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Directors and Officers Liability Insurance 1987.

Directors and Officers Liability Insurance 1987

The changing scene of directors and officers liability insurance necessitates those of use who have an interest in the subject to become acquainted with the latest available source material. This publication cites some significant case law that affects the directors and officers (D&O) insurance application, insuring agreements, and policy exclusions. The book's primary function is to serve as an educational supplement to the practicing law institute's educational programs and is also used as a reference manual for attorneys and professionals unable to attend their various educational sessions. It is a collection of nine papers that were compiled and edited by Dan L. Goldwasser.

In the first paper, Goldwasser enumerates the changes that have recently taken place in D&O insurance. He points out that some changes have been positive, including: (1) restricting the types of claims that can be asserted against corporate officers and directors; (2) insurance laws designed to make insurers more responsive to their insureds; and (3) amendments to the Federal Risk Retention Act permitting the formation of risk retention groups. On the negative side, courts are continuing to expand the liability exposure of corporate officers and directors by recognizing new theories of liability and further eroding the protective "business judgement" rule. In addition, jurors have become accustomed to awards which only a few years ago would have staggered the imagination of most corporate management and their respective insurance carriers.

The second paper is simply an outline of the types of claims currently being made against directors and officers. In the third paper, Dennis J. Block, Nancy E. Barton, and Steven A. Raidin explore the indemnification agreements by which the corporation reimburses its directors and officers for judgements, settlements, expenses, and attorney fees arising out of their services to the corporation. D&O insurance, the author notes, is carried both to reimburse the corporation for indemnification payments and to cover the directors and officers in circumstances where corporate indemnification is unavailable.

Robert A. Zeavin and Robert J. Drexler, Jr. point out in their paper that some of the most significant case law deals with the D&O insurers' obligation to defend its insured. The cogent issue is whether an insurer must pay the insured's defense cost as incurred or be able to postpone paying defense cost until the litigation is concluded and all coverage issues resolved. In addition to the case law, the authors report that numerous states have changed, or are considering changing, statutes governing a director's financial liability. These statutory changes are being made in an attempt to ease the problem many corporations are experiencing in recruiting qualified people to serve on their board.

The fifth paper is a simple outline dealing with the issues in the D&O market. The sixth paper, by Richard E. Cowan, is a checklist for directors and officers contemplating a change of existing coverage or those seeking to acquire new coverage. The chapter addresses issues such as how to fill out an application form; the different documents that are required to complete the form; the important endorsements; ways to limit exclusions; and the questions that need to be resolved about defense costs.

In their paper, David W. Ichel, Sharon O. Thompson and Eli M. Rosenbaum discuss D&O insurance coverage and provide an overview of the current problems. There is a lengthy narrative in this paper of what actually constitutes a claim against officers and directors. The authors point out how the courts across the country are divided with respect to whether the enforcement of the insurance coverage for punitive damages would controvene public policy. It would be imperative for practitioners and insureds to determine which state's statute would apply because of its impact on the payment of punitive damages.

The last paper deals with directors and officers liability insurance coverage disputes. Arthur J. Washington shows, in his paper, insurers and their insureds almost invariably settle D&O coverage disputes rather than litigate them to conclusion. The companies do this, he notes, because the courts will construe the policy language against the drafter of the contract. The insureds and their council, on the other hand, find a compromise generally results in some payments whereas litigation might not. However, the author notes that more and more insureds are willing to litigate rather than compromise if there is a possibility of a massive loss.

In many instances, the reader of this book gets a feeling of deja vu. The same cases and commentary are repeated throughout the work. The redundancy is caused by the overlap in the material presented as well as the editor and authors not attempting to unify the papers into a cohesive work. If one can overlook this annoying problem, they will be rewarded with some insights into the causes and effects of the D&O liability crisis. The reasons for the frequency and severity of lawsuits and the shrinking availability of adequate insurance coverage is explored in detail. A disturbing trend that academicians and practitioners alike should be aware of deals with the question of the defendant's liability and the policy's response. The authors cite numerous instances where courts in different jurisdictions might view the same or substantially identical policy language as ambiguous in some cases and unambiguous in others. The tendency of the carriers would naturally be to restrict coverage and reduce exposures where they feel that the court's interpretation of their contract would be other than was intended in their premium calculations. A coverage crisis similar to that in malpractice will result if the courts continue to be oblivious to the decisions of their brethren in other jurisdictions.
COPYRIGHT 1989 American Risk and Insurance Association, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Author:Power, Fred B.
Publication:Journal of Risk and Insurance
Article Type:Book Review
Date:Dec 1, 1989
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