Possible conflicts of interest with D&O insurance in event of shareholders’ class actions

Abstract

Listed companies and their directors and officers run an increasing risk of becoming involved in a shareholders’ class action. Since class actions involve significant compensation amounts, it is of vital importance to all parties involved that the directors/ officers and the company being sued have adequate Directors & Officers (D&O) insurance. Without sufficient insurance, these directors and the company might have to bear compensation in whole or in part themselves. If they are incapable of doing so to one extent or another, which is usually the case in light of the extensive compensation amounts with class actions, the injured parties will receive nothing or incomplete compensation and the class action will not realise its goal. This also has a negative effect on the scope of liability law. D&O insurance is therefore relevant for both the parties involved in the collective action and for society. Nonetheless, conflicts of interest can arise between the company and the directors being sued in respect of the cover if they are underinsured. In addition, conflicts of interest between the various D&O insurers could also arise which can negatively affect both the insurance cover and the settlement of a promising class action. D&O insurance must be set up in such a way given the various interests and in light of the goals of a collective action and liability law that these potential conflicts of interest are prevented as much as possible. The first conflict of interest between the company and directors can be restricted through the inclusion of either an allocation clause or an order of payment clause. In addition, a choice can be made to make a (greater) division between the Side A and Side C coverage within the D&O insurance policy or to take out a separate Side A policy altogether. The potential effects of the conflicting interests between the various D&O insurers involved with regard to the cover and the claim settlement can be mitigated by incorporating a properly defined follow form clause and an adequate leading underwriter clause. In that context, but also independently thereof, in my opinion a direct duty of good faith and fair dealing of the primary insurer(s) toward excess insurers (and also a duty of care of excess insurers) should be adopted.

Authors:
Weterings Wim