In today's corporate and regulatory environment, companies—and their boards of directors—are paying close attention to directors and officers (D&O) liability insurance. But when it comes time to file a claim, many companies fail to take the necessary steps to ensure their claims will be handled smoothly and expeditiously.

When a D&O claim arises, events happen very quickly. D&O claims are by their very nature extremely sensitive to the company, often involving its highest-ranking past, present or future executives. When the lawsuit is filed, directors and officers want answers to their questions immediately. Although the question of insurance coverage is usually not one of the first asked, it should be. Companies should not wait until legal expenses mount to explore their D&O coverage and the intricacies of filing a D&O claim.

To help ensure a D&O claim is resolved favorably, companies should take note of the following five issues described in detail below.

1. Follow the Policy's Notice Requirements
Following the policy's notice requirements is the most critical step in handling a D&O claim. If notice is not timely, the D&O insurer will have a strong coverage defense. The company must follow the specific notice terms and conditions defined in its actual D&O policy that applies to the claim—not a pro forma policy sample or last year's policy or someone else's D&O policy. They must review the claims reporting requirements under the policy, paying attention to the specific requirements for an actual claim or a notice of circumstance. D&O policies do not have standard policy language, so each insurer's claim reporting requirements often differ by varying degrees.

2. Carefully Select Defense Counsel Under the D&O Policy
The selection of defense counsel causes the most and earliest disagreements between D&O insurers and insureds. It usually becomes an issue because the insured doesn't carefully read its D&O policy until the claim has arisen and isn't familiar with all of the policy's requirements. If not resolved carefully, it can set the tone of trust or mistrust between the two that can last for the duration of the litigation.

Most D&O insurers have a panel counsel list that contains names of qualified, capable D&O defense attorneys with whom the insurers have not only negotiated preferential rates but also have obtained agreements to abide by the insurers' written litigation management guidelines. The panel counsel list also tends to have attorneys who have not been adverse parties to the insurers in the past, so the insurers are usually confident they will work well together.

Selecting defense counsel with whom the insurer is comfortable helps in containing defense costs, keeping the insurer advised of developments, and ensuring the best outcome of the litigation for the insured.

In today's difficult insurance marketplace, it is not only a good idea to select attorneys from the panel counsel list—it is often required by the D&O policy. Some insurers will not (ever!) deviate from the panel counsel list. In fact, more and more D&O insurers are actually endorsing the panel counsel list onto the D&O policy. Companies are well advised to check their current D&O policies to determine if there is a panel counsel list endorsed onto it. It is best to know this in advance of receiving an actual D&O claim.

Companies that conclude they must deviate from the panel counsel list should ensure they have good reason for doing so and can communicate and demonstrate to the insurer why they must deviate. Companies should pay particular attention to concerns that may cause the insurer to counter the argument. For example, if a company suspects that its insurer is refusing to deviate only because in doing so, it is afraid that the cost of defense may skyrocket, then the company should clearly state that cost is an issue of concern to it as well, that the insurer's litigation management guidelines will be followed, and that the company will work closely with the insurer to ensure the claim is defended wisely and prudently.

If there isn't a panel counsel list, and the insurer agrees that the insured can choose its defense counsel, most D&O policies provide that the insurer must consent in writing to this choice before defense expenses are incurred. It should not be assumed that verbal consent is sufficient because the insurer says so over the phone. Companies should obtain a physical copy of the letter and put it in a safe place. Litigation can be protracted, and files can be lost. This letter will forever ensure that the insurer will continue to pay the defense attorney directly or reimburse the insured over the entire lifetime of the litigation.

One more thing about panel counsel lists—insurers don't like or want to lose any more than insureds do. Insurers have culled the best D&O defense attorneys to be on these panel counsel lists using the valuable experience of much past D&O litigation.

The lists are constantly evolving based on current experience and performance. New attorneys are added; some attorneys are no longer used. Why not take advantage of what the insurer may have learned the hard way? And, if the company has a large retention, why not take advantage of the insurer's lower, negotiated rates? It is in the best interests of the directors and officers to try to preserve the D&O policy limit in the event it is needed to fund a claim settlement or judgment. Company executives who are defendants in D&O litigation will not want to learn that all or most of the policy limit was spent to defend the case and that there is little or no money left to pay the judgment!

3. Disputed Coverage, Reservation of Right or Denial Letters: Don't Panic
Disputed coverage, reservation of rights, or denial letters can be intimidating. They are extremely lengthy and often difficult to understand at first blush. When carefully analyzed, however, it usually can be discerned that the D&O insurer is simply reciting the allegations in the lawsuit and the various policy terms and conditions that may be applicable to the claim.

It is important to look for the specific coverage defenses the insurer is raising. For example, those relating to specific policy exclusions may mean that the insurer is already considering how to allocate defense costs between the covered claims for which it is responsible and the uncovered claims for which the insured is directly responsible.

4. Potential Policy Rescission
The insurer can always threaten to cancel the policy due to new circumstances that have come to light because of the new D&O claim. The insurer will likely claim it was previously unaware of such circumstances and that such circumstances were not included on the D&O policy application.

Most D&O claims are somewhat "run-of-the-mill" and ultimately will be covered as the facts are discovered. Although rescission is getting quite a bit of attention today, it is not used very often in practice.

Additionally, insurers are more apt to consider seeking rescission when there is a financial restatement by the insured. They will argue that they relied on the incorrect financial statement(s) in the underwriting process, and thus there was a misrepresentation to them. In such cases, rescission could be an issue. If a company determines that its insurer is using financial restatement as a ground for rescission, it should consult with legal counsel.

5. Remember: The D&O Policy is an Asset
Most importantly, the D&O policy is an asset that could be worth millions of dollars to an insured. Defense costs alone can be astronomical; the D&O policy can fund defense cost payments, judgments, and settlements. The company's general counsel or other representative must treat the policy as such an asset.

It is important that the company's in-house general counsel or its outside defense counsel keep the D&O insurer up-to-date on developments in the case—even though it may be time consuming. Insurers often take issue with not being timely informed— especially when they are paying for the cost of the defense.

Consider the following to keep the insurer informed:

• Hold quarterly meetings or conference calls with the D&O insurer when there is an active claim.
• Share the defense strategy to the fullest extent possible and ask for the insurer's input.
• Inform the insurer of aspects of the case that may be problematic.
• Share the perceived strengths and weaknesses of the case.
• Make sure the insurer fully grasps the gravity of the situation.