First, what proof of wrongdoing is required for the exclusions to apply? The base policy form typically bars coverage for wrongdoing "in fact." Often, insurers offer an endorsement that prohibits application of these exclusions unless and until there is a "final adjudication" of intentional wrongdoing. Even with the more favorable "final adjudication" requirement, insurers have attempted to obtain such a "final adjudication" in the coverage case, not the underlying litigation. Accordingly, try to negotiate a "final adjudication in the underlying claim" requirement.

If your company is sold, "tail" insurance should be purchased to provide coverage for claims filed after the date of closing that relate to wrongful acts occurring at or prior to closing. In addition, the coverage provided by the acquiring entity should be seamless, so that there is no gap for "wrongful acts" or "interrelated wrongful acts" that "straddle" the closing date. Insurance counsel or experts should be consulted whenever a major transaction is at hand to ensure that the run-off coverages and the new policies provide seamless coverage.

In addition, some D&O carriers insert provisions within ADR clauses that choose a particular state's law (often New York law) and/or that purport to render inapplicable the maxim of contract construction that insurance contracts should be construed against the insurer as the drafter, one of a policyholder's most powerful weapons in a coverage dispute. If the arbitration clause is deleted, this harmful negation of the presumption will also be removed.

This issue is particularly problematic for companies incorporated in Delaware in light of a recent decision holding that a board could amend the bylaws to eliminate former officers' or directors' advancement entitlement even after a loss has occurred.

First, some bankruptcy courts consider standard D&O policies to be assets of the bankrupt company because of the Sides B and C protection afforded to the company. Second, since a standard D&O policy combines coverage for both indemnified and non-indemnified losses, the policy limits may be exhausted or depleted by indemnified losses, leaving directors and officers uninsured or with little Side A coverage.

Two types of Side A excess coverage exist: standard follow-form excess Side A coverage, and excess umbrella Side A coverage, sometimes called Difference in Condition (DIC) coverage. Under the former type of Side A coverage, if the primary policy contains problematic language, the excess follow-form Side A-only policy may not drop down and pick up coverage when the primary policy has failed.  Excess umbrella Side A-only DIC coverage, in contrast, is designed to be broader than primary coverage, and should "drop down" and function as primary insurance when the primary carrier has canceled or rescinded coverage, or when the corporation has refused to indemnify the director or officer in question.

The best practice is to coordinate closely with the risk management and law departments whenever a "litigation-hold" notice is issued on the one hand, and notice of a claim or circumstances is sent to any carrier on the other. The carrier will respond to the notice letter by requesting more information, denying coverage or accepting coverage, often under a reservation of rights. You should hire coverage counsel to advise you of your rights and obligations in each scenario, including the right in some states to independent counsel, retained by you at the carrier's expense, when the insurer accepts a defense under a reservation of rights. In addition, do not settle the underlying action without first obtaining the carrier's consent unless the carrier has materially breached the contract by categorically denying coverage. In most states, settlement without consent voids coverage unless the insurer has materially breached.

The above article is reprinted from the June 2010 edition of Risk Management Magazine.