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Directors & Officers Liability Claims, Some Examples
Executives of mutual insurance companies have periodically questioned the need to carry Directors & Officers Liability Insurance. While the most publicized type of directors & officers litigation relates to stock companies and their declining stock performance, directors of mutual insurance companies are subject to other types of D&O claims. In today’s environment of mergers, acquisitions and demutualizations, management has to make difficult and often times unpopular decisions that can open them up to potential personal liabilities. D&O litigation can result from several sources such as: Policyholders, Employees, Competitors and Regulators / Government. Allegations of wrongdoing can run the gamut from misrepresentations in merger discussions to failing to represent the interests of policyholders to wrongful terminations of employees. In essence, a director or officer can be sued if they fail or are perceived to have failed in the performance of their duties of obedience, loyalty and diligence to policyholders and the organization.
One of the best examples of Policyholder litigation (and the importance of buying coverage from the NAMIC Insurance Program) is a situation that occurred in the midwest. A short-term policyholder of a mutual insurance company sued the mutual and it’s directors, contending the mutual company had “excess surplus” and that any “excess” should be returned to policyholders. On the surface, this litigation seemed to run counter to the normal management of a mutual company. The company had been financially successful and the profits had been added to the company’s surplus position through the years. The act of reinvesting the profits back into the company was protecting the company’s future, as well as the policyholders’ interests, and would normally draw praise. If the litigation were successful, every financially sound mutual insurance company in the country could be subject to litigation seeking to disgorge the “excess surplus”.
If the mutual company had purchased Directors & Officers Liability Insurance through a standard market, that carrier would have likely attempted to settle the claim early simply to avoid costly litigation. Though this would have been a good short-term solution, it would have invited future litigation against any mutual insurance company in the industry. The NAMIC Program recognized the significance of this litigation. In the motion for summary judgment, supporting briefs were sought and filed by the Department of Insurance and NAMIC (trade association) as well as the Directors & Officers Liability carrier, NAMIC Insurance Company. These briefs proved to be very powerful and fortunately for the mutual company (and all mutual companies), the case was won on summary judgment. While the case is currently being appealed, it illustrates that value of D&O insurance and in particular, the aggressive claim handling of NAMIC Insurance Company.
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