For many years the New York Insurance Department has permitted directors’ and officers’ liability insurers to issue insurance policies in which the insured has the duty of defense even though it required insurers issuing other types of liability insurance policies, such as automobile liability insurers, to defend their insureds.

In 2007, the New York legislature failed to pass legislation that would have explicitly addressed the defense obligation under directors’ and officers’ liability policies by exempting them from the requirement that the insurer have the duty to defend the insureds. The proposed legislation would have amended N.Y. Ins. Law § 3420 by including language permitting the Department, via regulations promulgated by the superintendent, to authorize coverage on an indemnification basis with respect to directors’ and officers’ liability insurance policies or liability insurance policies insuring large commercial risks.

Although the legislation did not pass, a position by the Department that the insurer must have the duty of defense under directors’ and officers’ liability policies would contravene New York law and not meet the needs of the archetypal insured purchasing directors’ and officers’ liability insurance. This is a significant issue as the requirement applies not only to insurers issuing policies in New York on admitted paper, but those writing insurance in the Free Trade Zone as well.

It is true that the proposed regulation would have explicitly excluded D&O policies from the requirement mandating that the insurer have the defense obligation. More significantly, however, the legislation would have statutorily required that all liability policies contain a duty to defend. As no such requirement is currently mandated by statute, it is counterintuitive to conclude that the requirement should be enforced, while the exception is no longer allowed.

In addition, a decision by the Department mandating that insurers have the duty of defense under D&O policies would conflict with New York case law, which explicitly acknowledges that an insured may have the duty to defend under a D&O Policy. In National Union Fire Ins. Co. of Pittsburgh v. Ambassador Group Inc. 157 A.D.2d 293, 299, 1990 N.Y. App. Div. LEXIS 6522 (1990), the court examined a D&O policy stating, “the policy herein, as is the case with most directors and officers liability policies [emphasis added], does not impose an obligation to provide a defense, but only reimburse expenses incurred in the defense.” See also Amrep Corp. v. American Home Assurance Co., 81 A.D.2d 325, 440 N.Y.S.2d 244, 1981 N.Y. App. Div. LEXIS 10914 (1981); Gon v. First State Insurance, 871 F.2d 863 (1989); Federal Ins. Co. v. Kozlowski, 18 A.D.3d 33, 35, 2005 N.Y. App. Div. LEXIS 3029 (2005).

Moreover, other materials issued by the New York Insurance Department continue to support the Department’s historical position permitting insureds to have the duty of defense under D&O insurance policies. For example, General Counsel Opinion 12-14-99 (#2), which interprets, in relevant part, N.Y. Ins. Law § 3420, acknowledges that the Department has approved D&O policy filings in which the insurer does not have the duty of defense.

Finally, a decision by the Department requiring D&O insurers to provide a duty of defense under their policies would not address the needs of the typical insured purchasing a D&O policy. D&O insurance policies are commonly purchased by corporations to address the risks inherent in their business activities. They may also be purchased by directors who sit on corporate boards. It is not unusual for the scope of coverage to be heavily negotiated and corporations often employ risk managers who are experienced in such negotiations.

Given the sophistication of the typical insured, it is not surprising that they want to control the defense of any claims and thus, do not want the insurer to have the duty of defense under the policy. In high stakes litigation, the insureds invariably want to use counsel familiar with their business and with whom they are comfortable. They also want to control the defense strategy which is typically the right of the party having the duty of defense under the policy. This is such a pivotal issue that a decision by the Department that takes away the insureds’ right to defend themselves may encourage insureds to seek the desired coverage outside the State of New York, thus, potentially having a chilling effect upon the D&O insurance industry in New York.

The author concludes that: “A decision by the New York Insurance Department requiring D&O insurers to have the duty of defense under their policies is inconsistent with New York law and would unilaterally impose constraints on an established marketplace which has successfully met the needs of insureds for several decades.”

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