D&O WARS: CORPORATE SHAREHOLDERS PAY PREMIUMS; DIRECTORS, OFFICERS DO NOT.

 

Underwriting vs. Claims, again.

    Directors and Officers Insurance Premiums are paid by their corporations.  That of course means that D&O Premiums are really paid by the Shareholders.  See Louise Story, "Ex-Bank Executives Settle F.D.I.C. Lawsuit" (New York Times Online, December 13, 2011).

   D&O Policies are Liability Insurance Policies of course.  D&O Policies provide Insurance Coverage for Defense and Indemnity.  Directors' and Officers' Defense Fees are paid as they are incurred.  The effect is that covered Directors and Officers hire large law firms to provide them with the best possible defense.  See the list of counsel representing the Defendant Officer in Federal Deposit Insurance Corp., as Receiver for Indymac Bank, F.S.B. v. Perry, 2011 WL 6178544 (C.D. Cal. December 13, 2011), Download FDIC as Receiver for Indymac Bank, FSB v. Perry (C.D. Cal. Case No. 11.5561, Order Denying Defendant's Motion to Dismiss, Filed Dec. 13, 2011) PUBLIC ACCESS.  Parenthetically, this is not a guarantee of success on the merits.  See id. at *2-*4 (Motion to Dismiss of Defendant Officer, based on California Business Judgment Rule or "BJR," was denied because, as the Court pointed out in its opinion, the California Business Judgment Rule "does not apply to corporate decisions of officers in California," no case has ever applied it to officers under California law, and California statutes on the Business Judgment Rule expressly apply to directors without conferring BJR protection on corporate officers at all).

   In yet the latest visible manifestation of a sometimes covert war between Underwriting and Claims, some Insurance Companies are marketing D&O Coverage to apply to "clawbacks," i.e., to claims for "the return of money people never should have received."  Reuters Breaking Views, "Pushing Back on Clawbacks" p. B2, col. 1 (New York Times Nat'l ed., "Business Day" Section, Tuesday, December 20, 2011), published in an edited version online with the headline, "Pushing Back on Clawbacks".

   It seems that there is an available argument that Public Policy should prohibit Insurance Coverage for the underlying acts that result in the clawback claims.  Since the Financial Institutions, Reform, Recovery and Reinforcement Act of 1989 ("FIRREA") provides for clawback claims in cases of "gross negligence" and in cases subject to State causes of action at least equal to "gross negligence," whatever the State causes of action may be labeled and even if the State claims are simply labeled as "negligence," see F.D.I.C. v. Perry, 2011 WL 6178544 at *1 n.1, it seems that Public Policy may be involved to raise an argument against providing the perpetrators with Insurance Coverage against clawback claims.

   This may not mean that Insurance Companies will not necessarily pay Defense or Indemnity expenses for clawback claims, however.  See Reuters Breaking Views in the New York Times of Tuesday, December 20, 2011, supra:  "And courts have ruled that insurance covering similar kinds of improper payments isn't enforceable.  But if insurers want to pay, there's nothing to stop them.  Most have agreed generally not to challenge reimbursement."

      In the end, unfortunately, Underwriting may still insist on marketing the "clawback coverage".

 

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Comments

[George]

Hey,
Thanks! Great post you have written on "D&O WARS: CORPORATE SHAREHOLDERS PAY PREMIUMS; DIRECTORS, OFFICERS DO NOT.". Really I can say that your post is very informative, I'll come across your blog again when you will update it with new.
Thanks,
George
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