I recently participated in a panel at the Association of Business Trial Lawyers Annual Meeting – “Bad News Delivered: The Board Meeting and Crisis Management.”  Among other topics, the panel discussed the role of insurance counsel in crisis management, and addressed the following questions:

Who Is The Client? 

When meeting with a board in a time of crisis, it is critical to identify whether your client is the company or the board.  And if it is the company, the board must understand that while they are the decision-makers for your client, they themselves are not your clients.

Depending on whom you represent, your advice and strategy may differ.  Although acting on behalf of the company and bound by fiduciary duties and the duty of loyalty, in a time of crisis board members may be concerned about how the company’s insurance can be used to protect their interests, as opposed to the company’s.  If counsel is representing the company, the strategy may focus on preserving the coverage to settle a nasty case, fund burdensome defense or investigation costs, or protect individuals who are critical to the company’s on-going business strategies.  And if the company is in bankruptcy, the debtor in possession or trustee may want to preserve the assets for claims against the estate, as opposed to lower priority indemnity claims or non-indemnifiable claims against individual insureds such as board members.

If counsel is representing an individual, he or she may have the luxury of an indemnification from the company – assuming the company is able to fulfill it.  If not, counsel may need to invoke Side A or other provisions in the policy to preserve the policy limits for the individual directors or officers, and access to much-needed defense costs.

Have All Possibly Applicable Policies Been Placed On Notice?

Depending on the nature of the actual or anticipated claims relating to the crisis, all potentially applicable policies covering the company and its board members should be put on notice:  directors and officers or management liability, errors and omissions coverage, employment practices liability, employee benefits and general liability policies.  If an outside board member has been placed on the board by an investor or strategic partner, is outside entity coverage available?  Does a board member maintain stand-alone independent director liability coverage?

If claims-made policies are due for renewal, is there a risk that the insurer will not renew, or that even if it does renew it will attach a “specific event exclusion” endorsement to the renewal policy?  If so, not only should all claims be reported prior to policy expiration, but a thorough notice of potential claims should be made in accordance with the policy’s “notice of circumstance” provisions.  In certain circumstances, the company may decide to purchase an extended reporting period (ERP) for claims not yet made.

If the company is contemplating bankruptcy, it may be able to trigger an automatic run-off of the policy or purchase an ERP for claims based on wrongful acts committed before the bankruptcy filing.  The automatic run-off usually lasts for the remainder of the policy.  While an ERP can provide coverage for claims made several years after the filing, it is unlikely that money from the debtor’s estate will be available to fund it.  And purchase of an ERP prior to bankruptcy may constitute a voidable preference.

How Can Limits Be Preserved?

If the company’s policies are wasting assets which may be used to satisfy non-dischargeable liability claims against the estate, an insurance company is unlikely to release policy limits for defense of the individual insureds without relief from the automatic stay.  If relief from stay is either not required or is granted, counsel may need to address competition for funds if individual insureds require separate counsel and defense costs “waste” the limits of liability.  In that case, there is no general counsel to review the bills and control the “burn rate.”  An insurer who realizes its limits will be spent may simply pay invoices as they arrive, without any serious review.  Should counsel seek to partition the policy?  Ask the bankruptcy court to supervise the disbursement of funds?  Warn the insurer of the consequences of mismanaging the proceeds?  A “vigorous” defense of several defendants, each with their own counsel, can easily mean exhaustion before trial, and no limits left for a settlement or judgment.

Has Consent Been Obtained For Defense Counsel?

If lawsuits have been filed or investigations commenced, clients automatically (and understandably) reach out to their trusted counsel to represent them.  But defense fees spent before notice, even if covered, generally will not be paid or credited against the policy retention.  At the very least, the insured is required to obtain the insurer’s consent to the retention of counsel.  It may in fact be required to allow the insurer to control the defense and select counsel.  The company has to balance its desire to act quickly and control the defense, with the need to fulfill notice and cooperation requirements in the policy.

A trusted advisor must address a number of concerns in a crisis situation. They would do well to make sure that insurance is on that list.