Most hospitals and systems protect directors or trustees with some form of directors and officers liability insurance. D&O policies also insure the hospital against trustee claims for indemnification under governing corporate bylaws, and some policies protect the hospital itself from various types of claims. In every case, D&O policies insure board members against situations in which the hospital cannot or will not indemnify them, including because of an inability to pay or a concern about certain circumstances.
D&O coverage comes in various forms, depending on whether the hospital is for-profit or nonprofit. Three common coverage sections are:
• Section A (D&O liability): Covers officers and directors against certain claims for wrongful acts in that capacity for which the hospital cannot or will not indemnify. Side A coverage often is available with no deductible or retention.
• Section B (corporate reimbursement): Insures the hospital against requests for indemnity by officers and directors against whom certain claims are asserted arising from wrongful acts in their capacities as officers or board members. Side B coverage almost always contains a retention before the insurer will start paying.
• Section C (optional corporate insurance): Protects the hospital against certain claims for wrongful acts of its officers and directors and, in many cases, its own wrongful acts. It often is limited to securities claims or claims naming the hospital as a co-defendant along with insured individuals.
Each form of coverage raises issues that should be discussed with insurance experts and legal counsel. In some cases, board members may wish to obtain advice from their own attorneys or insurance professionals or professionals hired specifically to advise the board. Boards should seek this advice when the policy is being negotiated and the insurer may have some flexibility in its terms. After a claim has occurred, it may be too late to deal with the following questions.
1 Who is insured? All D&O policies define the individuals and entities to be insured. This language requires review to ensure coverage for past, present and future officers and trustees (and the estates, heirs, spouses and domestic partners of the insured), and relevant subsidiaries and affiliates as well as other boards on which officers or directors may be required to serve. The definitional scheme is particularly important for hospitals with complex corporate structures that include for-profit and nonprofit entities and, increasingly, affiliated physician networks.
2 What claims trigger coverage? For there to be coverage under a D&O policy, there must be a claim. Most policies define "claim" to include not only lawsuits but arbitrations, written demands for money and requests for tolling agreements, which delay the running of applicable statutes of limitation. Defense of claims for injunctions also may be covered, but the cost of compliance usually is excluded. Investigations by attorneys general, state and federal regulators and payers, including Medicare and Medicaid, should be included in the policy's claim definition.
Similarly, the policy should cover formal investigations or subpoenas and informal investigations and document requests. Most organizations are reluctant to deal with publicity and legal issues arising from receipt of a governmental subpoena and prefer voluntary interviews and production of documents. While the latter may reduce the volatility of a particular situation, it does not necessarily reduce time and expense, which makes coverage of such situations so important.
3 Who gives notice of a claim? D&O policies are typically "claims made" policies, which means claims must be made against the insured and then noticed to the insurer within the policy's effective period, a grace period thereafter, or in some cases, an extended reporting period purchased for additional premiums. Most polices have requirements for notice of a claim. During policy negotiations, it's important to consider whose knowledge triggers a notice requirement because insurance should not be jeopardized in a situation in which an employee learns of a claim but has no knowledge of reporting requirements. For this reason, many policies trigger mandatory notice only when a claim is known to senior risk management or legal officials.
4 What is notice of circumstances? Most D&O policies allow the insured to provide voluntary notice of circumstances that may lead to a claim. Such notices allow coverage for a claim asserted after policy expiration so long as the circumstances are noticed to the insurer during the policy period. For example, a policyholder might notice concerns about the correctness of a securities disclosure as a circumstance though no suit has been threatened or asserted. Boards should require procedures for review of claims and potential claims so there are conscious decisions on whether to notify insurers of particular claims and circumstances before policy expirations. Where possible, policy provisions requiring mandatory notice of circumstances should be avoided.
5 Who will defend a claim? Most trustees believe that when a claim is covered by insurance, they will be able to select counsel at the insurer's expense. That is not necessarily the case. Many nonprofit D&O policies include a duty to defend, which often allows the insurer to choose counsel and control the defense. Even where there is no duty to defend, some policies require selection of counsel from an insurer-designated list. Boards should consider having trusted counsel included in such panels.
6 When can a policy be rescinded or canceled? Many D&O policies can be rescinded if the insurer can prove a material misrepresentation in an application. Some policies also may be canceled at the discretion of an insurer upon 30 days' notice. Ideally, a policy should provide that the insurer can cancel only for nonpayment following a grace period, and that coverage of individual insureds cannot be rescinded for any reason. Where rescission or denial of coverage is possible based on misrepresentation or intentional wrong, it should be limited through a severability clause to the individual responsible for the misrepresentation or injury. D&O policies and applications should be reviewed to ensure that cancellation, rescission and exclusion provisions are tailored as narrowly as possible.
7 Are restitution, fines and penalties covered? Another issue arising from increased regulatory scrutiny is the extent of coverage for restitution, punitive or multiple damages, and certain fines and penalties. While insurers may propose policies that exclude such awards, it is common for certain fines and penalties to be covered. Because the insurability of restitution, punitive damages and fines varies by state, some policies require coverage to be governed by the most favorable law with any reasonable connection to the policy.
8 How are settlements handled? Settlements raise three important issues. First, some policies purport to give the insurer the right to settle, but most insureds are concerned about such provisions because settlements can raise strategic and reputational risks. Second, policy exclusions based on fraudulent or intentional injury should be limited to final adjudications in the underlying case so they do not apply when a case is settled. Third, while D&O policies often require the insured and insurer to use good faith in allocating a settlement between covered and noncovered claims, many policies require an allocation based on "the relative legal exposures" of the claims and parties. If possible, this standard should be deleted because it often leads to unfair, pro-insurer results. Counsel should be consulted as to a proper standard or whether the likely controlling law provides a standard so it is unnecessary to include one.
9 What is the order of payment? D&O policies have coverage limits that often include defense costs. Directors and officers should require a priority-of-payment provision so that, in the event of multiple claims on policy proceeds, it is clear that policy limits are available first to officers and directors and only then to the hospital.
D&O policies demand careful review. To ensure coverage that is as robust as possible, boards must require periodic presentations on D&O coverage based on review by experienced professionals.
Steven R. Gilford (firstname.lastname@example.org) is a partner in the litigation department and co-chair of the insurance recovery and counseling group at Proskauer, Chicago.