Bankruptcy and Directors & Officers (D&O) Liability Insurance Considerations for Protecting and Accessing the Insurance Policy and Proceeds

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1 Bankruptcy and Directors & Officers (D&O) Liability Insurance Considerations for Protecting and Accessing the Insurance Policy and Proceeds SPEAKERS: Tony Tatum Mark Maloney Scott Wallace, Marsh USA Tuesday, May 19, :30 1:30 p.m. Eastern Time If you have not downloaded the program materials, please do so now at learn/handout To connect to the audio part of the program, please call: A customer service representative will connect you to the seminar. For technical assistance at any time during the presentation, please call:

2 Speaker Biography Tony Tatum is a partner in King & Spalding's Atlanta office and a member of the firm s Business Litigation Practice. Mr. Tatum s practice focuses on complex commercial litigation, with an emphasis in insurance coverage and recovery litigation, arbitration, and consultation, as well as securities and shareholder litigation. Mr. Tatum represents leading companies such as AFC Enterprises, Inc, Central Georgia Health Systems, Inc., Harbert Management Corporation, Kelly Services, Inc., Kimberly-Clark Corporation, and The Coca-Cola Company, and has litigation experience in state and federal courts at both the trial and appellate levels. Tony Tatum ttatum@kslaw.com In his insurance coverage practice, Mr. Tatum regularly represents policyholders in all aspects of insurance coverage disputes, including complex litigation and arbitration relating to property damage, business interruption, directors and officers liability (D&O), environmental and pollution, advertising injury and intellectual property, political risk, employment practices liability, fiduciary liability, errors and omissions, fidelity and crime coverage, and other manuscripted lines of coverage. Mr. Tatum regularly advises clients and their directors and officers regarding D&O indemnification and insurance issues related to these matters, and in negotiating best in class terms and conditions for clients with U.S. and international insurers for D&O and many other lines of insurance coverage. Mr. Tatum obtained his undergraduate degree in Risk Management and Insurance from The University of Georgia. Subsequently, Mr. Tatum worked as a senior analyst with two leading financial services companies in the areas of regulatory insurance compliance. Mr. Tatum graduated, cum laude, from Georgia State University College of Law. He was a law clerk for the U.S. Attorneys Office, Department of Justice and an extern for former Georgia Congressman Ed Jenkins. In both 2006 and 2007, Mr. Tatum was named a "Georgia Rising Star" by Atlanta Magazine. Speaker Biography Mark M. Maloney mmaloneyr@kslaw.com Mark Maloney is a partner in the Atlanta office of King & Spalding and a member of the Financial Restructuring Practice Group. Mr. Maloney s practice includes representation of a broad range of clients in litigation matters involving creditors rights, bankruptcy, lender liability and other financial and commercial disputes. He has represented debtors, official committees, secured and unsecured creditors, and other parties in interest in major Chapter 11 bankruptcy cases and other insolvency proceedings in over 20 states and the District of Columbia. From 2003 through 2007 he has been listed as one of the top bankruptcy attorneys in the country by The Deal Magazine. In addition, Mr. Maloney has been selected by his peers as a Georgia Super Lawyer, as published in Atlanta Magazine, and as a member of the Georgia Legal Elite, as published in GeorgiaTrend magazine. Mr. Maloney also serves as Co-Chairman of the American Bankruptcy Institute s Litigation Committee. In recent years Mr. Maloney s practice has focused on representing litigants in contested matters, adversary proceedings and other litigation in significant Chapter 11 bankruptcy cases and insolvency proceedings. Mr. Maloney also has experience in general commercial litigation and tax litigation and is admitted in both the United States Court of Federal Claims and the United States Tax Court. Mr. Maloney is a frequent lecturer on bankruptcy topics and serves as Co-Chairman and faculty member for the Litigation Skills Symposium sponsored by the American Bankruptcy Institute. His publications include "Orix Credit Alliance, Inc. v. Delta Resources, Inc.- Poor Losers," in the Annual Survey of Bankruptcy Law, "At Your Service: Deciphering the Amendments to the Service Rules," in Bankruptcy Litigation, "Specific Personal Jurisdiction and the 'Arise From or Related To' Requirement What Does It Mean?" in the Washington & Lee Law Review. Mr. Maloney is also a co-author of the Aspatore Books publication Inside the Minds: The Roles and Motivations of Key Players in Bankruptcy Cases, and co-author of the West Group treatise Successful Partnering Between Inside and Outside Counsel. He has served previously as co-editor of Bankruptcy Litigation and as a member of the Advisory Board for the Annual Survey of Bankruptcy Law.

3 Speaker Biography Scott serves as Marsh s FINPRO Claims Advocate for the South Zone, specializing in directors and officers, employment practices and other professional liability claims. Scott Wallace, Esq. Marsh, USA Senior Vice President FINPRO Claims Advocacy Scott.A.Wallace@marsh.com Prior to joining Marsh in 2007, Scott was associated with the Chicago law firm of Kerns, Pitrof, Frost & Pearlman, where he represented insurance carriers in the U.S. and Bermuda markets regarding directors and officers liability, professional liability, employment practices liability and errors & omissions coverages. He handled insurance coverage issues in the areas of securities, employment, corporate and health care law and counseled domestic and foreign insurers and reinsurers on policy interpretation, policy drafting and claim exposure. Scott began his legal career practicing in Atlanta with the law firm Kitchens Kelley Gaynes, where he specialized in commercial defense and policyholder litigation. Bankruptcy and Directors & Officers (D&O) Liability Insurance Considerations for Protecting and Accessing the Insurance Policy and Proceeds SPEAKERS: Tony Tatum Mark Maloney Scott Wallace, Marsh USA Tuesday, May 19, :30 1:30 p.m. Eastern Time

4 Topics For Discussion Overview of the D&O insurance policy -- who are the insureds and what are some key provisions and issues relevant in the bankruptcy context? Bankruptcy -- overview of the process, the trustee, creditors committee, and potential impact of the automatic stay on the use of the D&O insurance policy proceeds Amendments a company should seek to its D&O policy to help ensure that the D&O insurance policy and its proceeds will be available post-bankruptcy for claims Does the company need an extended D&O run-off policy and a separate D&O policy post-bankruptcy, and how should company management address potential bankruptcy with its D&O insurers? 7 Overview of the D&O Policy Tony Tatum 8

5 Who Are The Insureds? Traditional D&O Coverage Traditionally, directors and officers liability policies provided two types of coverage: Insuring Agreement A (or Side A Coverage ): Liability coverage payable directly to the Ds&Os for claims for wrongful acts when indemnification is not permitted or not available due to insolvency; and Insuring Agreement B (or Side B Coverage ): Coverage payable to the corporation/insured entity to reimburse it for indemnification provided to their Ds&Os and officers for claims for wrongful acts against them. 9 Who Are The Insureds? (cont.) Entity Coverage Insuring Agreement C (or Entity Coverage ): liability coverage payable directly to an insured entity for its wrongful acts. This type of coverage is typically limited to securities claims in policies issued to publicly-traded companies, but it may be broader in other types of private company policies. 10

6 How Do Claims Trigger the D&O Policy? Aggregate Limit of Liability Claims Against Directors & Officers Claims Against Corporate Entity Indemnification? NO Direct payment of loss by insurer No self-insured retention Personal asset protection Non-Indemnifiable Side A D&O coverage YES Reimbursement of indemnified loss Applicable self insured retention Balance sheet protection Corporate Reimbursement Side B D&O Coverage Reimbursement of paid loss to corporate entity Applicable self insured retention Balance sheet protection Entity Liability Side C D&O Coverage 11 Some Key D&O Coverage Issues in the Bankruptcy Context If a Company becomes subject to a bankruptcy proceeding, the Company will likely be unable to fund its D&O indemnification obligation. Will the filing of bankruptcy convert the underlying Side B claim to a non-indemnifiable Side A claim under the policy? If the D&O policy also provides entity coverage (Side C), it may be considered by the courts as an asset of the bankruptcy estate. If the policy is an asset of the bankruptcy estate, are the proceeds frozen so that the insurer cannot pay Side A claims to the Ds&Os? What provisions can be included in a D&O policy to help ensure that Ds&Os are indemnified under the policy if the Company is in bankruptcy? 12

7 D&O Coverage Issues Resulting From A Bankruptcy (cont.) D&O policies typically contain a change in control provision. Will a bankruptcy filing trigger a change in control, causing the policy to go into run-off? Trustees often bring claims against former directors and officers of the Company. Does the D&O policy cover claims brought by the bankruptcy trustee against the Ds&Os? Defense costs alone for numerous post-bankruptcy claims can quickly deplete the limits of insurance. Are there other insurance solutions for Ds&Os if the Company s D&O policy has Side C coverage? 13 Bankruptcy -- Overview of the Process and Impact of the Automatic Stay on the D&O Policy Mark Maloney 14

8 The Bankruptcy Process and the Parties Purpose of Bankruptcy Chapter 7 Liquidation Chapter 11 Reorganization Creditors Committee and Trustee 15 Current Trends and New Filings in Bankruptcy This economic cycle generally is producing two types of bankruptcy cases for businesses: Quick, prepackaged or prearranged cases, and Liquidate and litigate cases 16

9 The Bankruptcy Court s s Automatic Stay Section 362(a) of the Bankruptcy Code The automatic stay under Section 362(a) of the Bankruptcy Code provides that the filing of a petition in bankruptcy automatically stays certain actions directed against the debtor s property. The automatic stay generally does not extend to actions pending against the debtor s Ds&Os unless it amounts to an act to obtain possession of property of the estate or to exercise control over property of the estate. See Steyr-Daimler- Puch of America Corp. v. Pappas, 852 F.2d 132 (4 th Cir. 1988). Accordingly, in cases where the debtor and its Ds&Os are defendants, the lawsuit will likely be automatically stayed as to the debtor only. 17 The Bankruptcy Court s s Automatic Stay (cont.) Extension of the Automatic Stay to Pending Litigation Against the Debtor s Ds&Os Ds&Os often seek to enjoin litigation pending against them arguing that (1) an adverse judgment would increase the debtor s indemnification exposure if the debtor s insurer refused to advance defense costs or if the costs exceed policy limits; (2) the litigation would be disruptive to the management of the debtor or interfere with the reorganization of the debtor; (3) the continued litigation is an attempt to circumvent the automatic stay; or (4) that a judgment against the non-debtor creates collateral estoppel issues for the debtor. 18

10 The Bankruptcy Court s s Automatic Stay (cont.) Exception Applied - A few courts have accepted these arguments although largely in the products liability arena where the argument of circumvention of the automatic stay is arguably stronger than in the securities fraud space. See, e.g., Lomas Fin. Corp. v. N. Trust Co. (In re Lomas Fin. Corp.), 117 B.R. 65, 68 (S.D.N.Y. 1990); A.H. Robins Co. v. Piccinin, 788 F.2d 994, 1001 (4th Cir. 1986). 19 The Bankruptcy Court s s Automatic Stay (cont.) Exception Inapplicable - However, most courts have refused to extend the automatic stay to actions against a debtor s Ds&Os, finding that the requisite unusual circumstances do not exist because the underlying litigation typically does not interfere with the debtor s reorganization, the litigation is based on independent torts or breaches by the Ds&Os, and/or the defendants indemnification claims, if any, are not absolute. See, e.g., Primavera Familienstiftung Tag Assocs. (In re Granite Partners, L.P.), 194 B.R. 318, (Bankr. S.D.N.Y. 1996). 20

11 D&O Policies and Proceeds -- Assets of the Bankruptcy Estate? If the automatic stay does not apply to pending litigation, the Ds&Os will want the policy to fund defense costs that otherwise would have been advanced by the debtor. D&O Policies vs. Proceeds Many courts consider the D&O policy and its proceeds separately in determining whether they are the property of the insured debtor s bankruptcy estate. 21 D&O Policies and Proceeds -- Assets of the Bankruptcy Estate? (cont.) D&O Policies - Most courts consider D&O policies property of the debtor s estate. See, e.g., La. World Exposition, Inc. v. Fed. Ins. Co. (In re La. World Esposition, Inc.), 832 F.2d 1391, 1399 (5 th Cir. 1987) ( There are a great many bankruptcy cases holding that liability insurance policies that provide coverage for the bankrupt s liability belong to the estate. ); MacArthur v. Johns-Manville Corp., 837 F.2d 89 (2d. Cir. 1988) The more critical issue is whether the D&O policy proceeds are the property of the estate. This issue typically arises when an insurer is asked to advance defense costs to Ds&Os or make other payments under the policy when the company is in bankruptcy. 22

12 D&O Policies and Proceeds -- Assets of the Bankruptcy Estate? (cont.) D&O Proceeds - Recent Authority Addressing Proceeds If Debtor Has No Direct Interest in Policy Proceeds» Many courts have held that where the debtor does not have a direct interest in the proceeds of a D&O policy, the proceeds are not property of the bankruptcy estate. See, e.g., La. World Exposition, Inc. v. Fed. Ins. Co. (In re La. World Exposition, Inc.), 832 F.2d 1391 (5 th Cir. 1987); In re MCSi, Inc., Secs. Litig., No. C (S.D. Ohio Feb. 26, 2004).» These courts reason that the D&O policy benefited only the Ds&Os by providing either direct coverage for claims made against them or indirect coverage by reimbursing the corporation for its indemnification of the Ds&Os. See also In Re Edgeworth, 993 F.2d 51 (5 th Cir. 1993). 23 D&O Policies and Proceeds -- Assets of the Bankruptcy Estate? (cont.) If The Debtor Has Made Indemnification Claims» Other courts have held that where there are claims for indemnification coverage under Insuring Agreement B, the D&O policy proceeds may be property of the bankruptcy estate. See In re Allied Digital Techs. Corp., 306 B.R. 505 (Bankr. D. Del. 2004); In re Tom s Foods, Inc., 2006 Bankr. LEXIS 3319 (Bankr. M.D. Ga. Dec. 7, 2006).» These courts reason that payments to the Ds&Os for defense costs would deplete the policy limits, thereby increasing the debtor s exposure to indemnification claims in other litigation. The debtor s interest in being reimbursed by the insurer for the amounts it must indemnify its Ds&Os is sufficient to hold that the policy s proceeds are an asset of the bankruptcy estate. 24

13 D&O Policies and Proceeds -- Assets of the Bankruptcy Estate? (cont.) Where the D&O Policy Provides Side C Entity Coverage» Some courts have held that D&O policies that provide entity coverage are the property of the bankruptcy estate. See Homsy v. Floyd (In re Vitek, Inc.), 51 F.3d 530 (5 th Cir. 1995); In re Metropolitan Mortgage & Secs. Co., 325 B.R. 851 (Bankr. E.D. Wash. 2005).» These courts reason that the existence of direct coverage for the entity makes the policy a vehicle for both individual and corporate protection. Because the proceeds of the policy are commingled, the debtor s interest in the policy proceeds is sufficient to bring the entirety of the policy proceeds into the estate.» However, some courts have held that the proceeds of a D&O policy are not the property of the bankruptcy estate even though the policy included Side C entity coverage. See First Central Financial Corp. (The mere appendage of entity coverage [for securities claims] to [the] Policy by way of a rider... does not provide sufficient predicate, per se, to metamorphose the proceeds into estate property. ) 25 D&O Policies and Proceeds -- Assets of the Bankruptcy Estate? (cont.) General Principles Regarding Policy Proceeds Typically, a bankruptcy court will treat proceeds as owned by the Ds&Os if it s a Side A only policy. If the policy has Side C entity coverage, there is greater likelihood of the proceeds being tied up in the estate, although some courts have held even if the policy contains entity coverage, the policy proceeds are not part of the estate because the main purpose of the policy is to protect Ds&Os. The murkier arena is when considering a policy with both Side A and B coverages v. a policy with A/B/C coverages, but generally speaking an A/B only policy is safe from becoming part of the bankruptcy estate under most situations. The concern arises where Side C coverage is present. Sliding scale - Side A (safest) to full A/B/C (danger of proceeds being tied up in the court). 26

14 D&O Policy Terms That May Help Ensure Proceeds Are Paid to the Ds&Os Key D&O Policy Provisions to Consider Change in Control Provision Definition of Financial Insolvency and Presumptive Indemnification Insured v. Insured Exclusion Priority of Payments Provision Waiver of Automatic Stay Provision Advancement of Defense Costs Dedicated Side A Limits Excess Policy Considerations 27 Key D&O Policy Provisions to Consider Change in Control Provisions Typical Provision:» If, during the Policy Period, there is a Change in Control, the coverage provided under this Policy shall continue to apply but only with respect to a Claim against an Insured for a Wrongful Act committed or allegedly committed up to the time of the Change in Control; and (a) coverage will cease with respect to any Claim for a Wrongful Act committed subsequent to the Change in Control; and (b) The entire premium for the Policy will be deemed to be fully earned immediately upon the consummation of a Change in Control.» Change in Control means... the appointment of a Receiver, Conservator, Liquidator, Trustee, Rehabilitator, or any comparable authority, with respect to the Parent Company. 28

15 Key D&O Policy Provisions to Consider (cont.) Implication for Insureds:» Policy goes into run-off for remainder of policy term» No coverage for acts after effective date of transaction» Premium is fully earned Options:» During policy renewal, request removal of bankruptcy event as triggering the change in control provision» If event occurs during the policy period with a bankruptcy trigger in the provision, seek waiver of the change in control» Otherwise, work with broker and counsel to secure new D&O coverage as necessary for post-filing wrongful acts 29 Key D&O Policy Provisions to Consider (cont.) Definition of Financial Insolvency and Presumptive Indemnification» D&O policies usually contain two separate retention provisions for Side A coverage (direct coverage for non-indemnifiable loss) and Side B coverage (corporate reimbursement for indemnifiable loss). Typically, there is no retention for Side A coverage. In contrast, the retention applicable to Side B or C coverage is much larger (e.g., up to or exceeding $1 million for large publicly traded corporations).» D&O policies generally contain presumptive indemnification provisions that provide if the corporation is required or permitted to indemnify its Ds&Os, then the larger retention applicable to Side B coverage will apply. Thus, irrespective of whether the company actually indemnifies its Ds&Os, if indemnification is permissible, the larger Side B retention will apply.» Presumptive indemnification provisions typically do not apply when the insured entity is unable to indemnify its Ds&Os as a result of financial insolvency or financial impairment.» Some policies equate financial insolvency with the insured organization becoming a debtor-in-possession under the Bankruptcy Code, or with a receiver, liquidator, rehabilitator, etc. being appointed. 30

16 Key D&O Policy Provisions to Consider (cont.)» Other D&O policies define financial insolvency or impairment as the inability financially to advance defense costs under applicable law. In addition, some policies do not define the terms financial insolvency or financial impairment. Implication:» Unless the policy defines financial insolvency to include a debtor-inpossession, D&O insurer may argue that a debtor-in-possession is or could be required, or permitted, by the Court to indemnify its Ds&Os. The insurer may withhold first dollar coverage for defense costs leaving the Ds&Os to pay the Side B retention which is often substantial. Options:» Request inclusion in the D&O policy of a specific definition of financial insolvency that includes debtor-in-possession or other bankruptcy filing event.» Dedicated Side A excess limits to drop down if the primary D&O insurer denies advancement of defense costs. 31 Key D&O Policy Provisions to Consider (cont.) Insured v. Insured ( I v. I ) Exclusion The terms of the I v. I exclusion vary. Generally, the I v. I exclusion bars coverage for claims brought by or claims brought by or on behalf of one insured against another insured. The main issue in the bankruptcy context is whether a bankruptcy trustee, creditors committee or assignee of the debtors or creditor rights constitutes an Insured under the policy such that claims brought by them against the debtor s Ds&Os trigger the I v. I exclusion. 32

17 Key D&O Policy Provisions to Consider (cont.) Insurers argue that because a bankruptcy trustee stands in the debtor s shoes for purposes of asserting claims against its Ds&Os, the I v. I exclusion bars coverage for the trustee s claims just as it would bar coverage for claims brought in the name of or by the debtor itself. Trustees and creditors committees (and Ds&Os) argue, however, that the debtor and the trustee are legally separate entities and that the purpose of the I v. I exclusion is not implicated in the bankruptcy context because the actions by trustees or creditors committees are not collusive. 33 Key D&O Policy Provisions to Consider (cont.) Options:» Most insurers will grant a carveback to the I v. I exclusion for claims brought by the trustee:» Exclusion applies unless the claim: is brought by the Bankruptcy Trustee or Examiner of the Company or any assignee of such Trustee or Examiner; or any Receiver, Conservator, Rehabilitator, Liquidator, Custodian, or comparable authority of the Company. 34

18 Key D&O Policy Provisions to Consider (cont.) Priority of Payments Provision» If there is a single limit of liability and claims are brought that trigger coverage provided to both the corporate entity (Side C) and to its Ds&Os (Side A), a bankruptcy trustee or creditor will argue that the policy and its proceeds should be considered an asset of the bankruptcy estate and as a result the policy proceeds cannot be used to pay costs of Ds&Os. Options:» Include an order of payments provision that specifies that the Ds&Os have first claim to the policy proceeds. This should provide a basis for the bankruptcy court to allow the Ds&Os access to the proceeds of the policy to pay for defense expenses and potential liabilities. KSU # Key D&O Policy Provisions to Consider (cont.) Sample Policy Language: It is understood and agreed that if Loss, including Defense Expenses, shall be payable under more than one of the INSURING AGREEMENTS, then the Insurer shall, to the maximum extent practicable pay such Loss as follows: first, the insurer shall pay that Loss, if any, which the Insurer may be liable to pay on behalf of the Insured Persons under INSURING AGREEMENT (A); second, the Insurer shall pay that Loss, if any, which the Insurer may be liable to pay on behalf of the Company under INSURING AGREEMENT (B); and third, the Insurer shall make such other payments which the Insurer may be liable to make under INSURING AGREEMENT (C) or otherwise. 36

19 Key D&O Policy Provisions to Consider (cont.) Waiver of Automatic Stay Provision Typical language: If a liquidation or reorganization is commenced by the Parent Company under Title ll of the United States Code, then with respect to a covered Claim, the insureds hereby:» (a) waive and release any automatic stay or injunction to the extent it may apply in such proceeding to the proceeds of this Policy under such Bankruptcy Law; and» (b) agree not to oppose or object to any efforts by the Insurer or any Insured to obtain relief from any stay or Injunction applicable to the proceeds of this Policy as a result of the commencement of such liquidation or reorganization proceeding. Benefit: Insurer should be able to cover Ds&Os despite the bankruptcy of the company. Enforceability of provision has not been meaningfully tested yet in the courts. 37 Key D&O Policy Provisions to Consider (cont.) Advancement of Defense Costs The D&O policy should have a provision stating that the insurer will pay covered Defense Costs on an as-incurred basis. If the D&O policy does not specify that an insurer must pay defense costs as they are incurred, then the Ds&Os may find themselves in a situation where they are obligated to pay millions of dollars of defense costs out of their own pockets until a claim is finally resolved and the insurer is obligated to pay the covered defense costs and the damages. A typical D&O policy that has an advancement of defense costs provision will also provide that if it is finally determined that any defense costs paid by the Insurer are not covered under this Policy, the Insureds agree to repay those non-covered Defense Costs to the Insurer. Many carriers will agree to delete this latter requirement. 38

20 Key D&O Policy Provisions to Consider (cont.) Dedicated Side A Limits Typical Benefits:» No presumptive indemnification;» Specifically non-rescindable;» Full severability of the application and conduct exclusions;» Policy drops down as primary in the event of insolvency of the underlying carrier;» Less restrictive fraud exclusion;» Less restrictive I v. I exclusion;» Covers Ds&Os where company refuses to indemnify; and» Covers where primary policy has been deemed an asset of the debtor s estate in bankruptcy. 39 Key D&O Policy Provisions to Consider (cont.) Other Excess Policy Considerations Several recent decisions suggest an excess D&O insurer is not obligated to pay covered claims or defense costs unless the underlying D&O insurer itself has fully paid the limits of its policy. See Qualcomm, Inc. v. Certain Underwriters at Lloyd s, 161 Cal. App. 4 th 184 (2008). If the D&O policy does not contain flexible exhaustion language that reduces restrictions on payments of loss, there is a possibility that the insurer will argue that the excess D&O policy's payment obligations will never be triggered if the underlying D&O insurer settles with the policyholder for anything less than full policy limits. 40

21 Key D&O Policy Provisions to Consider (cont.) Options: An excess D&O insurance policy should have a provision that specifically states that payment of the underlying policy limits for covered claims, by either the insurer or the policyholder, or a combination of both, is sufficient to exhaust the underlying coverage. All D&O excess coverage should also include clear follow form provisions that state precisely the underlying policies that govern the application of D&O coverage in the program. A policyholder purchases follow form excess D&O insurance in order to obtain seamless coverage for the same set of potential losses. 41 Bankruptcy and Directors & Officers Liability Insurance Considerations for Protecting and Accessing the Insurance Policy and Proceeds Scott Wallace, Atlanta Marsh USA 42

22 Run-off Coverage Triggers Coverage is automatically triggered by the change of control provision in the policy: Policy goes into run-off for remainder of policy term No coverage for acts after effective date of transaction The entire premium is fully earned Primary D&O (AIG example language) Excess D&O Clause 12 Organizational Changes: If the Named Entity shall consolidate with, merge into, or sell all or substantially all of its assets to any other person or entity or group of person or entities acting in concert; or any person or entity or group of persons or entities acting in concert shall acquire management control of the named entity coverage converts to prior acts only. Clause 10 Discovery: The Insurer shall offer such discovery period pursuant to such terms, conditions, exclusions and additional premium as the Insurer may reasonably decide. All Excess policies follow form of the primary policy. 43 Fiduciary (Chubb example language) Excess Fiduciary Run-off Coverage Triggers Clause 16 Acquisition by another Organization: If the Parent Organization merges into or consolidates with another organization and the Parent Organization is not the surviving entity; or another organization or person or group of organizations and/or persons acting in concert acquires securities or voting rights which result in ownership or voting control by the other organization or person of more than fifty percent (50%) of the outstanding securities or voting rights representing the present right to vote for the election of or to appoint directors or manager of the Parent Organization coverage converts to prior acts only. Upon notice and at the request of the Parent Organization, the Company shall provide to the Parent a quotation for an extension of coverage.any coverage extension pursuant to such quotation shall be subject to such additional or different terms, conditions and limitations of coverage and payment of such additional premium, as the Company in its sole discretion may require. Excess policy follows form of the primary policy. Employment Practices (Travelers example language) Clause 12 Organizational Changes: If the Named Entity shall consolidate with, merge into, or sell all or substantially all of its assets to any other person or entity or group of person or entities acting in concert; or any person or entity or group of persons or entities acting in concert shall acquire management control of the named entity coverage converts to prior acts only. Clause 10 Discovery: The Insurer shall offer such discovery period pursuant to such terms, conditions, exclusions and additional premium as the Insurer may reasonably decide. 44

23 Run-Off Option plus Ongoing Coverage Stand alone pre-bankruptcy run-off program plus stand alone post-bankruptcy program. Pre-Bankruptcy 6-Year Run-Off Program Post Bankruptcy Program *Day Zero Features Separate dedicated run-off limits for incumbent D&Os. Non-cancelable term assures run-off duration. Clean sheet program with separate limits for post bankruptcy company. *Day Zero is determined when the insured emerges from bankruptcy. 45 Run-Off Option plus Ongoing Coverage for Subsidiary Bankruptcy Continuous pre-bankruptcy program for Parent plus Stand alone post-bankruptcy program for Subisidiary. Pre-Bankruptcy Program (Parent and Subsidiary) Post Bankruptcy Program continues (Parent with prior acts coverage for Subsidiary) Renewal Date Post Bankruptcy Program (Subsidiary) Day Zero* Features Single limit for Parent, inclusive of Subsidiary s pre-bankruptcy exposure. Clean sheet program with separate limits for post bankruptcy Subsidiary company. * Day Zero is determined when Subsidiary emerges from Bankruptcy Benefits Corporate Protection via corporate reimbursement and entity coverage No disruption to Parent policy Considerations A-B-C limits are shared by entity and directors and officers Potential limit dilution issue Greater likelihood of primary policy becoming an asset of bankruptcy estate No guarantee for prior acts coverage of Subsidiary. Parent s pricing for on-going coverage will be impacted by Subsidiary s prior acts exposure. 46

24 Run-Off Option plus Ongoing Coverage Continuous pre-bankruptcy program for Parent plus stand alone run-off and on-going program for Subsidiary. Pre-Bankruptcy Program (Parent with Subsidiary exclusion) Post Bankruptcy Program continues (Parent with Subsidiary exclusion) Pre-Bankruptcy 6-year run-off Program (Subsidiary only) Post Bankruptcy Program (Subsidiary) Features Single limit for Parent, exclusive of Subsidiary s pre-bankruptcy exposure. Separate limit for Subsidiary run-off program. Clean sheet program with separate limits for post bankruptcy Subsidiary company. * Day Zero is determined when Subsidiary emerges from Bankruptcy Day Zero* Benefits Corporate Protection via corporate reimbursement and entity coverage for Parent Minimal disruption to Parent policy Flexibility on program structure for Subsidiary run-off coverage Considerations Expensive Claims administration may be complex / Other Insurance issues. May have difficulty securing similar size and scope of program for the run-off policy. 47 Securing Run-off Coverage Incumbent markets may have a competitive advantage in placing this coverage They know the existing board, management, operations and history of company good or bad Depending on timing of the deal to the expiration date, there may be unearned premium at play If close to the renewal date, will seek to ensure that the existing policy provisions are competitive with what would have been received at renewal enhancements for the run-off period can usually be negotiated. Outstanding claims most run-offs are extensions of existing limit in place as opposed to a fresh aggregate. Outstanding claims can be an issue if the existing limits are being eroded. An alternative would be to seek competitive quotes from non-incumbent markets. Communication with underwriters is critical. 48

25 Immediate Strategy Activities Run-Off Confirm Timeline and Due Dates Submission information needed Confirm lines of coverage and limits desired Request run-off quotes from existing carriers Unearned premium to be applied to run-off premium Premiums to include commission Target range 1X - 1.5X rating Request run-off quotes from non-incumbent carriers, if needed Arrange for underwriting conference calls, if needed

26 Questions Self Study Code: