Author: Walker Newell
Modern public company Directors and Officers (D&O) insurance policies are long and detailed. Dozens and dozens of pages. Tens of thousands of words. Numerous endorsements and exclusions.
Given this breadth, the uninitiated might assume that these policies specifically answer all key recurring insurance-related questions that come up in D&O litigation. That assumption would be wrong.
There are plenty of specifically enumerated items in D&O policies. But there are also a variety of consequential areas that are left intentionally fuzzy and subject to negotiation between the policyholder and the insurance carrier if and when a particular issue arises.
As we'll see, there are some good and company-friendly reasons for these gray areas. There are also ways that insurers may at times try to leverage ambiguity to their benefit. Knowledge is power. Let's look at a couple of examples.
"Reasonable" defense costs
When a public company is hit with a federal securities class action, the first step is to find experienced outside counsel to represent the company and any officers and directors named in the suit. Most modern public company D&O policies are based on reimbursement (not duty-to-defend) and don't specify panel counsel. This means that the company gets to go out into the world itself to find the lawyers best suited to handle the case.
There are many securities defense lawyers in the world, and they all charge different hourly rates. Some of these lawyers command an hourly rate equivalent to a night in a very nice hotel. Others charge an hourly rate roughly equal to a month of tuition for your kid's daycare. Still others charge an hourly rate that is higher than the annual average per capita income in many countries.
On the flip side, does the policy give public companies carte blanche to hire the most expensive lawyers in the world, without any limitations?
It doesn't. It's easy to understand why insurers would be uncomfortable with the prospect of unlimited hourly rates. (As an aside, companies have strong incentives to keep fees down even if insurance will ultimately foot some of the bill, so it's not as though the interests of insurer and insured are greatly misaligned here. For example, the company is on the hook to pay the self-insured retention before the policy begins to pay for a covered claim, so there's a strong incentive to keep fees down.)
How does the typical modern public company D&O policy navigate these tensions? Many policies use the following general framework:
- The company needs to get the insurer's consent to hire the counsel they select.
- The insurer needs to consent to counsel.
- The insurer's consent to counsel cannot be "unreasonably" withheld or delayed.
- Defense costs need to be "reasonable" (and sometimes "customary").
But what are "reasonable" defense costs? Is it unreasonable to hire a lawyer who costs as much on an hourly basis as front row tickets to Taylor Swift?
What if the insurer doesn't consent to counsel? What qualifies as "unreasonable" in this context?
With a strong broker and expert defense counsel, the client shouldn't need to sweat over these questions. Insurers with large D&O insurance books have a birds-eye view of the federal securities litigation ecosystem. They know the hourly rates different firms charge and the reasons why different companies choose different firms with different hourly rates. Companies and insurers both want the best possible lawyers to do the most efficient possible job to get the securities class action thrown out as quickly as possible.
In most cases, these conversations are relatively seamless. When complexity arises, a sophisticated insurance broker will step in, advocate effectively and ensure that the policy's "reasonableness" requirements aren't a barrier to the company's ability to choose the right lawyers for the job.
Circumstances that could "reasonably" give rise to a claim
As a company, it's important to be on top of any developments that might qualify as a "claim" under your D&O policy. If the officers and directors of the company are named in litigation, that should be an immediate call to your broker. Same answer if a securities class action is filed against the company. Pick up the phone. If you wait too long and submit a notice later than the time period specified in the policy, the insurer might have a right to deny coverage.
Sometimes, other things happen at a company which don't quite meet the technical definition of a claim but are nevertheless risky from a D&O perspective. One example might be a brewing corporate crisis that hasn't yet triggered formal litigation — but may in the future. Another example might be an accounting restatement, which could — or couldn't — lead to future litigation or investigations.
When this happens, it can sometimes be good for the company to notice the matter as a circumstance that may give rise to a claim. This notice allows the company to pin a future claim that arises out of the circumstance onto the then-current policy, fend off any future late notice arguments and preserve all available rights under the policy. This notice also keeps the renewal process unimpaired.
Modern public company D&O policies typically give companies the right — but not necessarily the obligation — to notice circumstances for these reasons.
Of course, "circumstances" occur all the time, any of which could in theory give rise to some future claim at some point in time. It wouldn't be practicable or wise to send a notice every time something interesting and potentially negative happens at your company, and your insurer wouldn't accept these notices, anyway.
So how does your D&O policy define a "circumstance?" In commonly used language, a circumstance is something that is "reasonably likely" or could "reasonably be expected" to give rise to a claim. The policyholder also needs to be able to detail the potential claim with some degree of specificity.
Of course, this explanation doesn't help us that much from a definitional perspective. Often, reasonableness is in the eye of the beholder.
Ultimately, it's helpful to policyholders to have the ability to notice circumstances and added specificity in this area would likely have the effect of restricting coverage. Moreover, an expert D&O broker can help to advise you on whether it's beneficial to notice something as a circumstance and then advocate with the insurers to ensure that you get the full benefit of the policy's protections.
Shining a light on gray areas
These are just two examples of places where, in the D&O policy, wiggle room is a feature, not a bug, for both companies and insurers. Conversations with insurers are often iterative, factoring in policy language, the insurer's history with the company, the broker's market relationship with the insurer, and other hard and soft factors. With a strong brokerage team, these terms can be leveraged for the benefit of the company, directors and officers.
Published April 2026
