This article originally appeared in Anderson Kill's Policyholder Advisor (July/August 2007).
There is a disturbing trend emerging out of certain insurance coverage decisions involving Directors & Officers (D&O) insurance that should be of concern to all D&O policyholders. In a limited set of circumstances, involving coverage actions seeking D&O recovery for underlying securities class-actions alleging that the corporate entity profited from its own misrepresentations, insurance companies have argued that courts should re-write D&O insurance policies and deny policyholders the benefits of the insurance they purchased. Some courts have accepted this argument and denied recovery for underlying securities settlements that are expressly covered under D&O policies by deeming these losses restitutionary in nature and/or “uninsurable as a matter of law.” Other courts, however, have issued decisions that cast doubt on the propriety of the insurance companies’ argument and the effect of the decisions limiting coverage. This article addresses these rulings, and the options available to policyholders to avoid the loss of bargained-for coverage.