A February 14, 2011 article in Business Insurance discussed favorable changes in the market for public company Directors and Officers (“D&O”) liability insurance. What is even more pronounced, however, though less chronicled by main stream insurance 
publications, is availability of significant coverage enhancements for purchasers of Not-for-Profit (“NFP”) D&O insurance.
Because of the sheer number of such coverage enhancements, this is the first in a series of blog posts that will discuss what I consider to be the enhancements most useful to the typical buyer of NFP D&O. Along the way we will look at not only new coverages but also improvements to both existing coverages and other policy provisions. In the latter category, consider the so-called “hammer clause”.
Found typically in a Defense Costs, Settlements, Judgments (AIG) or Defense of Claims and Settlements (Starr) section of the policy, the hammer clause encourages the insured to agree to a settlement proposed by the insurer and acceptable to the claimant. In policy forms still being used, should the insured not agree to the settlement , the insured becomes responsible for 100% of all settlement amounts (often to include incremental defense costs) excess of the proposed settlement rejected by the insured.
Insurers, when challenged, lighten the hammer by agreeing to a 60/40 split; the insured assuming responsibility for only 40% of the amount excess of the proposed and rejected settlement. When still challenged, the hammer becomes just a bit lighter at 70/30 and, most prevalently, with 80/20 splits. All of these potential changes are, of course, subject to what an insurer is filed to offer in any jurisdiction.
Sometime around 18 months ago or so, insurers began removing the hammer clause altogether, although in policies with separate coverage parts for Employment Practices Liability (“EPL”) and Fiduciary Liability (“FL”), diligence is encouraged to ensure that the hammer does not apply to any coverage parts and not just the D&O.
For the buyer of Not-for-Profit D&O/EPL/FL policies, first determine if the current policy contains a hammer clause of some weight (chances are it does) and if it does, call your agent or broker and ask why.
