New York D&O Policies Must Include Duty to Defend, Not Just Indemnify, According to Opinion of the New York Department of Insurance

According to Opinion of the New York Department of Insurance

February 16, 2009

On October 16, 2008, the New York Department of Insurance Office of General Counsel (the “Department”) issued Opinion OGC Op. No. 08-10-07 (the “Opinion”) finding that a Director and Officer (“D&O”) liability policy may not include a provision that places the duty to defend upon the insured, rather than the insurer. Currently, many D&O policies require that the insurer merely indemnify the insured. Under such a policy, the insured, often subject to consent of the insurer, may select his or her own defense counsel and control the defense. The insurer then reimburses the insured for reasonable defense expense. Pursuant to the Opinion, however, D&O insurance policies in New York may not require that insureds arrange for their own defense.

The Opinion relies upon N.Y. Comp. Codes R. & Regs. tit. 11, Part 71 (Regulation 107), which states that “the insurer generally has a duty to defend any liability suit coverage under the policy in which damages are sought. This duty to defend typically has been separate and apart from the obligation to pay damages under the policy and, accordingly, the insurer must provide a proper defense” to the insured. Citing In re WorldCom, Inc. Sec. Litig., 354 F. Supp. 2d 455 (S.D.N.Y 2005), the Department noted that “the duty to defend customarily includes an insurer’s right to choose the attorney and to control the litigation strategy.”

The Department’s requirement that all D&O policies include a duty to defend, rather than just a duty to indemnify, is at odds with many insurance policies currently issued in the market, not to mention the preferences of many insured directors and officers. Typically, D&O insurance is purchased by corporations to protect key decisionmakers, or by individuals who sit on corporate boards, and many of these corporations and board members prefer to manage their own defense. Though the Opinion acknowledges that a sophisticated insured may prefer to control their own defense, the Department opines that an insurer may choose to give the insured the ability to participate in the defense, so long as the duty to defend remains with the insurer.

Subsequent to the Opinion, the Department will not approve D&O policies that merely indemnify the insured. Insurers will need to undertake additional litigation management duties in cases brought subject to a D&O policy issued in New York. In addition, directors, officers, and corporations may lose a significant amount of control of defense and litigation of claims brought against them subject to a D&O policy unless defense participation is provided for in the insurance policies.

McGuireWoods’ Insurance Coverage Counseling & Litigation Group provides legal representation to policyholders in coverage litigation, including bad faith actions. In addition, the firm’s Insurance Coverage Group can provide insurance counseling to assist policyholders to verify that they have the appropriate insurance in place.