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LETTER: D&O policies can provide defense cover

Posted On: Nov. 26, 2006 12:00 AM CST

To the editor: After reviewing the Nov. 6 Perspective, "Don't Assume D&O Policy Covers Defense Expenses," it's necessary to build out the picture, as details of the WorldCom and KPMG cases are required to understand this area of exposure.

While WorldCom was sobering for directors, the order to pay the settlement with personal assets is rare and not a trend. A critical fact is WorldCom had declared bankruptcy, limiting its ability to indemnify directors and officers; the only other funds for defense, settlements or judgments were the D&O insurance program or personal assets. Unfortunately, WorldCom's coverage was being rescinded by most of its insurers. Based on a review of the rescission actions, WorldCom's policies did not have severability of the applications/representations provisions to protect innocent directors.

When a company does not indemnify due to insolvency or if the SEC seeks to bar indemnification, the primary A, B and C policy should respond without any retention. This is not an area to be addressed solely via an A-side difference-in-conditions policy.

Where companies are pressured not to indemnify individuals subject to Justice Department proceedings, the KPMG case offers good news. The KPMG individual defendants asserted that KPMG refused to advance a defense because the government had both pressured the firm and violated their right to a fair trial. Absent such pressure, KPMG would have paid.

Justice is not done when firms are coerced into depriving present or former employees of the means of defending themselves. If suspects are found guilty, they should pay. But the determination must be made fairly—not in a proceeding in which the government has an unfair advantage before the trial has begun.

D&O policies frequently have provisions for payment of the retention in claims where the company is permitted and financially able to indemnify. The larger the retention, the more significant this becomes, and the handling of presumptive indemnification varies.

While A, B and C programs can provide for payment for insureds when the company has wrongfully denied indemnification, the more traditional approach is an A-side DIC policy, which pays on behalf of individual directors and officers when indemnification has been denied for any reason. To ensure predictable protection for all parties, it is essential to have an experienced broker partner when creating or renewing D&O coverage.

Steve Shappell, Esq.

Managing Director, Legal and Claims Practice

Aon Financial Services Group

Denver