KEY D

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KEY DO POLICY PROVISIONS/ISSUESHow They Really
Work!
2004 PLUS International Conference San Diego,
California November 4, 2004
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PANEL
Philip L. BlaisPresidentBlais Excess Surplus
Agency of Texas Ltd.
Ernest Martin, Jr.PartnerHaynes and Boone, LLP
Raul Carrillo Sr. Vice President /General
Counsel El Paso Electric Corp.
Carol A.N. Zacharias Counsel ACE Professional
Risk
A. Quentin Orza II Vice PresidentRLI Insurance
Group
The views expressed are those of the speakers
and no other organization or person.
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AGENDA

• POLICY PROVISIONS/ISSUES WILL BE
• REVIEWED IN THREE PHASES
• INTRODUCTION Gray Phase The panel will provide
  a
• basic overview of the policy provision/issue.
• DISCUSSION Blue Phase The panel will discuss a
• number of the key points surrounding the policy
• provision/issue.
• TRENDS Green Phase The panel will provide
• information relating to the past, present and
  future trends
• relating to the specific policy provision/issue.

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AGENDA

• POLICY PROVISIONS/ISSUES TO BE
• REVIEWED BY THE PANEL
• Insuring Agreements
• Severability Provisions Policy / Application
• Notice Provisions
• Prior Pending Litigation
• Continuity
• Change of Control provisions
• Allocation
• Retention Waivers
• Policy Definitions
• Claim
• Loss
• Subsidiaries
• Insured Person

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DOINSURANCE POLICY PROVISIONS/ISSUES

• INSURING AGREEMENTS
• Directors Officers coverage available only
  when the corporation either cannot or does not or
  is not allowed to indemnify, no retention
  applies.
• Corporate Indemnification insurer indemnifies
  the corporation for its obligation to indemnify
  the directors or officers, subject to a
  retention.
• Entity coverage for the entity, normally only
  applicable to securities claims and employment
  claims.
• Outside Directorships available to cover
  executives serving on other boards at the request
  of the corporation.

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DOINSURANCE POLICY PROVISIONS/ISSUES

• INSURING AGREEMENTS
• Differences in Public / Private forms
• What is full entity coverage and what are the
  pros and cons?
• How broad or permissible can the corporate
  indemnity be?
• What if the company is financially unable to
  indemnify?
• What is significance of pay on behalf language?
• What is difference in continuity date and
  retroactive date? Why are these important?

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DOINSURANCE POLICY PROVISIONS/ISSUES

• INSURING AGREEMENT
• Side A Only Coverage
• Board Direct Side A
• Concerns created by entity coverage
• What is Order or Priority of Payments and why is
  it important?

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DOINSURANCE POLICY PROVISIONS/ISSUES

• SEVERABILITY PROVISIONS
• Severability of the Application provides that
  directors or officers who were unaware that an
  application for coverage was provided to
  underwriters that included false or misleading
  information cannot be denied coverage because of
  that.
• Severability of the exclusions of the policy
  provides that the conduct exclusions
  (deliberately illegal acts, fraud or personal
  profit) of one officer or director cannot be
  imputed to any other director or officer.

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DOINSURANCE POLICY PROVISIONS/ISSUES

• SEVERABILITY PROVISIONS
• Full severability - (Wedtech, SDNY, 1990
  Atlantic Permanent, 4th Cir. 1988)
• Imputation to the entity
• Application Materiality
• Standards for determining fraud in the
  application differs by jurisdiction (e.g. Texas
  is favorable to the insured New York is
  favorable to the Insurer)
• Variations in policy applications concerning
  knowledge of potential claims

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DOINSURANCE POLICY PROVISIONS/ISSUES

• SEVERABILITY PROVISIONS
• Entity
• Specified Positions
• Non rescindable Side A
• Limiting imputation wording to past executives to
  a 4 year period from last date of service

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DOINSURANCE POLICY PROVISIONS/ISSUES

• NOTICE PROVISIONS
• Claims Made or Claims Made Reported
• Notice of Circumstances
• Some have limited automatic extensions of time to
  report claims usually 30 to 60 days.
• Extended Reporting/Discovery/Tail Coverage

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DOINSURANCE POLICY PROVISIONS/ISSUES

• NOTICE PROVISION
• Notice by the Insured
• As soon as practicable
• Knowledge of claim by General Counsel or Risk
  Manager or equivalent
• Prior/Pending Litigation Exclusion or Endorsement

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DOINSURANCE POLICY PROVISIONS/ISSUES

• NOTICE PROVISION
• Bilateral/unilateral discovery
• Set premium or to be determined
• Notice of claim provided to agent vs insurer

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DOINSURANCE POLICY PROVISIONS/ISSUES

• PRIOR PENDING LITIGATION PROVISION
• Prior Pending Litigation Date
• Litigation not limited to DO litigation

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DOINSURANCE POLICY PROVISIONS/ISSUES

• PRIOR PENDING LITIGATION PROVISION
• P/P date as of inception or backdated?
• New carrier on existing limits
• New limits
• Laundry List of claims pros and cons

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DOINSURANCE POLICY PROVISIONS/ISSUES

• PRIOR PENDING LITIGATION PROVISION
• Underwriters willingness to backdate varies
  depending on condition of market hard or soft.
• Becoming a necessary element for competing
  underwriters to obtain new business
• Does the wording swallow up the coverage
  (arising from similar facts, circumstances,
  situations language)?

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DOINSURANCE POLICY PROVISIONS/ISSUES

• CONTINUITY PROVISION
• Continuity is not defined in the policy. The
  continuity date is the date an application that
  included a warranty statement was signed
  regarding knowledge of claims or circumstances
  that could give rise to a claim.

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DOINSURANCE POLICY PROVISIONS/ISSUES

• CONTINUITY PROVISION
• Importance of maintaining continuity
• Main Form Application vs Renewal Application

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DOINSURANCE POLICY PROVISIONS/ISSUES

• CONTINUITY PROVISION
• Waiver of application
• Automatic inclusion of public information, i.e.
• Amend definition of application to .. Public
  documents filed by an organization with the
  securities and exchange commission during
  the last 36 months and prior to the inception
  date of the policy.

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DOINSURANCE POLICY PROVISIONS/ISSUES

• CHANGE OF CONTROL PROVISION
• Change of Control/Organizational Changes
• What are the triggers? Variance of triggers in
  policy forms.
• What happens to the policy?
• How this provisions effects availability of
  premium financing

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DOINSURANCE POLICY PROVISIONS/ISSUES

• CHANGE OF CONTROL PROVISION
• Proxy fights
• Bankruptcy
• Emergence from Bankruptcy
• Board changes
• Security for Old Director decisions
• Who pays the premium?
• Purchase and Sale Agreement may require 1-6 years
  of coverage be purchased by the Old Directors
  if available in the market at a predetermined
  of the annual premium

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DOINSURANCE POLICY PROVISIONS/ISSUES

• CHANGE OF CONTROL PROVISION
• Different language in various insurers policies
  
• Specific Waivers of Change of Control provisions

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DOINSURANCE POLICY PROVISIONS/ISSUES

• ALLOCATION PROVISION
• Covered Uncovered Parties
• Covered Uncovered Claims or Allegations

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DOINSURANCE POLICY PROVISIONS/ISSUES

• ALLOCATION PROVISION
• "Best Efforts" / Relative Benefits
• Alternative Dispute Resolution
• Predetermined Allocation
• Coinsurance
• Other Solutions

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DOINSURANCE POLICY PROVISIONS/ISSUES

• ALLOCATION PROVISION
• Entity coverage or no entity coverage
• Protection of individual directors assets
• Intent of Directors and Officers coverage

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DOINSURANCE POLICY PROVISIONS/ISSUES

• HAMMER CLAUSE
• Defense and Settlement Conditions
• To settle or not to settle
• Dropping the hammer

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DOINSURANCE POLICY PROVISIONS/ISSUES

• HAMMER CLAUSE
• Example of Hammer Negotiations
• Hard v Soft Hammer Clause

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DOINSURANCE POLICY PROVISIONS/ISSUES

• HAMMER CLAUSE
• Competition in market place affects insurers
  willingness to negotiate amended hammer clause.

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DOINSURANCE POLICY PROVISIONS/ISSUES

• POLICY DEFINITION - CLAIM
• Claim includes written demand for monetary or
  non monetary damages and injunctive relief. A
  claim can also include formal civil, regulatory
  and criminal investigations and formal regulatory
  proceedings.

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DOINSURANCE POLICY PROVISIONS/ISSUES

• POLICY DEFINITION - CLAIM
• Civil and/or Criminal Investigations?
• Regulatory Investigations?
• Written demand for injunctive relief?
• Informal investigations?
• Informal regulatory proceedings?
• Commenced by service of a subpoena

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DOINSURANCE POLICY PROVISIONS/ISSUES

• POLICY DEFINITION - CLAIM
• The definition of claim rarely includes oral
  demands as there is a significant lack of
  documentation or proof of such demand.
• Also, recently carriers have been amending the
  definition of claim (as respects to Securities
  Claims) not to include administrative or
  regulatory proceedings against the company unless
  an Insured Person is also continuously involved
  in the claim.
• The broader the definition of claim, the more
  diligent the insured must be in notifying the
  insurer of the claim.

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DOINSURANCE POLICY PROVISIONS/ISSUES

• POLICY DEFINITION - LOSS
• Loss includes damages,
• settlements, judgments and
• defense costs.

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DOINSURANCE POLICY PROVISIONS/ISSUES

• POLICY DEFINITION - LOSS
• Punitive Damages coverage blanket or securities
• Claims only? Most favorable jurisdiction
  language?
• Taxes, fines, penalties, multiple
• damages?
• Disgorgement and restitution, under SOX or
  otherwise?
• Uninsurable matters?
• Dividends and other profit distributions
  excluded?
• Derivative demand investigative costs covered?
• Treatment of Bump up / Bump down claims

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DOINSURANCE POLICY PROVISIONS/ISSUES

• POLICY DEFINITION - LOSS
• Level 3 case
• Conseco case
• Does Level 3 and Conseco make Securities Coverage
  illusory?

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DOINSURANCE POLICY PROVISIONS/ISSUES

• POLICY DEFINITION - SUBSIDIARY
• Subsidiary is an entity in which the named
  Insured owns directly or through its
  subsidiaries, more than 50 of outstanding
  securities that represent the right to vote for
  such entitys directors. The standard definition
  of Insured organization includes those
  subsidiaries owned or controlled on the inception
  date of the policy.

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DOINSURANCE POLICY PROVISIONS/ISSUES

• POLICY DEFINITION - SUBSIDIARY
• Newly acquired or created subsidiaries
  automatic coverage, time limitations, etc.?
• Joint ventures, limited partnerships

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DOINSURANCE POLICY PROVISIONS/ISSUES

• POLICY DEFINITION - SUBSIDIARY
• Trend in reducing the auto sub threshold
• Trend in reducing the auto sub reporting period

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DOINSURANCE POLICY PROVISIONS/ISSUES

• POLICY DEFINITION INSURED PERSON(S)
• Insured Person (s) includes past, present and
• future members of the board of directors and
• duly elected officers of the company. Most
• policies also extend the coverage to all past,
• present and future employees of the company
• as respects securities claims.

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DOINSURANCE POLICY PROVISIONS/ISSUES

• POLICY DEFINITION INSURED PERSON (S)
• Broader definition of Insured person may
• dilute coverage available to DOs
• Spousal coverage
• Claims by former directors or officers (time
• limit for applicability of Insured v Insured
  exclusion)
• Blanket independent contractor coverage under
  definition of employee
• Impact of partnerships and joint ventures as
  insureds

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DOINSURANCE POLICY PROVISIONS/ISSUES

• POLICY DEFINITION INSURED PERSON (S)
• What is an officer and director?
• Domestic Partner Extension