsidiary. This is so if the act occurred prior to the date the organization became a subsidiary.

Organization or Insured Person Claim. The “insured versus insured” exclusion. Claims brought by or on behalf of the organization or any insured person, in any capacity, are not covered. Exceptions to this exclusion include: shareholder derivative claims; claims by former directors or officers for wrongful termination; and cross-claims.

ERISA. A claim for an actual or alleged violation of the Employee Retirement Income Security Act of 1974 (ERISA) is not covered.

Regulatory Action. There is no coverage under MP 00 09 for claims arising out of actions or proceedings brought by any regulatory agency (such as a federal or state regulatory agency or supervisory authority or a deposit insurance corporation).

Lending Services. Claims arising out of actual or alleged wrongful acts in connection with lending services are not covered.

Professional Services. Excludes coverage for claims arising out of the rendering or failure to render professional services.

Insurance. The policy does not cover claims arising out of actual or alleged failure or omission in providing insurance to any customer or client of the organization.

Pollution. Claims based on or arising out of the escape or release of pollutants are not covered. Pollution clean-up and monitoring, removal, or testing costs arising out of a demand or request or lawsuit are also not covered. Claims or suits on behalf of governmental authorities for damages due to responding or assessing the effects of pollutants in any way are not covered.

Limit of Liability

The most that the insurer will pay for all loss is the aggregate limit of liability shown in the declarations. If this aggregate is exhausted by the payment of loss, the insurer has no further obligations or liability of any kind under the policy.

All claims arising out of the same wrongful act or interrelated wrongful acts of one or more insured persons will be considered a single claim. Such single claim will be deemed to be made on the date the initial claim arising out of such wrongful act or interrelated wrongful acts was first made, or notice of such wrongful act or interrelated wrongful acts was first reported.

Claims expenses are part of the loss and are not payable in addition to the limit of liability. If such expenses are paid, this reduces the limits of liability available to the insured.

Defense and Settlement

MP 00 09 states that the insured persons must defend and contest any claim made against them; the insurer does not assume any duty to defend under this policy. However, the insured persons and the organization shall not admit or assume any liability, enter into any settlement, stipulate to any judgment, or incur any claims expenses without the prior written consent of the insurer. The insurer is entitled to (but not obligated to) associate in the defense and the negotiation of any settlement of any claim. The insured persons and the organization must provide the insurer with full cooperation, assistance, and all information that would reasonably be required to allow the insurer to reach a decision on consenting to the expenses.

The insurer does promise to advance on behalf of the insured persons claims expenses that the insured persons have incurred in connection with the claims. These advance payments must be repaid to the insurer in the event and to the extent that the insured persons will not be entitled to payment of such loss.

The insurer may, with the written consent of the insured persons, make any settlement of any claim that is deemed reasonable. If the consent is withheld, the liability of the insurer will not exceed the amount for which the claim could have been settled plus claims expenses incurred as of the date the settlement was proposed in writing by the insurer to the insured persons.

If there is a covered loss and a loss that is not covered then the insurer and the insured persons will try to agree upon a fair and reasonable allocation of payment. If such an agreement comes into being, the insurer will advance claims expenses allocated to the covered loss. In arbitration, suit, or other proceeding, no presumption will exist regarding what is fair and reasonable allocation. Negotiated, arbitrated, or judicially determined allocations of claims expenses due to a claim will be applied retroactively to all, notwithstanding any prior advancement to the contrary. Allocations or advancements of claims expenses will not apply to or create any presumption with respect to allocation of other losses on account of such claim.

Conditions

There are ten conditions listed on MP 00 09.

Notice. As a condition precedent to the insurer's obligation under the policy, the named insured or any insured person must give written notice of any claim as soon as practicable, but no later than sixty days after the end of the policy period or after the end of the extended reporting period, if that period is exercised.

If during the policy period, any insured person or the organization becomes aware of a specific wrongful act that may reasonably be expected to give rise to a claim, and written notice is given to the insurer, then any claim subsequently made against any insured person is deemed to be a claim made during the policy period. The written notice must include the following information: a description of the wrongful act, including all relevant dates; the names of the persons involved in the specific wrongful act; particulars as to the reasons for anticipating a claim that may result from such specific wrongful act; the nature of the alleged damages; and the circumstances by which the insured persons or the organization first became aware of the specific wrongful act.

Extended Reporting Period. An extended reporting period is available by an endorsement if the policy is cancelled or not renewed. The insured must request this item in writing and pay the premium in full within thirty days after the end of the policy period; once in effect, the extended reporting period may not be cancelled. As with the claims-made CGL form, this extended reporting period does not extend the policy period or change the scope of coverage provided; it applies only to the following situations: the claim is first made and reported to the insurer during the extended reporting period, and the claim arose out of a wrongful act that occurred on or after the retroactive date (if any) and before the end of the policy period.

There is no separate or additional limit of liability for the extended reporting period. The limit of liability available during the extended reporting period is the remaining amount, if any, of the aggregate limit of liability available at the time the policy was cancelled or nonrenewed.

Assistance and Cooperation. The insured persons and the organization must give the insurer all the information, assistance, and cooperation the insurer reasonably requires as a condition precedent to its rights under this policy.

Subrogation. With respect to any payments made under the policy on behalf of any insured person, the insurer is subrogated to the rights of recovery; the insured persons and the organization must do everything necessary to secure and preserve these rights and execute all required papers. The insured person and the organization must execute documents necessary to bring suit in the insured person's or the organization's name. Any recoveries, less the cost of obtaining them, will be distributed to the insured until it is reimbursed for any loss that it sustains that exceeds the sum of liability, then to the insurer, until it is reimbursed for the payment made under the policy.

Other Insurance. If any loss resulting from any claim is insured by any other valid policy, this policy applies only in excess of the amount of any deductibles, retentions, and limits of liability under that other policy, whether the other policy is stated to be primary, contributory, excess, contingent, or otherwise, unless the other policy is written specifically excess of this policy by referencing this form's policy number.

Assignment. No change, modification, or assignment of interest under the policy is effective without the written consent of the insurer.

Action Against Us. No action shall be taken against the insurer unless, as a condition precedent, there is full compliance with all the terms and conditions of the policy. No person or organization has the right under the policy to join the insurer as a party to any action against the insured person and the organization to determine the liability of any insured person; and, the insured persons and the organization may not implead the insurer to any action against them. The bankruptcy or insolvency of any insured person does not relieve the insurer of any of its obligations under the policy.

Representation and Severability. The insured persons and the organization represent that all the information and statements contained in the application are true, accurate, and complete. The insurer declares that that information is the basis for issuing the policy and is considered as incorporated into and constituting a part of the policy. In the event that the application contains any misrepresentation or misstatement of a material fact, the policy does not afford coverage to any insured person who knew of such misrepresentation or misstatement.

Changes in Exposure. If the organization acquires or creates another organization before or during the policy period, the insured persons of such organization will be covered under the policy, but only with respect to wrongful acts that occurred after that acquisition or creation.

If the fair market value of any consideration paid by the organization during the policy period for an acquisition is more than 10 percent of the named organization's total assets, the named organization must give written notice of such acquisition to the insurer as soon as practicable but no more than ninety days after the effective date of the acquisition or assumption and must pay additional premium.

If the organization is acquired during the policy period or merges with another organization such that the insured organization is not the surviving entity, then coverage under this policy continues until the end of the policy period, however, only with respect to claims arising out of wrongful acts that occurred prior to the acquisition or merger. The full annual premium for the policy period is deemed to be fully earned immediately upon the occurrence of the merger or acquisition, and the insurer is to be notified in writing as soon as practicable about the merger or acquisition.

If before or during the policy period an organization ceases to be a subsidiary, coverage with respect to insured persons will continue until the end of the policy period, but only with respect to claims arising out of wrongful acts occurring prior to the date the organization ceased to be a subsidiary.

If the named organization is taken over by the appointment of a receiver, liquidator, or similar official, coverage will continue to the end of the policy period but only for wrongful acts that took place prior to such appointment.

Territory and Valuation. MP 00 09 covers wrongful acts that occurred or claims made anywhere in the world. All premiums, limits of liability, loss, and any other monetary amounts under the policy are expressed and payable in the currency of the United States. If judgments, settlements, or any other loss components are expressed in any other currencies than U.S. dollars, payment under the policy will be made in U.S. dollars using the exchange rate published in the Wall Street Journal on the date the judgment is entered, the settlement is agreed upon, or other component of loss is due.

Definitions

There are sixteen terms defined on MP 00 09.

Application. An application is the signed application for the policy, including any attachments and other materials submitted in conjunction with the signed application.

Claim. The definition of claim has four parts: it is a written demand for monetary damages; a civil proceeding commenced by the service of a complaint or similar pleading; a criminal proceeding begun by a return of an indictment; or a formal administrative or regulatory proceeding commenced by the filing of a notice of charges, formal investigative order, or similar document. The claim has to be made against any insured person for a wrongful act and it includes any appeal.

Claims expenses. This means that part of a loss consisting of reasonable and necessary fees and expenses incurred in the defense or appeal of a claim, including attorneys' and experts' fees. Not included are the wages, salaries, benefits, or expenses of any director, officer, or employee of the organization.

Financial insolvency. This means the status of the organization resulting from the appointment of any receiver, conservator, liquidator, trustee, rehabilitator, or similar official to control, supervise, manage, or liquidate the organization; or the organization becoming a debtor in possession.

Insured person. An insured person means any former, present, or future duly elected director or duly elected or appointed officer of the organization. For organizations operating outside the United States, the term applies to any person who holds an equivalent position.

Interrelated wrongful act. This means all causally connected wrongful acts.

Lending services. This means the actual or alleged purchases, sale, syndication or restructure of a loan, lease or other extension of credit, or the failure to do any of the foregoing, including any advice given.

Loss. A loss is claims expenses, compensatory damages, settlement amounts, legal fees, and costs awarded pursuant to judgments. A loss does not include civil or criminal fines or penalties imposed by law, punitive or exemplary damages, the multiplied portion of multiplied damages, taxes, or matters that are uninsurable under applicable law.

Named Organization. This is the entity named in the declarations as the named organization.

Organization. The organization is the named organization and/or any subsidiary.

Policy period. This is the period of time from the inception date of the policy shown in the declarations to the expiration date shown in the declarations, or its earlier cancellation or termination date.

Pollutants. This matches the definition on other insurance policies. It means any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste. Waste includes materials to be recycled, reconditioned, or reclaimed.

Professional services. This refers to any activity performed by any insured person for or on behalf of customer or client of the organization for a fee.

Regulatory agency. A federal or state agency, deposit insurance organization, self-regulatory or equivalent agency.

Subsidiary. This means any organization in which more than 50 percent of the outstanding securities or voting rights representing the present right to vote for the election of directors or those in equivalent positions is owned in any combination by one or more organizations.

Wrongful act. A wrongful act is any actual or alleged error, misstatement, misleading statement, neglect, or breach of duty, omission, or act by the insured persons in their insured position or capacity for the organization. It also means any matter claimed against them solely by reason of their serving in such insured position or capacity. A wrongful act does not apply to a position or capacity in any entity other than the organization, even if the organization directed or requested the insured person to serve in such other position or capacity.

Endorsements

There are sixteen endorsements which may be used with the MP 00 09 05 09. Among them are:

For Coverage Extension Outside Service Endorsement, MP 04 01 05 09: provides coverage for claims brought against insured persons serving in outside positions.

Designated Professional Services Endorsement, MP 21 01 05 09: restricts coverage for claims brought against the insured persons or the organization for providing or failing to provide any professional service.

Exclusion – Captive Insurance Company Operations Endorsement, MP 21 02 05 09: restricts coverage for claims brought against the insured persons or the organization arising out of the ownership, management, maintenance, and/or control by the organization of any captive insurance company.

Exclusion – Parent Organization Endorsement, MP 21 03 05 09: restricts coverage for claims brought against the insured persons or the organization by or on behalf of an organization where more than 50 percent of voting rights is controlled by that organization.

Exclusion – Specific Litigation Or Other Incident Endorsement, MP 21 04 05 09: restricts coverage for claims brought against the insured persons or the organization arising out of a specific lawsuit or other incident.

Exclusion – Specific Subsidiary Endorsement, MP 21 05 05 09: restricts coverage for claims brought against the insured persons or the organization for their service in the specific subsidiary.

Exclusion – Pending Or Prior Litigation Endorsement (Newly Acquired Subsidiaries), MP 21 06 05 09: restricts coverage for claims made before the pending or prior litigation date against any newly acquired subsidiary or its insured persons.

Exclusion – Initial Public Offering (IPO) Endorsement, MP 21 07 05 09: restricts coverage for claims made against the insured persons or the organization in connection with an initial public offering.

Exclusion – Secondary Public Offering (SPO) Endorsement, MP 21 08 05 09: restricts coverage for claims made against the insured persons or the organization in connection with a secondary public offering.

Exclusion – Intellectual Property Liability Endorsement, MP 21 09 05 09: restricts coverage for claims made against the insured persons or the organization arising out of any liability in connection with intellectual property.

Exclusion – Fungi Or Bacteria Endorsement, MP 21 10 05 09: restricts coverage for claims made against the insured persons or the organization arising out of any liability in connection with fungi or bacteria.

Exclusion – Racketeer Influenced And Corrupt Organizations Act (RICO) Endorsement, MP 21 11 05 09: restricts coverage for claims made against the insured persons or the organization arising out of any actual or alleged violation of the Racketeer Influenced and Corrupt Organizations Act (RICO).

Exclusion – Nuclear Energy Liability, MP 21 12 05 09: restricts coverage for claims made against insured persons resulting from hazardous properties of nuclear material.

Exclusion – Antitrust Endorsement, MP 21 26 05 09: restricts coverage for claims made against the insured persons or the organization arising out of price fixing, restraint of trade, and other violations of any statutes addressing antitrust issues.