ICI Mutual Insurance Company, a leading provider of liability insurance for mutual fund directors, has revised its insurance coverage in an effort to provide independent directors with more protection in disputes with fund advisers.
David Silver, president of ICI Mutual of Washington, D.C., said the company now will cover directors in most instances when they are sued by a fund adviser. Previously, ICI Mutual's policies usually did not cover directors in such cases.
ICI Mutual made the change in coverage for its directors and officers/errors and omissions insurance in response to concerns which SEC Chairman Arthur Levitt expressed last month, Silver said. Levitt warned directors that they may find themselves uninsured in litigation with a fund adviser because of exclusions in directors and officers insurance. In such a circumstance, directors could find themselves without insurance to cover costs associated with a court fight, Levitt said.
The change in coverage "ensures that fund independent directors may recover for defense costs, settlements and judgments" in suits between directors and a fund adviser, Silver said in a letter to Levitt dated March 31. The change was effective on that date.
"We heard the SEC's call and have responded in a manner that allows independent mutual fund directors to continue to protect shareholder interests while protecting ICI Mutual," Silver said in a statement.
Fund directors and a fund adviser frequently are insured under the same policy, a practice which can reduce premiums and promote efficiency. Historically, however, ICI Mutual excluded claims in suits in which one insured, such as a fund adviser, filed suit against another party insured under the same policy.
Mutual fund industry lawyers said that insurance companies developed so-called "insured versus insured" exclusions to guard against collusion between two insured parties trying to receive undeserved payments. The revised ICI Mutual coverage allows coverage for the two parties under one policy but still excludes lawsuits which are collusive, Silver said.
David A. Sturms, a mutual fund lawyer with the firm of Vedder, Price, Kaufman & Kammholz in Chicago, welcomed ICI Mutual's change in coverage. The exclusion for coverage when insureds sue one another was meant to protect insurance companies from paying claims that were not intended to be covered, not to expose directors to liability in cases where a fund adviser sues a director, Sturms said.
"The answer they have come up with is the right answer," Sturms said.
ICI Mutual is owned by its shareholders. Natalie Shirley, executive vice president of ICI Mutual, said last week that ICI Mutual provides coverage for approximately 30 percent of the mutual fund industry's directors. Those directors are responsible for supervising about 70 percent of the industry's assets, Shirley said.