December 28, 2018 Practice Points

Don’t Forget Insurance in Time of Crisis

A lawyer steering a company through a crisis must consider a host of crucial issues while advising the client. Insurance coverage should be high on that list

by Mary E. McCutcheon

A lawyer charged with steering a company through a crisis—whether a high profile securities fraud or sexual harassment claim, a criminal investigation or a catastrophic product failure—must consider a host of crucial issues while advising the client. Insurance coverage should be high on that list.

The first, and critical, step is to identify all potentially applicable policies and notify those insurers. While the company’s risk manager or broker typically is charged with this task, counsel should review this effort in a crisis situation and make sure that no possible sources of coverage are overlooked. Possible coverages include directors and officers or management liability, partnership liability, errors and omissions, employment practices liability, employee benefits and general liability policies. Also consider whether board members face personal exposure, and may have separate coverage to protect them. An outside board member who has been placed on the board by an investor or strategic partner may be entitled to outside entity coverage under the insurance carried by his or her employer. Or a board member may have purchased stand-alone independent director liability coverage.

If a claims-made policy is about to expire, the insurer may be reluctant to renew the policy. Even if it offers to renew, it may propose prohibitive renewal terms. Counsel can work with management and the broker to negotiate reasonable renewal terms. An insurer who does renew is very likely to attach a “specific event exclusion” endorsement to the renewal policy, in effect excluding coverage for any loss even remotely related to the crisis situation. In that case, not only should all claims be reported prior to policy expiration, but a thorough notice of potential claims should be made in accordance with the policy’s “notice of circumstance” provisions. It may be possible to negotiate an agreement whereby all claims excluded under the renewal policy pursuant to the specific event exclusion are covered under the expiring policy, even if not properly noticed under that policy. The goal is to limit the insurer’s exposure to one year of limits, and to avoid an gap in coverage. If this cannot be achieved, it may be wise to purchase an extended reporting period (ERP) for the expired policy, to capture coverage for claims not yet made which would otherwise fall under the specific event exclusion.

Maintaining insurance coverage may become even more essential if the company is considering bankruptcy or reorganization. A claims-made policy may include an automatic run-off of the policy or the ability to purchase an ERP for claims based on wrongful acts committed before the bankruptcy filing. The automatic run-off usually lasts for the remainder of the policy. While an ERP could provide coverage for claims based on pre-filing wrongful acts that surface a year or more after the filing, it is unlikely that money from the debtor’s estate will be available to fund it; the purchase of an ERP prior to bankruptcy may constitute a voidable preference.

If lawsuits have been filed or an investigation commenced, clients automatically (and understandably) reach out to their trusted counsel. But defense fees spent before notice, even if covered, generally will not be paid by the insurer or even credited against the policy retention. At the very least, the insured is required to obtain the insurer’s consent to the retention of counsel. A policy may in fact allow the insurer to control the defense and select counsel, or at least limit the amount that the insurer is required to pay for defense fees. The company has to balance its desire to act quickly and control the defense, with the need to fulfill notice and cooperation requirements in the policy.

Counsel’s advice to the client and tactics to maximize coverage may differ depending on whether the goal is to protect the company or the individual officers and directors. The company may focus on preserving the insurance coverage to settle a nasty case, fund a burdensome defense or investigation, or protect certain individuals who are critical to the company’s on-going business strategies. On the other hand, individuals may wish to prioritize their own exposures and preserve the assets for non-indemnifiable claims which threaten their personal assets. An attorney advising an individual who may be the target of suits should consider invoking any “priority-of-payments” policy provisions in the policy, which may permit or even require the insurer to conserve funds for non-indemnifiable losses faced by individual insureds. And if the company has filed for bankruptcy, the debtor in possession or trustee may want to preserve the assets for claims against the estate, as opposed to lower priority indemnity claims or non-indemnifiable claims against individual insureds such as board members.

A crisis presents many strategic and financial challenges for clients and their counsel. Counsel’s attention to insurance assets will not eliminate the crisis, but may minimize its financial impact.

Mary E. McCutcheon is with Farella Braun + Martel LLP, San Francisco, CA.


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