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Cutter & Buck D&O Rescission Case Holds Significant Ramifications
(Article courtesy of WorldWide Facilities, Inc)
While Tyco, Global Crossing, Adelphia and even Martha Stewart have garnered nationwide headlines during the past several months, an announcement by a Seattle court judge to uphold a D&O insurer's rescission of its D&O insurance policy holds significant ramifications that could be felt long after several of the aforementioned cases have settled. At a minimum, the decision underscores once again how critical it is for directors and officers to understand the policy language inherent in their D&O contracts. Unfortunately for most, this understanding is not realized until after they are named in a multi-million dollar shareholder suit. Only then does a true “reality check” take place.
In Cutter & Buck, Inc. v. Genesis Insurance Co., the judge found that limited severability language in the D&O insurance contract does not prevent an insurer from rescinding the policy completely and that, absent carefully constructed severability language, innocent directors and officers can have their D&O insurance coverage void and of no effect whatsoever as a result of a misrepresentation in the D&O application or the personal conduct of just one director or officer.
The court concluded that the Genesis rescission of the Cutter & Buck D&O policy was proper but ever more importantly, ruled that the rescission applied to all Insureds under the policy -- directors, officers and the corporation -- regardless of any involvement in, or any knowledge of, the misrepresentations. In this particular instance, the severability clause within Cutter & Buck’s primary policy allowed the knowledge of the person who signed the application (CFO Stephen Lowber) to be imputed to all Insureds thereby leaving all Insureds – innocent or otherwise -- susceptible to rescission.
The Cutter & Buck decision comes at a time when the majority of the D&O insurance carriers have moved to restrict the “full” severability language that was available in the ultra-competitive marketplace of the late 1990’s. While the current D&O marketplace is softening in terms of pricing, the same cannot be said relative to key terms and conditions inherent in the D&O policy.
In addition to a more restrictive severability clause, several D&O carriers have added language which effectively attaches any past, present or future SEC filing by the Insured to the Insured’s application. This subtle change which often goes unnoticed by most brokers during renewal negotiations can have a devastating impact as it effectively allows a clear path for D&O carriers to rescind the entire policy in a financial restatement case. If all SEC filings are part of the application, then any financial restatement case could potentially be viewed by D&O carriers as a material misrepresentation in the application.
Each of the approximately 60 D&O insurance carriers in the marketplace address key issues such as severability in their own specific way. Recent complimentary D&O audits performed by Worldwide (see attached link) continue to uncover key imputation and severability issues – most of which have not been properly articulated to the Insured.
At a minimum, the executive in charge of purchasing the D&O at his/her
organization should take proactive steps to ensure that the first time
they learn about how key issues such as severability work is not after
they have been served with a multi-million dollar securities suit.
last updated: June 3, 2004
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Diversified Risk Insurance Brokers
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