Beware the pitfalls of D&O disputes

Directors purchasing directors & officers (D&O) insurance should be aware of the pitfalls and the fact that disputes are common in the event of claims in this line of business, but there are some key things they can do to ensure their policy protects them and pays out when it should.

That is the advice of John Curran, partner at Fenchurch Law, specialising in insurance disputes with a particular focus on D&O, energy, industrial, and institutional risks. The firm will represent only policyholders, and not insurers themselves, in its work.

Curran will give a speech today (Wednesday, June 5) at 9am in the Learning Hub titled ‘D&O insurance—when directors run for cover’, which will cover some of the dangers of this policy and offer advice on how to avoid them.

Insurers regularly dispute and delay claims on these policies, he notes, and always at what is a particularly difficult time for the policyholder.

“The policyholder may already be under investigation from the regulator and being sued on top of this. At such a time, it is extremely unlikely they will then also sue their insurer for not paying up.

“It is a systemic problem with these policies. The policyholder ends up under huge pressure and is more likely to compromise with the insurer.”

Curran said there are four key things that policyholders should do ahead of agreeing to a new policy.

The first is to ensure they have the best possible coverage for a regulatory investigation including a very early trigger mechanism, which might even kick in before an investigation has formally begun.

The second is to minimise disclosure obligations to the insurer as much as possible, which will reduce the likelihood of later disputes.

The third is to try to include clauses that insist on the use of dispute resolution, and that payments are made up front even if a dispute is ongoing. “This can take financial pressure off the policyholder,” he said.

Finally, he suggests including what he calls a sleep-easy cover, which means that a director remains covered for six years after retiring or leaving the business.

“Once you leave, you have no control over whether the company will buy that insurance in the future. This allows you to sleep at night knowing coverage is in place,” he concluded.