Ensuring that the right directors and officers (D&O) liability insurance policy is in place, insured by an insurer who performs on claims, is the most important thing a director or officer can do to protect themselves before a claim is made against them. Once a claim is made there are steps that must be taken to maximise that policy’s performance. In my last article,   ‘Avoidance of Doubt’ I discussed the importance of getting your claims notification right. This article addresses the steps necessary to ensure your policy performs as drafted.

Proving claims fall within coverage
In most jurisdictions the insured has a duty to positively prove that the loss falls within the coverage of the policy. Put technically, the insured must evidence: (1) that the proximate cause of the loss was an insured peril; (2) the quantum of that loss; and (3) when he or she first became aware of the loss.

The best way to protect against delays and arguments is to keep your insurer involved in the claims process

In practice, the easiest way to prove a loss is covered is by checking off the positive requirements of a particular insuring provision of the policy and any relevant definitions. In a D&O policy, most forms have an ‘all-risks’-style insuring agreement which provides coverage for losses suffered by directors and officers as a result of claims brought against them during the policy period. Accordingly, a director or officer claiming on their policy will normally have to show (i) that there is a ‘claim’ against them (within the definition in the policy); (ii) that the claim was made during the policy period; and (iii) that the claim is being made against the director or officer because of some act, error or omission in their role as a director or officer, or because of their position. In an issued lawsuit, providing a copy of the court documents should be sufficient for an insurer to begin advancing defence costs; however, if the claim is simply a written demand that the director or officer pay the claimant or is in a regulatory or administrative context, care needs to be taken to ensure all policy requirements are met and that the policy is properly triggered.

Once the underlying claim has been resolved, a final determination on coverage can be made, particularly with regard to any damages or other payments a director or officer may have to make to the claimant. Here, the policy’s definition of ‘loss’ is vitally important and the insured should ensure they explain the basis for any award or settlement clearly so that the insurer can quickly discern how the amounts owed fall within the policy.

It should also be remembered that in most jurisdictions the insured is only required to prove the elements of the loss to the civil standard of the ‘balance of probabilities’ or ‘preponderance of the evidence’, i.e. that it is more likely than not. Attempts by insurers to apply a higher burden of proof should be resisted.

Defence of the claim
The policy itself will often modify the insured’s duties in handling the claim. The insured in a D&O claim is usually entitled to conduct the defence. However, insurers require that their consent be obtained before making significant decisions in the matter. For example, most D&O policies will require consent before the insured incurs defence costs, so the selection of defence counsel should discussed with the insurer. Many insurers have their own billing guidelines to present to defence counsel. Unless your policy states otherwise, such guidelines are just that – guidelines – and there is no contractual obligation for your defence counsel to follow them in order for their costs to be covered under their policy.

Your broker should have an experienced specialist team of D&O claims handlers who have worked on numerous D&O claims from notification through payment and can guide you through the process

Nevertheless, compliance with such guidelines, if reasonable, and acquiring insurer agreement to actions and strategy beforehand, will speed up payments and avoid disputes over defence cost invoices.

Insurer’s consent is usually required for any offer or acceptance of a settlement. To avoid delay and later disputes over the reasonableness of the settlement, providing reasons for the amount and timing of the settlement to your insurer can ensure either that their consent is given in a timely manner or at least minimise their ability to reasonably argue a lack of consent as a defence. The best way to protect against delays and arguments is to keep your insurer involved in the claims process so if you need a quick decision they are already fully briefed on the circumstances and can provide an answer without the need to spend time reviewing information.

In certain circumstances, insurers will have a right to take over the conduct of the defence of a claim or settlement negotiations, particularly in cases where there is a conflict between board members or a conflict between an individual director or officer and the company. Where insurers wish to rely on an exclusion to avoid coverage, the burden of proving the exclusion applies falls on insurers, not on the insured. In well-drafted D&O policies, many of the exclusions will either not apply to defence costs or not be triggered unless and until there is a final finding against a director. Once an insured has proven the claim falls within coverage, most policies will have a provision that requires the insurer to begin advancing costs – even if they think an exclusion applies.

Involving your broker
Most directors and officers are fortunate enough to not have to use their D&O policy. When they do have a claim, the mechanics of making a claim and getting their costs paid are unfamiliar. Your broker should have an experienced specialist team of D&O claims handlers who have worked on numerous D&O claims from notification through payment and can guide you through the process. Their experience can provide a helpful sense check on whether insurers are acting reasonably or not in the handling of a claim and they can act as advocates for you with insurers who are not honouring the terms of their policy.

For more information email stephanie.manson@aon.co.uk or call +44 (0)207 086 4928