Hunton Insurance Recovery Blog

A California appeals court recently reversed a trial court’s determination that a D&O insurer had no duty to reimburse legal fees incurred by a company’s former CFO in defending against an SEC civil enforcement action, shareholder derivative claims, and counterclaims by the company asserting that the CFO breached his indemnification agreement. In doing so, the appeals court rejected the insurer’s argument that the defense costs the company advanced to the CFO were “restitutionary” damages excluded from the D&O policy’s definition of loss.

The court explained that its ruling favoring broad executive protection was consistent with the generally understood purpose of D&O liability insurance—to provide protection for individuals whose business decisions, made in their capacity as the management of a corporation, subject them to the risk of personal liability for losses that the corporation or its shareholders may incur.

We have previewed in prior posts the ways artificial intelligence is rapidly changing the way business operate, including the many ways AI has influenced the insurance market, creating both opportunities and risks for policyholders. We later highlighted, based on a recent securities lawsuit, how corporate management may be at risk for the alleged use or misuse of AI and how companies should evaluate their directors and officers (D&O) and management liability policies to ensure that they are prepared to respond to and mitigate AI-driven risks, including claims alleging that a company or its officers and directors made misrepresentations about AI.

The US Securities and Exchange Commission has levied $125,000 in civil penalties on Cheesecake Factory as part of a settlement to resolve the agency’s allegations that the company made materially misleading statements to investors about the impact of the COVID-19 pandemic on its business. While this is the first such case reported by the SEC, it is only one in a string of recent third-party liabilities companies have faced that implicate directors’ and officers’ liability insurance coverage.

The calendar may have started anew in 2018, but federal regulators have affirmed that they are still firmly focused on one of 2017’s emerging issues—cryptocurrencies and, more specifically, initial coin offerings (ICO).

This week, SEC Chairman Jay Clayton issued a statement on Initial Coin Offerings (ICO) addressing the legality, fairness, and risks associated with those offerings. Although the agency’s bulletin was one of many recent public statements by federal agencies on ICOs and cryptocurrencies generally, this new warning highlights additional issues and concerns with the ICO phenomenon that are particularly relevant to insurance coverage.