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Though defenses will be raised against coverage, insurers are likely to be on the hook for much of the damages sought in these cases.Many of the claims brought against professional services firms, corporate defendants, or individual officers and directors relating to subprime losses generally should fall within the scope of the defendants' directors and officers (D&O) or errors and omissions (E&O) policies.Defendants in such litigation should be prepared to face opposition from insurers, who will likely assert a variety of coverage defenses and exclusions.Companies can take measures, however, to maximize their chances of recovering some or all of their defense costs and potential losses from insurance carriers.This exclusion was frequently invoked in optionsbackdating cases.
The availability of insurance coverage for these claims will be an important— and likely highly contested—issue as these cases go forward and settlements are negotiated.It may therefore be more difficult for insurers to disclaim coverage on the grounds of intentional misconduct, at least in securities cases.In connection with a number of options backdating cases, insurers asserted that they had the right to rescind their policies based on misrepresentations made in the policyholders' insurance applications.Many of these issues will likely be the same as the ones that have occurred in connection with prior types of securities litigation, including the options-backdating lawsuits and suits arising out of the savings and loan crisis.Their resolution, however, may be different in this context. D&O and E&O policies typically exclude from coverage liability based on fraud, criminal acts, or intentional misconduct by the insureds.
This article examines which coverage issues are most likely to arise in these cases, with a particular focus on the largest category of cases—securities actions on behalf of investors.