The Ruble seminar in Louisiana was fantastic (so was New Orleans, which I had never visited before).  A really good group, very interactive and quite interested in the privacy liability topic.  Maybe it was because I was teaching Thursday morning instead of my usual slot the last four hours of the session.  Maybe it was because we're all starting to become more aware of the need for this critical coverage and are girding our loins to broach the subject with our insureds.

I was going to provide a continuation of last week's update, but let me digress for a moment, and pick that thread up again next week.

One of my agents asked me a very interesting question regarding an account we had recently bound.  It was a D&O account with a professional exposure.  The insured had asked a question about bodily injury coverage under the D&O policy.  Technically, there is not coverage for any BI claim, but we need to make sure that there will be coverage for the Ds & Os (and entity if we can get it) for claims brought on by the fallout from a catastrophic BI situation.

Let's look at some background and examples.  When I was at RLI in the mid-90s our D&O policies contained exclusions for claims arising from bodily injury/property damage.  But carriers were starting to replace the "arising from" wording with "for" wording.  Why?

Because there were some catastrophic events that caused a lot of diminution of stock value around that time period, and the claims brought against the Ds & Os for the mismanagement that lead to the catastrophic events were denied because the stock value drop would not have happened were it not for the BI or PD caused by the catastrophic event.  How does this happen?

The "arising from" preamble to an exclusion reads something like this:  "We will not cover any claim arising from, related to, or in any way connected with, directly or indirectly bodily injury or property damage..." (or whatever wrongful act is being excluded). 

In many jurisdictions, this means that if there is BI/PD anywhere in the chain of causation that leads to the eventual D&O claim -- no coverage.

So imagine you're BP, or any of the domestic companies that were involved in the oil spill last year.  Stock value drops in publicly-traded companies is the most clear cut example, so we'll focus on that for the moment. 

If you had an "arising from" pollution exclusion or "arising from" BI/PD exclusion on your policy, and due to regulatory moratoriums, protesters and overall bad press, your stock price dropped 50% after the spill, shareholders could bring a claim against the Ds & Os for mismanagement that lead to the diminution of value of the stock.  In fact, they'd be silly not to.  Clearly, someone must be responsible for mismanaging, not taking proper precautions, cutting corners, dodging regulations, etc., right?  Otherwise this disaster would not have occurred.

So, the claim is made against the Ds & Os for mismanagement leading to negative events which caused a precipitous drop in value from which the shareholders will not recover for at least five years, according to experts.

If the D&O policy has "arising from" exclusions, will it respond to this claim?  The simple test, in some jurisdications, is "but for the BI/PD, would there be a claim today?"  In our above example, there would not be any claim if there had been no BI/PD.  So even though the suit is not alleging that the Ds & Os caused the BI/PD, and it is not seeking damages for the harmed persons and property from the BI/PD, the harm to the shareholders would not have occurred were it not for the BI/PD.  Therefore, the exclusion applies to this claim.

If the exclusion says "We will not cover claims for bodily injury....", it excludes coverage for claims made by the bodily injured person(s) to be made whole.  That's what the GL policy is for, and this is generally not something sought under the D&O policy.  What we are worried about in the context of the quality of the D&O coverage is the follow-on claim brought by other stakeholders.  Those stakeholders can be shareholders, regulators, customers, competitors, vendors. 

Beware that many markets will provide what they call a "management carveback", which by its title would lead you to believe that "management" has coverage under the endorsement.  However, upon careful reading, you may find that the carveback only applies to suits brought by shareholders, or derivative actions.  Such carvebacks may or may not be valuable, depending on your insured's structure.  The key is to go back to the underwriter and request a full A-Side carveback - i.e., Ds & Os being excepted from the exclusion.

Also be aware that some policies are structured such that exclusions that apply solely to the entity may be grouped together.  If that is the case, and that's the only place you find these onerous exclusions, you already have A-Side coverage, because the exclusion does not apply to the Ds & Os or to corporate reimbursement of same.

In the privately-held D&O world, the most obvious claimants would be minority shareholders, if the value of the company does not recover by the time one or more want to cash out; customers and regulators.  All of these stakeholders can be hurt by the fallout from the BI/PD situation itself, the bad press following, the financial stresses arising therefrom, or the changes in operations required in response to same.

Probably the easiest way to keep track of the potential claim scenarios is to ask yourself: who other than the injured parties (or owners of the damaged property) can be hurt by anything that happens after the BI/PD has occurred?  Once you put your thinking cap on with that question, you'll come up with all kinds of situations for any of your insureds.

Strive to secure coverage at least for the Ds & Os for these claims, and you'll be doing well.

Next week, we'll explore some more recent developments in privacy liability, and then move on to some more thrilling and exciting topics.