D&O Insurance and the 4,000 Case

According to recent publications, Mr. Shaul Alovich filed a claim against his Directors and Officers’ (D&O) liability insurance company to reimburse the defense costs paid to finance his defense in the 4,000 case.

According to the indictment, Alovich, in his capacity as the Chairman of the board of Bezeq and Walla, bribed the former PM, Benjamin Netanyahu, in return for regulatory reliefs.

According to the publications, it seems that the insurer denied his request and claiming that they will wait until the end of the proceedings to see if he is convicted. If he’s acquitted, they will indemnify him for his defense costs.

Generally, the D&O insurance goal is to cover claims filed against directors and officers (and not the company) in their capacity as directors and officers. The claim definition in the policy usually includes criminal proceedings as well.

The payments provided under the policy are for damages, judgments, settlements, and defense costs .

The policy intention is to cover negligence (and in some jurisdictions also reckless) behavior, while dishonest acts or fraudulent acts are excluded. However, usually, the dishonest acts exclusion will only apply if it is established through a final judgment , that insured acts were dishonest or fraudulent .

As legal processes take time, usually an ‘Advancement Of Costs’ provision is included in the policy. According to this provision, the insurer shall advance defense costs before the final disposition of the claim .

However, the advancement of payments by the insurer shall be repaid to the insurer, if the insured shall not be entitled to payment under the terms of the policy.

This provision usually does not require the insurer’s consent to advance costs, but only a pre-approval of the sum of the costs before they were incurred. In case the insured did not receive such approval, the insurer shall only be liable for reasonable defense costs.

As we can understand, the D&O policy should also cover defense costs for criminal prosecution. In addition, the insurer shall advance the defense costs before final disposition. However, in case that the insured is convicted, then the dishonest acts exclusion will be triggered, and the insured should repay the insurer the defense costs.

Nevertheless, a similar issue was addressed by the United States district court at Pennsylvania in 1987, in Little v. MGIC Indemnity Corp. The court in Little determined the insurer’s duty to pay defense costs arose contemporaneously with the insured’s obligation to pay those costs. The court, reading the language of the exclusion, found that the dishonesty exclusion’s language supported this conclusion, as it protected the insured from exclusions from coverage until final adjudication of dishonesty occurred.

The D&O policy at issue in Little also provided that in the event it was finally established that the insurer has no duty to indemnify, the insured agreed to repay the insurer the advanced defense costs. In addition, the Advancement of Costs provision stated that “the insurer may, at its option and upon request , advance defense costs. Therefore, the insurer contended that this clause meant that the insurer had the discretion to advance defense costs, while the insured contended that the insurer still had the obligation to pay costs as they were incurred. The court found that each side’s reading of the policy was a reasonable one and, as a result, the policy language was ambiguous.

As any legitimate ambiguity must be resolved against the insurer (also by the Israeli Supreme Court), the court in Little concluded the policy must be construed against the insurer to require it to pay Little’s defense costs as they come due, subject to its conditional right to reimbursement. The contemporary advancement principle outlined in Little has been followed in federal courts.

In conclusion, Alovich may have a strong case against his insurer. Even if his policy requires his insurer’s consent. As ruled in the Little case, the insurer should still advance his defense costs.

D&O insurance is one of the most complicated policies in the market, if not placed properly it can cause a significant financial loss to the company and its D&Os.