01
Jul
2003

The Newest Game in Town:Rescinding Your D&O Liability Insurance - What Can You Do About It

Executive Insurance Advisor

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PUBLISHED ON: July 1, 2003

A $92 million dollar blow was delivered to Tyco by Chubb and excess insurance companies in the form of additional premiums to “maintain and extend” D&O liability insurance which has already been paid for, recent press accounts reports. Shortly after the announcement, a lawsuit to void Tyco’s insurance was withdrawn. The tactic used was the threat of rescission. The latest 2002 Tillinghast-Towers Perrin survey reports 97% of those surveyed are buying D&O Policies. This overwhelming market penetration in the market to sell policies is overshadowed by D&O insurance companies’ attempts to rescind the policies they sold. The threat of rescission seriously threatens the policyholder, especially given the increasing importance of D&O liability insurance. The general standard for granting rescission is restrictive and often prevents an insurance company from using this tactic. The law regarding rescissions varies from jurisdiction to jurisdiction, and policyholders should be prepared to prevent attempts at improper rescission.

Who Are The Players?

The latest 2002 Tillinghast-Towers Perrin survey reports that three sellers dominate the D&O liability insurance market. AIG with 35% share, Lloyds with 14%, and Chubb with 13% share. The remaining insurance companies have a 5% share or less.

What You Need to Know About Rescission

The Enron, Tyco and WorldCom scandals undoubtedly have damaged the D&O Liability Insurance market. Policyholders must be aware of the potential risks in their policies. The standard for rescission varies from state to state. Typically rescission requires a misrepresentation in the policy application that is: (1) material; and (2) of such nature that defeats or seriously interferes with the insurance company's ability to accept or reject the application. Usually a matter is not material unless the misrepresentation is
substantial and influences the party to whom it was made. Some courts have held nondisclosure on the part of policyholders does not necessarily void a policy if no duty to disclose exists. In addition, intent to deceive is difficult to prove even when a material misrepresentation is made in the policy application if made innocently and in good faith. The insurance companies bear the burden to show that the requirements of rescission have been met.

Rescission Is The Latest Post-Loss Underwriting

Insurance companies attempt to tackle the burden of proof and the restrictive standards of rescission by making leaps to assert alleged omissions and misrepresentations and asserting the materiality of the information in question. Rescission has become the new form of post-loss underwriting. Insurance companies are presumed to know the business of their policyholders. This has been the rule since the advent of insurance, literally hundreds of years ago. After a claim is made, insurance companies may attempt to gather irrelevant information and argue that it was omitted or misrepresented by the policyholder. Policyholders should protect themselves from this practice. Insurance companies must make their underwriting decisions prior to selling policies, not after a claim has been made.

How You Can Protect Your D&O Liability Insurance

Understanding the requirements for rescission will help policyholders fight improper rescission attempts. The best advice is to avoid these problems before they happen. Work with an insurance broker or insurance consultant experienced with D&O liability insurance policies. Seek severability in the application and in the “bad acts” exclusions. Policyholders can also prevent grounds for rescissions and D&O claims with a good corporate governance structure. It is important to choose D&O liability insurance policies carefully and keep in mind protection for “innocent directors” who may suffer most if the policy is rescinded. The bottom line is that insurance companies will routinely challenge significant claims. Policyholders should not accept attempts at rescinding bought and paid for D&O liability insurance policies.