Perkins Coie LLP on Avoiding Gaps in Insurance Coverage for Private-Equity-Placed Directors at Portfolio Companies

Perkins Coie LLP on Avoiding Gaps in Insurance Coverage for Private-Equity-Placed Directors at Portfolio Companies

Michael Sharkey   By Michael T. Sharkey, Partner, Perkins Coie LLP

Directors & Officers ("D&O") liability insurance policies purchased by private equity and venture capital firms frequently include "Outside Directorship" coverage, designed to protect the individuals that those firms place as directors on the boards of their portfolio companies from lawsuits arising out of their service in these outside directorships.  Outside Directorship coverage typically is written to be excess both to any D&O insurance purchased by, and to any indemnification available from, the portfolio company.  The provisions making the Outside Directorship coverage excess to the portfolio company indemnification, however, may create an unintended gap in coverage from the standpoint of the private equity firm.

Specifically, a private equity fund could suffer a negative impact, through its ownership stake in the portfolio company, if the portfolio company's uncapped indemnification obligations to its directors are primary to the Outside Directorship coverage purchased by the private equity firm.  Even in absence of specific "double excess" language expressly making Outside Directorship coverage excess to the portfolio company's indemnification, insurance companies may argue for this same result, based on a subrogation clause, or the definition of covered "loss."  With careful review and attention to the language of its agreements, however, a private equity firm may be able to foreclose such insurance company arguments and maximize its potential for insurance coverage.

The time to conduct such a review is before a loss takes place that gives rise to a dispute over priority as between the insurance and indemnification.  Such a review should extend to all the potential sources of coverage or indemnification for the private equity firm's director representatives:  "A private equity firm should review the indemnification provisions of all relevant agreements before a loss, and adjust them accordingly, to decrease the likelihood of disputes with its insurance company over priority, or of unintended gaps in its coverage."

Michael T. Sharkey is a partner in the insurance coverage practice of Perkins Coie LLP, where he represents policyholders in insurance coverage disputes nationwide. He also counsels policyholders on the insurance implications of various transactions and agreements. He can be reached at MSharkey@PerkinsCoie.com.

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