The Origins of Public Company D&O Panel Counsel: How and Why It Developed

In the late 70’s and early 80’s, the public company Directors and Officers (“D&O”) policy was still very much a developing product. It was never intended to be an airtight contract replete with exclusions, nor was it a model of clarity or a poster child for litigation certainty. 

It had a D&O Side A coverage part that covered alleged wrongful acts of directors and officers not indemnifiable under the corporate by-laws of the company that employed them. Where the alleged wrongful acts of the directors and officers were indemnifiable by the corporate entity under its  by-laws, the corporate entity would advance defense costs or indemnification amounts on behalf of the directors and officers and then seek reimbursement from the D&O insurer under the corporate reimbursement section of the policy. 

The D&O policy in the 70’s and 80’s was therefore not a defense and indemnity policy but an indemnification reimbursement policy. It was primarily intended to guard against liability arising under the Securities Act of 1933 and the Securities Exchange Act of 1934, including claims involving alleged financial misrepresentations or non-disclosures in connection with IPOs, secondary issuances and the financial disclosures required of publicly traded companies. 

The policy was never intended to be a vehicle for litigation. Instead, it was intended to be a contract that required collaboration, cooperation and negotiation—a working partnership between insurer and insured. And it was very much a work in progress. 

In the late 70’s and early 80’s, the appetite for the product began to grow with the advent of the class action securities bar, spearheaded by the Milberg Weiss firm (now Milberg) and other securities class action firms.

At the time, the public D&O form gave the insured the right to select and control defense counsel. As the plaintiffs’ bar grew in the securities class action space, AIG, as the lead market, could not continue to allow insureds to select defense firms that were not qualified to defend against the growing avalanche of securities class claims.

I came up with the idea of a D&O panel counsel list attached to the policy, consisting of the biggest and best securities defense firms from which an insured would have to choose counsel in the jurisdiction where it was sued. I went around the United States and enlisted these firms to become part of our D&O program, with the caveat that they could not represent the insured in a coverage or allocation dispute against AIG. In effect, we had the best and brightest defending the securities litigation and not suing AIG on coverage or allocation. 

Remember, the entity was not covered for its own liability under the securities laws, but only for its indemnification of the D&Os. As a result, every class claim that named both the entity and the individuals, and was being defended by the same panel firm, required an allocation negotiation over defense fees and, ultimately, settlement.

AIG and National Union Fire Insurance Company were sued repeatedly between 1980 and 2000, but our ability to negotiate successful outcomes on coverage and allocation made us the lead insurer in this segment. National Union grew from a company with $100 million in top-line revenue to $2 billion, while AIG went from $20 billion to $100 billion in revenue by 2000 and became the second-largest company in the world by revenue. 

One of the major contributing factors to that growth was the panel counsel program and bringing the best firms in the world into a working partnership with us to litigate securities claims. We knew when to fight and where to fight coverage and allocation. We negotiated good deals with our insureds, won their confidence and avoided making bad case law because we knew when to fold and when to hold our cards.