Directors and officers (D&O) liability insurance helps companies with any defense costs they might incur should legal action be taken against them. Alternatively, the amount of money a D&O policy reimburses can be used as basis for a settlement should the lawyers of the defending company and the plaintiffs agree to it.
While already useful, some companies have sought to abuse their D&O policies to further avoid paying for costly lawsuits—and ended up with even bigger problems on their plates. A feature article on Reuters
explores how two insurers allegedly lied about how much D&O insurance they carried, and the penalty they suffered years after the original case.
In April 2015, AIG and CVS Caremark agreed to pay a combined total of $310 million (AIG paid $280 million, CVS $80 million) to settle a long-running class action which claimed that in 1999 one of the companies that would merge with CVS deceived plaintiffs’ lawyers about its D&O coverage during a shareholder fraud case.
An Alabama state court class action purported that MedPartners—a company that later merged with Caremark, which then merged with CVS—and AIG did not tell class counsel back in the 1999 case that the former had unlimited fraud insurance under a policy it had purchased from an affiliate of the latter.
According to allegations in the recently-settled case, both AIG and MedPartners represented that the company carried only $50 million in coverage, managing to convince plaintiffs’ lawyers to accept $56 million to settle the suit in 1999. AIG and MedPartners’ lawyers supposedly kept silent when shareholder counsel told the judge in 1999 that they took the deal, seeing that it was all the company could seemingly afford.
It was only much later on that suspicion over the AIG policy would surface. Law firm Hare Wynn Newell & Newton—which was one of the plaintiffs’ firms that split the fee award in the 1999 settlement—happened to represent a former MedPartners executive in a suit seeking reimbursement of his defense costs, only a couple of years later. During the case, MedPartners produced documents disclosing the terms of the AIG insurance policy. Upon discovering the truth of the policy, Hare Wynn partner John Haley realized that the shareholders in 1999 could have gotten much more.
“I went apoplectic,” he remarked. “I’m not sure I could repeat exactly how I felt.”
It took more than 10 years to finally get AIG and CVS to settle for $310 million.
AIG and CVS’ costly mistake serves as a harsh lesson for all companies with D&O policies. In the end, companies are better off letting their policies function as they intended.
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