From GCL to E&O, With a Bit of D&O: Getting the Most Out of Your Insurance Coverage David R. McDonald, Partner Nossaman Guthner Knox & Elliott LLP 50 California Street, 34 th Floor San Francisco, CA 94111 Phone: 415.398.3600 Email: dmcdonald@nossaman.com Copyright, 2005 Nossaman Guthner Knox & Elliott, LLP. All Rights Reserved. The information contained herein does not constitute a legal opinion and should not be relied upon by the reader as legal advice or be regarded as a substitute for legal advice.
Outline CGL coverage (duty to defend, indemnify) Other sources of coverage Business Interruption Insurance Advertising Liability Insurance Director s and Officer s Liability Ins. Approaches to Settlement Cost effective approaches to case management 2
Definitions Type of Liability Coverage First Party Liability (All Risk or Named Peril) Third Party Liability (CGL) Environmental Impairment Liability (EIL) Level of Coverage Primary Excess Umbrella 3
Definitions (continued) Direct insurance vs. reinsurance Occurrence policies vs. claims made policies 4
Anatomy of CGL Policy 5
Insuring Agreements Duty to Indemnify Defines scope of coverage Specified limits Duty to Defend Defines scope of defense obligation Unlimited dollar value 6
Duty to Indemnify Insurer must pay "all sums that the insured is legally obligated to pay as damages because of an occurrence." 7
Duty to Indemnify Issues Requires legal obligation. Requires lawsuit and potentially, court order to pay. Powerine Recent case-- No coverage for post tender expense, settlements w/o insurer knowledge/consent. Voluntary payment. Not applicable where insurer wrongfully denies tender, abandons policyholder. (Low v. Golden Eagle, 110 Cal. App. 4 th 1532). 8
Duty to Indemnify Issues (continued) Requires Property Damage Recent case-- No coverage for loss of computer data during upgrade as data not tangible/physical. Ward General Ins. v. Employers Fire Ins., (4 th App. Dist.) Occurrence--act or event or series of like acts or events during policy period Number of occurrences During policy period Multiple causes of loss; some covered, others not 9
Indemnity--Exclusions Intended or Expected Exclusion Act vs. damage Common and accepted practices No coverage for illegal acts (General Reinsurance v. St. Jude Hospital 107 Cal. App. 4 th 1097) Self insured employer improperly delayed paying claim for employee benefits. 10% penalty assessed. Insurer not obligated to pay penalty. 10
Indemnity Exclusions (continued) Owned Property Exclusion Soil vs. groundwater Threatened damage to groundwater versus actual damage Pollution Exclusion Sudden and accidental Absolute 11
Duty to Defend State law governs Potentiality of coverage Determined at outset of underlying litigation Triggering Event claim, administrative order or lawsuit (Foster Gardner) Duty to provide complete defense Some claims covered/others not (Buss) Insured in some years/uninsured or self insured in others (Aerojet) 12
Duty to Defend (continued) Notice and tender to insurers Recent case--insured will lose coverage if policy requires insured to provide recorded statement and insured refuses to do so after request by insurer, (Brizuela v. CalFarm Ins. Co., 116 Cal App. 578). 13
Duty to Defend (continued) Choice of underlying counsel Categories of expense that insurer must pay Legal fees associated w/ defending underlying case Legal expense Investigatory expense (Aerojet) Insurer must pay reasonable fees/expense 14
Late Notice Late Notice will preclude coverage under occurrence policies only if prejudice is shown to the carrier. Generally this rule wouldn t apply to claims made policies, however recent case holds that in certain cirmumstances an insurer will be equitably estopped from denying coverage because a claim was submitted under a claims made policy after the policy period, (Root v. American Equity Specialty Ins. Co. 2005 Lexis 1005). Caution: Case limited to facts proper notice to carriers also advised 15
Insured s Duty Not To Make Misrepresentations on Coverage Application Ins. Code 331 & 359 - Heavy burden of disclosures Parties must disclose in good faith all facts within his/her knowledge which are or which he/she believes to be material to the contract Extends to both intentional and unintentional misrepresentations, recent case--mitchell v. United National Ins. Co., 127 Cal. App. 4 th 457 (2005) 16
Missing Policies In most jurisdictions, not need actual policy Where reasonably diligent search not locate policy, secondary evidence admissible Oral testimony of brokers and employees admissible. (Dart Industries 29 Cal 4 th 1059 (2002)) 17
Other Sources of Coverage Policies bought by others (e.g., Additional Insured certificates) Recent cases: Minimal causal connection required for general to obtain coverage under subcontractor s policy. Vitton v. Pacific Ins. Landlord s coverage excess to tenant s coverage. Hartford Cas. v. Travelers Indemnity 18
Other Sources of Coverage (continued) Policies obtained through corporate acquisitions Recent cases no coverage for successor corporation (Henkel v. Hartford 29 Cal 4 th 934) Henkel buys Amchem s product line along with all related liabilities. Insurance not cover Henkel s losses for bodily injuries caused by Amchem products. 19
Other Sources of Coverage (continued) Henkel (continued) Henkel liabilities caused by contract. Not satisfy exceptions: (1) transaction is consolidation, merger or continuation, (2) acquisition of business destroys plaintiffs remedies against original manufacturer, (3) no statutory imposed successor liability. Assignment requires insurer s consent (not to be unreasonably withheld). Exceptions not applicable: at time of assignment (1) benefit already reduced to claim for money due, or (2) insurer already breached duty. 20
Business Interruption Arson (or terrorism) causing fire (or other damage) on site Business interruption requirements Named peril Directly caused property damage at covered location Interrupted business Caused loss of income 21
Advertising Injury Coverage Insured must have engaged in advertising Underlying action must involve enumerated advertising offense Currently include defamation, invasion of privacy, disparagement of another s good s products or services, misappropriation of advertising ideas or style of doing business, rights of privacy. Not include unfair business competition claims (Bank of the West) Causal link between offense and injury 22
Advertising Injury (continued) Recent cases--requires wide spread promotion to public direct solicitation insufficient. Rombe Corp. v. Allied Ins. Co. 128 Cal. App. 4 th 482 (2005) 23
Director s and Officer s Coverage Types of coverage Corporate reimbursement coverage Individual D + O liability coverage Sued solely because an officer or director of corporation (or where acts are inseparable) Discharging duties to corporation when actionable conduct arose Excludes claims arising out of their remuneration or dishonesty 24
Cost-Effective Management of Coverage Litigation At outset, game plan for litigation w/ budget. Make decisions re probability of various approaches. Periodic meetings w/ outside counsel re status, alternative approaches to case handling. Outsourcing where possible. Mediation. 25
Settlement: When and How Various times for settlement: After notice; before coverage lawsuit After suit filed but before discovery begins While key motions pending During expert discovery During trial Considerations Settle defense, indemnity or both Top down or bottom up Exhaustion 26
What Constitutes a Valuable D&O Investment? Severability Application Exclusions Policy Rescission Size of D&O Tower Side A, B and C and Side A Towers Conduct Exclusions In Fact versus Final Adjudication Continuity Issues with Moving Coverage Excess Layers Follow Form Language Specific Litigation Exclusions 27
What Drives Settlement Values? Lead Plaintiff Type of Case Settlement Value Damage Amount SEC Involvement Venue 28
Questions???