Monitoring Counsel: The Value of a Second Opinion in Coverage Disputes

How many times have you found yourself in a compromising coverage dispute because of advice from counsel that causes huge reputational damage, gives competitors something to market against you, and ultimately impacts market penetration in a book of business, the way policies are priced, and the scope of coverage?

For example, Directors & Officers (“D&O”) public company insurance has gone through an evolution since 1990 that has led to unfavorable results for the public company D&O class of business.

When an insurance company contests the existence or scope of coverage under a policy, it must be aware of the track record of the judge and jurisdiction in which the litigation is brought. Adverse decisions in the wrong jurisdiction before the wrong judge can have long-lasting implications.

Do not initiate litigation in those jurisdictions if the results will likely be unfavorable to you. Fold your cards if you end up in one of these venues through no choice of your own.

Consider Nordstrom, Inc. v. Chubb & Son, Inc., 820 F. Supp. 530 (W.D. Wash. 1992), aff’d, 54 F.3d 1424 (9th Cir. 1995).

A large market insurer decided to challenge the existence of entity coverage under a public company D&O policy. When Nordstrom and its directors and officers faced securities class actions, the market insurer funded only half of the settlement and defense costs, arguing that some of the exposure belonged to the uninsured corporate entity. The court rejected that allocation. The judge in Washington state ruled that the policy not only provided entity reimbursement by the D&O insurer for indemnification of its D&O’s but also provided coverage to the company for its independent corporate liability under securities laws. Because Nordstrom’s liability was concurrent, rather than derivative, with that of its directors and officers—the insurer was responsible for the entire settlement.   

Overnight the exposure to D&O insurers doubled and allocation arguments evaporated in the adjustment of securities claims under D&O policies.

Today, although Nordstrom was a public company decision, private company D&O has evolved into an all-risk policy—not only providing entity coverage, but coverage for anything not excluded.

I am here not only as an expert witness, but as an adviser and monitoring counsel on complex claims. Reach out. Know what you don’t know and ask for help or second opinions.