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Allocation, Allocation, Allocation: Unpicking the Allocation clause in D&O policies

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Allocation, allocation, allocation: Unpicking the allocation clause in D&O policies

Francis Kean, Executive Director, FINEX
Willis Towers Watson

It can be an unpleasant surprise to discover that not all costs reasonably related to an insured person’s legal representation are covered under most D&O policies. Francis Kean, Executive Director in Willis Towers Watson’s FINEX Group, explains why this is the case, and outlines what can be done about it.

The allocation clause:

An allocation clause will typically say that when an underlying claim includes both covered and uncovered matters, or includes both covered and uncovered parties, the insurer and the policyholder will use their best endeavours to agree on an allocation between loss covered under the policy and loss which is not covered. It will also usually stipulate that, in the absence of agreement, the issue will have to be resolved by arbitration. On the face of it this sounds quite reasonable but it is particularly when the clause is applied to defence and investigation costs that unwelcome expectation gaps can arise.

The Hidden problem

Francis Kean

Francis Kean

It is often the case that company directors are named in proceedings together with the company (or with others) or in circumstances where they find themselves sued in a variety of capacities, for example, as shareholders or as directors of other entities. In all of these situations the allocation clause may be engaged.

If, as a purchaser of D&O insurance, you have opted for so called Side C or entity cover, you will have essentially bought out the application of the allocation clause to securities claims – that is, claims brought by the company’s own shareholders. Under Side C cover, the insurers promise to pay all of the unallocated loss, including defence costs of both the directors and officers and of the company sued in the same securities claim. However, what is often missed when it comes to Side C cover is that it only provides this protection against civil claims, and not in respect of the regulatory investigations which often precede them. The costs involved in an SEC or FCA investigation are notoriously high and, because they are not covered under Side C, the allocation clause will also apply to them thereby significantly restricting the scope of cover.

What principles apply in determining the costs covered by Insurers?

When it comes to assessing which principles apply to the determination of costs covered by insurers, there are three categories to keep in mind: uncovered costs, covered costs, and mixed costs (which includes both covered and uncovered costs). This can produce a complex situation, and issues commonly arise especially in the mixed costs category where both covered and uncovered costs collide.

In the case of New Zealand Forest Products V New Zealand Insurance Company http://www.bailii.org/uk/cases/UKPC/1997/37.html , some US$ 8 million had been spent in defending both a director and a number of companies within the insured organisation. The parties agreed that the costs which related purely to the entities were not covered and that the costs which related purely to the director were fully covered. What of the costs which related to both? Importantly, there was no allocation clause in this policy.

With the allocation clause absent, the House of Lords strove to ascertain the intention behind the cover. It said:

Once it is accepted that the costs are not confined to those which relate solely and exclusively to the officer it is hard to find anything in the language which prevents the cover extending to all the costs which also relate to another defendant”

In other words the Court concluded that all the mixed costs were covered, provided that they also related to the insured defendant. So in the absence of an allocation clause (and without other specific language to the contrary) the Court decided that all the mixed costs were covered.

It is worth pointing out that the House of Lords also concluded that a layer of protection nevertheless existed for insurers in that D&O policies routinely included a clause (as did this one) relating to ‘required consent’, meaning insurers were not necessarily liable in respect of defence costs or settlements to which they have not explicitly consented.

The application of the allocation clause to defence and investigation costs

It might not be much of an exaggeration to say that the insurers’ insistence that the allocation clause be extended to all defence and investigation costs is born of the specific concern that mixed costs would otherwise be automatically covered. That concern may be well founded from their perspective but, from the buyers’ point of view, it can lead to unwelcome outcomes. Taking again, the New Zealand Forest Product facts, a typical allocation clause covering costs would very probably have meant that a large part of the US$8 million costs in play would not have been covered at all even if they reasonably related to the individual director’s defence. That is arguably not the outcome which the Insured would either have expected or welcomed and yet it can be what happens to significant elements of D&O claims.

Solving the puzzle

Interestingly, if we look across the Atlantic to the US where similar allocation principles apply, certain types of policy typically provide that insurers will pay up to 100% ( or perhaps a lower percentage) of the defence costs and investigation costs in a mixed claim. There is no reason why such pre-determined allocation clauses could not be added into UK D&O policies; nor indeed is there any reason why allocation clauses could be expressly dis-applied to defence and investigation costs. It is simply a question of negotiation, cost and choice. With signs of the D&O market hardening in the UK after a sustained period of soft conditions, it may be that insurers’ appetite for this type of revision is restricted. Even if that is so, it is better be aware of the issue up front rather than waiting until the insurers’ reservation of rights letter arrives following a claim.

Business

UK delays review of business rates tax until autumn

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UK delays review of business rates tax until autumn 1

LONDON (Reuters) – Britain’s finance ministry said it would delay publication of its review of business rates – a tax paid by companies based on the value of the property they occupy – until the autumn when the economic outlook should be clearer.

Many companies are demanding reductions in their business rates to help them compete with online retailers.

“Due to the ongoing and wide-ranging impacts of the pandemic and economic uncertainty, the government said the review’s final report would be released later in the year when there is more clarity on the long-term state of the economy and the public finances,” the ministry said.

Finance minister Rishi Sunak has granted a temporary business rates exemption to companies in the retail, hospitality, and leisure sectors, costing over 10 billion pounds ($14 billion). Sunak is due to announce his next round of support measures for the economy on March 3.

($1 = 0.7152 pounds)

(Writing by William Schomberg, editing by David Milliken)

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Discounter Pepco has all of Europe in its sights

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Discounter Pepco has all of Europe in its sights 2

By James Davey

LONDON (Reuters) – Pepco Group, which owns British discount retailer Poundland, has targeted 400 store openings across Europe in its 2020-21 financial year as it expands its PEPCO brand beyond central and eastern Europe, its boss said on Friday.

The group opened a net 327 new stores in its 2019-20 year, taking the total to 3,021 in 15 countries. The PEPCO brand entered western Europe for the first time with openings in Italy and it plans its first foray into Spain in April or May.

Chief Executive Andy Bond said its five stores in Italy have traded “super well” so far.

“That’s given us a lot of confidence that we can now start building PEPCO into western Europe and that expands our market opportunity from roughly 100 million people (in central and eastern Europe) to roughly 500 million people,” he told Reuters.

To further illustrate the brand’s potential he noted that the group has more than 1,000 PEPCO shops in Poland, which has a significantly smaller population and gross domestic product than Italy or Spain.

The company, which also owns the Dealz brand in Europe but does not trade online, has already opened more than 100 of the targeted 400 new stores this financial year.

Pepco Group is part of South African conglomerate Steinhoff, which is still battling the fallout of a 2017 accounting scandal.

Since 2019 Steinhoff and its creditors have been evaluating a range of strategic options for Pepco Group, including a potential public listing, private equity sale or trade sale.

That process was delayed by the pandemic, but Steinhoff said last month that it had resumed.

“The business will be up for sale at the right time. It’s a case of when, rather than if,” said Bond, a former boss of British supermarket chain Asda.

Pepco Group on Friday reported a 31% drop in full-year core earnings, citing temporary coronavirus-related store closures.

Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) were 229 million euros ($277 million) for the year to Sept. 30, against 331 million euros the previous year.

Sales rose 3% to 3.5 billion euros, reflecting new store openings.

($1 = 0.8279 euros)

(Reporting by James Davey; Editing by David Goodman)

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Fashion-focused livery launch reveals new colours for Gasly, Tsunoda in 2021

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Fashion-focused livery launch reveals new colours for Gasly, Tsunoda in 2021 3

Scuderia AlphaTauri debuted their colours for the 2021 Formula 1 season as drivers Pierre Gasly and Yuki Tsunoda unveiled the team’s new look with the livery for their AT02 racecars. The setting was a fashion-forward launch in the all-new showroom of AlphaTauri, Red Bull’s premium fashion brand.

Salzburg (AUSTRIA) – Formula 1 team Scuderia AlphaTauri served up a stylish preview of the new F1 season with a presentation of its 2021 livery alongside key looks from the upcoming Autumn/Winter 2021 collection of Red Bull’s premium fashion brand, AlphaTauri. The launch – held at AlphaTauri’s new showroom in Salzburg, Austria and presented digitally – marked the first time that drivers Pierre Gasly of France and Yuki Tsunoda of Japan have appeared together as teammates.

After a successful first season racing in AlphaTauri colours, the Italian outfit is looking to challenge the top of the ultra-competitive midfield in 2021, and the two young drivers have been assigned clear-cut roles. Gasly is Team Leader. The 25-year-old, who made his Formula One debut with the team in 2017 under its former name, Scuderia Toro Rosso, has earned two F1 podiums. During the 2020 campaign, Gasly’s maiden win at Monza was a defining moment for him and the team under its new name.

Tsunoda, 20, is the first Japanese driver to race in F1 since 2014, his promotion coming off the back of a fast, four-season trajectory from winning the 2018 F4 Japanese Championship and finishing third in the 2020 FIA F2 Championship to entering the top-level ranks this year. Expectations are high for his rapid style of learning to complement the experience of Gasly.

“The decision to go for Pierre and Yuki in 2021 was taken because Scuderia AlphaTauri’s philosophy is still to give talented young drivers from the Red Bull Junior Program the opportunity to step up to F1 and to educate them – this is why Yuki now gets his chance,” explained Team Principal Franz Tost. “With Pierre on Yuki’s side we have an experienced driver, who can help our Japanese rookie to develop faster, but at the same time we can aim for good results. I think this pair is the best possible scenario to achieve both our targets, and I’m also confident this will be a successful one.”

In 2020, Scuderia AlphaTauri won best livery by a landslide, and the team’s all-new, matte blue and white racecar livery took center stage with the drivers at the fashion event, anticipating the 2021 model that will debut at pre-season testing in Bahrain on 12 March. The test is the precursor to an unprecedented 23-race schedule, and in preparation for the demanding calendar both drivers have spent time at Red Bull’s Athlete Performance Center for intense fitness testing.

“I’m ready to take on the role of team leader. Yuki is a very quick driver, and he will help us move the team forward – we will work together to achieve that,” said Gasly, the team’s all-time top points scorer. “I really believe last year was the team’s best in terms of the way it worked, the development, the performance and the way it managed the race weekends. I’m always hungry for more, and I’m sure we can achieve great things in 2021.”

Tsunoda, who was honored with the Anthoine Hubert Award for best Formula 2 rookie in 2020, added, “I’ve been lucky enough to spend some time with Scuderia AlphaTauri ahead of the season, so I’m already developing strong relationships and learning a lot from them – including Pierre, who is an incredible talent. My main goal is to learn quickly and deliver results as soon as possible, and I’m really excited to get started.”

The launch at the AlphaTauri Showroom not only gave Gasly and Tsunoda a preview of the AlphaTauri Autumn/Winter 2021 fashion collection, but the drivers had the chance to select their new off-grid looks ahead of the season start.

Ahmet Mercan, CEO AlphaTauri, summarized: “This is a triple reveal at a unique point of time: a new AlphaTauri Showroom where fashion meets F1, a first look at the AW21 AlphaTauri collection and the unveiling of the new Scuderia AlphaTauri F1 livery and driver pairing.”

Scuderia AlphaTauri fans don’t have long to wait for racing action: The FIA Formula 1 season kicks off at the Bahrain Test on 12-14 March, in preparation for the Bahrain Grand Prix on 28 March.

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