Seven Ways Counsel Can Help Clients with D&O Claims

During a panel discussion on the topic of "Advising a Public Company in Crisis" at the ABA Annual Meeting earlier this week, unexpected time constraints forced me to dramatically abbreviate my planned remarks. On the fly, I fashioned what turned into a list of seven pointers for outside counsel who are assisting their clients in connection with the clients’ D&O claims. Perhaps proving once again that necessity is a mother, the points I conjured up on the spot actually withstand more leisurely scrutiny. Because I believe that these rules of thumb if followed could materially enhance most interactions with insurers on policyholders’ behalf, I reproduce the list of seven items here, with some additional commentary.

1. Keep the carrier informed: When a company is in crisis, communicating with the D & O carrier may seem low priority. But if the company has any expectation or hope of tapping into the D&O policy, there is a substantial detriment in treating the insurance as an afterthought. Complete and contemporaneous communications with the carrier is the single most important way to improve relations with the carrier, and will go a long way toward avoiding many of the problems that sometimes undermine efficient claims resolution.

2. Provide timely, detailed fee statements, separated by matter: Many of the messiest problems that arise in D & O claims involve defense fees, and far too many of these problems arise because billing statements are delayed, incomplete or unedited, or combine a host of legal matters all thrown together. Counsel should consider the legal bills as if they were collectively a brief presented to make the case for payment, and take the same care they would with any other brief. Moreover, counsel should anticipate that the carrier will read the bills very carefully, and in particular prepare and edit the bills with an eye toward the carrier’s likely response to the bills.

3. Threats don’t work: Experienced claims representatives have dealt with many lawyers, have had to face many disputes, have been called many names, have had their depositions taken, and have been accused of bad faith and worse. They have heard it all before, many times. They are inured to the threats, because they have to be to get their job done. But while they can disregard the threats because they must, they prefer to deal with people who have the self-confidence and professionalism to conduct business without resorting to threats. A professional tone is a much more effective approach that a warlike tirade. This of course does not mean backing down if the carrier takes an unreasonable position. The best response if that happens it not to make threats, but to provide reasons. Indeed, I believe it is possible to retain professionalism even if you have to sue the carrier. In the long haul, establishing a professional relationship with the carrier’s claim representative is far more likely to advance your client’s interests and will prove to be an asset if you must deal with the same representative again on a future claim.

4. If the carrier has questions, answer them: This point is really an extension of the prior point about maintaining professional relations. If the carrier feels it needs more information to process the claim, you are not advancing your client’s interests by treating the questions as an unthinkable impertinence. If for some reason it would be difficult or prohibitively expensive to answer the questions, pick up the telephone and try to find out what the carrier really needs and whether there might be a less burdensome or costly way to provide the information. Providing answers helps to remove barriers and expedite the process. Resisting questions and reviling the questioner can only cause problems.

5. Enlist the broker’s assistance: This one is particularly hard for some lawyers, as they presume that they bring everything to the table that is required to get claims resolved. The reality is that broker may have relationships that can help overcome barriers, and the broker may be able to play an important go-between role that can help smooth the path toward claims resolution. A skilled broker can help move the claims process toward the end game. It has been my privilege to be involved in the resolution of quite a number of D&O claims over the years. (As an aside, if your client’s broker is unable to play this role, there may be a serious issue with your client’s choice of broker.)

6. Help set expectations: As hard as it may be to accept, it is sometimes the case that there are defense fees or other costs that may not be covered under the policy. It is counterproductive to continue to agitate for the carrier to pay these items, and the more sharply the focus is kept on the items for which reimbursement appropriately is being sought, the more quickly the process can move toward the end game. Counsel can help here by helping to set the client’s expectations at a realistic level. False hope and unrealistic expectations only delay resolution and encourage unnecessary or even counterproductive disputes.

7. When difficulties emerge, try to resolve them in face-to-face meetings: Lawyers are excellent letter writers, but a letter-writing campaign has limited utility and is unlikely to get to the ultimate end game. In many instances, a face-to-face meeting for the purpose of trying to find a business resolution to disputed issues can get the claims process on a more productive track. Even a phone call is usually preferable to yet another letter.

Obviously, every circumstance is different, and there will be those situations to which these pointers are simply inapplicable. I have been involved in some unfortunate claims over the years where no amount of talking could eliminate the barriers to claims resolution. But in general, the pointers above if followed will in most circumstances substantially enhance the efficiency of the claims process and help avoid the kinds of problems that all too often undermine smooth claims resolution.

Hedge Fund Reassurance in an Uncertain Market: In an August 16 column on Bloomberg.com entitled "Hedge Fund Guy Atones for His Subprime Bond Sins" (here), Mark Gilbert takes a humorous look at what a current update from the fictitious hedge fund "Short-Term Capital Mismanagement LLP" might look like in light of the deterioration in the market for mortgage-backed securities. After reviewing the hedge fund's "proprietary investing tool" (sometimes called "a dartboard") and the "unique hexagonal cuboid models" used to select individual securities, the update reports that investment decisions of other funds using identical dice have resulted in "crowded trade."

After describing the efforts the fund has taken to verify the prices of the securities held in the fund, the update letter also reports:

We have, of course, been in touch with the rating companies to update our default-probability scenarios, particularly on the AAA rated investments we own. They recommended a forecasting method using stochastics to regress the drift-to-downgrade timescales for the past 100 years and throw them forward for the next five minutes. The technical term for this is ``induction,'' though those of you of a less quantitative bent may know it as ``guessing.''

We are pleased to report that, contrary to what current market prices might suggest, all of our top-rated securities remain absolutely AAA. Provided, that is, the future performance of the underlying collateral is identical to its history. Otherwise, the rating companies say our investments are likely to be reclassified as "toast.''

We have also been checking our back-up credit lines with our friends in the investment-banking world. As soon as they return our calls, we'll be able to update you on our emergency liquidity position. We are sure they are fine.

Some of you have written to us asking for your money back, citing clauses in the fund documentation called redemption rights....We have filed your letters in a special drawer in the filing cabinet marked "trash'' for now. Do you have any idea how much trouble you all would be in if we actually sold this stuff in the market today? At these crazy prices? Fuhgeddaboudit. You'll thank us later.

Special thanks to a loyal reader for the link to the Gilbert column.