Under Pressure to Diversify: Availability of D&O Coverage for Corporate Diversity Claims

Natasha Romagnoli and Hannah K. Ahn

With the recent rise in novel diversity lawsuits, which have targeted some of the leading companies across the country, and are sure to be a hot topic of litigation this year and beyond, policyholders are highly encouraged to review their existing directors and officers (“D&O”) insurance policies to ensure that they have adequate protection in place to cover diversity claims.

If you are one of the more than 100 million people who watched the Super Bowl, you noticed that companies are starting to be more vocal about the importance of diversity. With ads featuring all Black actors and more modern families, companies are celebrating inclusion and promising to join the fight to end systemic racism. The NFL itself is a prime example of this change in messaging. Years after Colin Kaepernick faced backlash for kneeling to protest inequality, the NFL ran its own ad this year that highlighted its pledge to spend $250 million to end racism.

Talk of diversity and inclusion has been growing—and growing more insistent—starting with the first Black Lives Matter protests in 2013 and building to last year’s protests following the murder of George Floyd, who died while being forcibly detained by Minneapolis police. Despite their messages of support for diversity and inclusion, however, many companies have struggled to promote diversity in their own ranks, especially with respect to their boards of directors and C-suite executives. But consumers and investors alike are now pressuring companies to meaningfully respond to their demands for internal change. Of late, this includes shareholder derivative lawsuits that use federal securities law not only to target the company’s lack of success in diversifying, but also to challenge the commitment of the company’s directors and officers to enact change. These novel “diversity lawsuits” open a new realm of potential liability, in addition to forcing companies to consider how to promote diversity in their ranks and respond to internal and customer demands for change.

While there have only been a handful of diversity lawsuits filed as of today’s date, the allegations against some of the best known names in business, like Facebook, Oracle, and Monster Beverages, could easily apply to other publicly-traded companies across the country. The individual details vary from case to case, but the common charge against the directors and officers of the sued companies is that they breached their fiduciary duties and violated Section 14(a) of the federal Securities Exchange Act by failing to include diverse directors on their boards and in their senior executive ranks, while at the same time touting their commitment to diversity, equality, and inclusion in the company’s proxy statements and other corporate publications. Corporate counsel can forget about their old playbook for dealing with employee discrimination complaints or outside groups threatening a boycott. This is new legal terrain being staked out by stakeholders in companies (in some cases, institutional investors) and the class action lawyers representing them.

To read our full client alert, please click here.

This client alert was reprinted in Wolters Kluwer Legal & Regulatory Solutions U.S. in April 2021.

Top 10 Tips for Insurance Policyholders (Fall 2020)

John A. Gibbons

1. Assess the policies you have and reassess the policies you should buy in the future.

2020 has brought a host of unwelcome events: pandemics, fires, floods, cyberattacks, financial failures, etc. An insurance program tailored to the risks and business opportunities of your specific company can provide for recovery during dark times, and specialized insurance products can help you safely expand your business. It is time to consider how tailored your current program is, and how you can better align insurance assets to your business in the future.

2. Use indemnities and additional insured status to expand your insurance assets.

Everyday business for many companies involves the use of terms and conditions; sales or services orders; and leases that address indemnification, minimum insurance requirements, and additional insured status. A well-thought-out use of additional insured status can allow you to leverage the insurance assets and insurance premiums of counterparties.

3. Ensure that you get the full benefits of your liability and property insurances.

Insurance policies provide many coverages, policy limits, and extensions that may not be readily apparent, and all of which may provide substantial financial assistance in the event of a loss. In addition, specialized forms of insurance, additional riders, or policy wording upgrades can better tailor policies to your specific business attributes. Use the renewal season to explore your options.

4. Avoid “conventional wisdom” about what is or is not covered.

With insurance, words matter! In fact, the wording determines the outcome. Do not accept statements about what others think a policy does or should cover. For example, claims for intentional wrongdoing and punitive damages often are covered by liability policies. Likewise, losses from your supply chain may be covered under your property policies. Non-payments of debts and breaches of contractual promises are covered under various forms of policies. Let the words lead you to coverage.

5. Give notice once you know of a loss or claim.

Typically, notice should be given soon after a loss, claim, or lawsuit, but remember that a delay in giving notice will not necessarily result in the loss of coverage. Consider the potentially applicable insurance assets that may apply and give notice.

6. Insist your insurers fully investigate claims.

Insurers have a duty to investigate claims thoroughly and must look for facts that support coverage.

7. Watch what you say.

Communications with an insurer or an insurance broker regarding a lawsuit against you or a loss are not necessarily privileged.

8. Don’t take “no” for an answer.

A reservation of rights is almost always the start of the insurance claim process, and a denial should not dissuade you from pursuing your rights. Even if coverage is not obvious at first, it may be there, if you look in the right places.

9. Document, document, document your claim.

Whether it is a first-party loss or a liability suit against you, write to your insurer and document your submission of information and materials. Require your insurer to respond in writing and to explain its position. A well-documented chain of correspondence narrows disputes, helps to limit shifting of insurer positions, or helps to make such shifting very apparent if your claim proceeds to formal enforcement measures.

10. Insist that your insurers honor their duties.

In the liability context insurers frequently owe broad duties to defend with independent, conflict-free counsel, even if uncovered claims dominate the lawsuit against you. In property insurance contexts, insurers have duties to help you on an expedited emergency basis to protect your interests immediately after a loss. It is important to hold insurers to their duties to protect you immediately upon assertion of liability or after a loss—delay only benefits insurers.

 

California Corner: Insurer’s Failure to Immediately Commence Defense Waives California Civil Code Section 2860 Rate Limitations for Independent Counsel

Julia K. Holt

California courts strictly enforce an insurer’s duty to immediately commence defending its insured. The insurer’s delay in doing so, even if the delay is short, constitutes a breach of this important duty. In fact, California imposes a 40-day time limit for an insurer to provide its written coverage position under the Prompt, Fair and Equitable Settlement of Claims requirements stated in Title 10 of the California Code of Regulations at Section 2695.7.

A breach in this regard results in a waiver of any claimed right of the insurer to control the defense of its insured. This includes a waiver of the insurer’s ability to seek to impose any Civil Code Section 2860 rate limitations for independent counsel. See Travelers Indem. Co. of Connecticut v. Centex Homes, No. 11-CV-03638-SC, 2015 WL 5836947, at *5 (N.D. Cal. Oct. 7, 2015), objections overruled, No. 11-CV-03638-SC, 2015 WL 6164429 (N.D. Cal. Oct. 8, 2015). In Centex Homes, the Court found “that Travelers breached its duty to defend by failing to provide Centex with a defense at least 30 days after the complaints were filed in the [noticed] actions . . . [and therefore] Travelers also lost its right to control Centex’s defense.” Id. Continue reading “California Corner: Insurer’s Failure to Immediately Commence Defense Waives California Civil Code Section 2860 Rate Limitations for Independent Counsel”

Pay Attention to Policy Language in a Hardening Insurance Market

Ian Ascher[1] and Jared Zola

The insurance market has proven to be a difficult environment for buyers in 2019. The long tenure of the soft insurance market cycle is changing, and is presenting challenges with pricing, capacity, and sustainability of favorable coverage terms. Coming out of difficult natural catastrophe years in 2017 and 2018, the property insurance market took a sharp turn to protect insurers’ bottom lines. While hardening of the property insurance market was expected, the broader casualty market has taken this opportunity to drive corrective action on their portfolios as well, leaving insurance buyers with little leverage.

How Insurers Are Reacting to the Market Shift

Insurers are approaching the market shift with different strategies, some focused on rate increases, while others are focused on restricting terms, or both. While individual loss experience still plays a role in renewal outcomes, there appears to be more of a portfolio-level push on rate and terms regardless of individual quality of risk factors for any given policyholder. In this environment, stricter control over capacity deployment leads to less competition, which may force the buyer into tough decisions regarding what utility insurance provides for its organization. The guarantee of comprehensive coverage at a fair price becomes harder to balance in a setting where definitively having both is less than certain. Continue reading “Pay Attention to Policy Language in a Hardening Insurance Market”

California Corner: California’s Bar on Coverage for Willful Acts under Insurance Code Section 533—Don’t Assume It Applies

David A. Thomas and Linda Kornfeld

Like a number of states, California prohibits insurers from indemnifying policyholders for liability based on intentional conduct that was committed with the intent to cause harm, although it does not bar a defense against such claims. California’s public policy is codified in Insurance Code Section 533, which provides: “An insurer is not liable for a loss caused by the wilful act of the insured; but he is not exonerated by the negligence of the insured, or of the insured’s agents or others.”

A significant body of law has elucidated the rules for application of Section 533. Reckless or grossly negligent conduct generally does not trigger application of the statute.[1] Nor, with very limited exceptions, does the mere fact that a policyholder intended the act that caused the harm bring the conduct within Section 533.[2] Instead, the policyholder must have intentionally performed a liability-producing act for the express purpose of causing harm or with knowledge that harm was highly probable or substantially certain to result.[3] Fraud and malicious prosecution are common examples.[4] Section 533, however, does not bar coverage for intentionally harmful acts based solely on vicarious liability.[5] Continue reading “California Corner: California’s Bar on Coverage for Willful Acts under Insurance Code Section 533—Don’t Assume It Applies”

Federal Court Says Subpoena Is a “Claim” Triggering Insurance Coverage

Jared Zola

An issue frequently raised in coverage disputes involving claims-made liability insurance policies is determining whether certain pre-lawsuit events or disputes constitute a “claim” sufficient to trigger coverage.

Unlike occurrence-based liability policies that respond in the policy year or years during which the coverage-triggering event occurred (e.g., the years in which a person sustained injury in an asbestos bodily injury claim), a claims-made liability insurance policy is triggered upon the insured’s receipt of a claim. Upon an insured providing notice of a claim, its insurers may dispute whether the notice-triggering event constitutes a “claim” at all. Continue reading “Federal Court Says Subpoena Is a “Claim” Triggering Insurance Coverage”

CGL Coverage for Cyber Data Breaches: Court Finds No Coverage unless the Policyholder Itself Publishes the Private Information

Deborah Greenspan

As cybersecurity incidents continue to mount and as the issue of data security becomes increasingly important and a source of potential liability, companies should consider whether their standard commercial general liability (“CGL”) policies provide adequate coverage. The case law, although limited, suggests that policyholders might face an uphill battle in obtaining coverage.

In Innovak International, Inc. v. The Hanover Insurance Company, No. 8:16-cv-2453-MSS-JSS, — F. Supp. 3d —, 2017 WL 5632718 (M.D. Fla. Nov. 17, 2017), the Court found that the insurer was not required to provide a defense to the policyholder because the underlying complaint did not allege that the policyholder published the private data. Innovak develops and markets accounting and payroll software and maintains a database accessible via Internet portals. The complaint alleged that as a result of Innovak’s negligence, hackers were able to access class members’ personal information, including social security numbers, addresses, dates of birth, telephone numbers, employment information, and spousal information. The complaint included claims for negligence, breach of implied contract, gross negligence, unjust enrichment, and fraudulent suppression. The claimants alleged that they suffered psychic injuries including stress, nuisance, loss of sleep, worry, and the annoyance of dealing with the data breach. Continue reading “CGL Coverage for Cyber Data Breaches: Court Finds No Coverage unless the Policyholder Itself Publishes the Private Information”

Asbestos Coverage: A Never Ending Story

John E. Heintz

In April 1977, a few weeks before I began practicing law, senior claims executives of eighteen liability insurance companies met to discuss the insurance implications of asbestos bodily injury claims. A majority of those at the meeting concluded:

“. . . that coverage existed for each carrier throughout the period of time the asbestosis condition developed, i.e. from the first exposure through the discovery and diagnosis. The majority also contended that each carrier on risk during any part of that period could be fully responsible for the cost of defense and loss.” Continue reading “Asbestos Coverage: A Never Ending Story”

Insurance Coverage for the Opioid Crisis

Amy J. Spencer

With the “opioid epidemic” at an all-time high—and the resulting news coverage and public awareness also at an all-time high—now is the time for pharmaceutical companies, pharmacists, hospitals, doctors, first responders, and employers to review their professional liability and general liability insurance policies and any other potentially applicable policies such as products liability and directors and officers (“D&O”) insurance. Continue reading “Insurance Coverage for the Opioid Crisis”

Insurance Liability, Risks, and Options in Augmented Reality: Catch ‘Em All

Kevin R. Doherty, Kevin J. Bruno and James S. Carter

Kevin R. Doherty Kevin J. Bruno Carter, James S.The rising Pokémon Go sensation has dramatically increased the popularity of augmented reality games, but it has also brought with it increased risks and liabilities for both game users and developers alike. For those who don’t know, Pokémon Go is a mobile app that, although released just last month, has already been downloaded over 75 million times, generated more than $75 million in revenue, and boasts daily usage statistics that have exceeded Snapchat, Twitter, Instagram, and Facebook. It’s a location-based augmented reality game that allows users to partake in virtual scavenger hunts. Using the user’s GPS and mobile camera, players are encouraged to explore their surroundings, seek out animated characters in real world places, and “catch ‘em all.” The characters are overlaid on the player’s screen and displayed as if they exist in reality. Unfortunately, distracted players on the hunt can end up wandering (or driving) into places they shouldn’t be, and becoming injured or injuring others as a result.

The number of Pokémon Go calamities increases daily, with incidents ranging from the mundane to the absurd and dangerous. In the few short weeks since its debut, users have experienced or caused numerous personal injuries, property damage, and car accidents. Some users have become stuck in trees and locked in cemeteries, while more serious incidents involve users straying onto train tracks, falling off cliffs, or entering restricted nuclear power facilities—all while on the hunt for Pokémon characters. Still others in pursuit of Pokémon have trespassed on private property, and some users have even been robbed after being targeted and led to specific locations using the app. Continue reading “Insurance Liability, Risks, and Options in Augmented Reality: Catch ‘Em All”

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