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.
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When a venture capital or private equity firm invests in a portfolio company (PC) and places a general partner on the PC’s board, they typically require that the PC agree to defend and indemnify the board member in any litigation arising out of their board service, and to purchase directors’ and officers’ liability insurance. However, the D&O insurance requirements are typically quite vague, and some firms may be surprised to learn of key gaps in the PC’s coverage. These gaps are usually discovered when the VC/PE firm needs the coverage most – i.e., after a lawsuit has been filed, naming their board member as a defendant. Here are two examples I’ve come across in representing venture capital and private equity firms:
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