15 June 2005

D&O: A Board of Director's Check-Up...

In a recent presentation by NASDAQ Insurance Agency, President and CEO Bill McGinty had some wise advice. Read your policies with extra care and your legal team at your side.

The Important Issues in Directors and Officers Liability Insurance

The Escalating Awards Issue – The average securities litigation settlement escalated from $16 million to over $36 million. Are your insurance limits sufficient?

The Shared Limits Issue – Over the last decade D&O policies have extended coverage to include protection for the corporation (“Entity Coverage”) as well as including coverage for employment practices liability and even some Errors and Omissions coverage. The result has been a cost effective program that has the effect of diluting the actual protection available to the Directors and Officers. In effect, the extension of coverage circumvents the original purpose of Directors and Officers Inability Insurance.

The Severability Issue – In the event of corporate misrepresentation such as significant financial restatements raising to a level sufficient for the rescission of the D&O, the innocent Outside Directors lose their policy protection along with the Inside Directors. The optimal situation is language insuring that innocent directors will be severed from the effect of the rescission of the policy making the policy non-rescindable under certain conditions.

The Bankruptcy Issue – Bankruptcy Courts have been considering arguments that D&O insurance proceeds are a corporate asset and denying or delaying the use of insurance proceeds for defense for Directors and Officers. Pre-set allocation of limits between the Corporation and the Directors and Officers provides some protection from the Bankruptcy courts. A safe haven may be separating protection for the corporation and the individual Directors and Officers.

Other items on your D&O Checklist should include: (Source: NASDAQ Insurance Agency)

1. Aggressively participate in brokering your D&O Program.

2. Insist on direct meetings with insurance carrier underwriters

3. Investigate higher "Side A" limits (cost-saving strategy)

4. Learn the difference between the denial of a claim and rescission of your policy.

What is at issue here is the plaintiffs recovering as much for their clients as possible, and that has included personal assets of the directors.

This article from Randy Myers at Corporate Board Member sums this up quite nicely:

Tim Burns, a partner at Neal Gerber & Eisenberg in Chicago says that you should always demand approval of the insurance and make sure your company doesn’t put off the purchase or renewal of D&O until the last minute, giving you less time and clout in negotiating coverage.

What if plaintiffs in a strong bargaining position insist—as happened with WorldCom and Enron—that they won’t settle without taking a piece of your hide? Burns has a possible way to work around this: buy yet another additional layer of insurance protection, with a unique provision that the layer of insurance disappears if a plaintiff goes after your personal assets. Given that stark choice, he suggests, most plaintiffs would take the insurance money at hand rather than gamble on reaching your personal funds. Burns says he has had informal conversations with insurance companies about underwriting such policies and expects they’ll become available if sufficient demand materializes.

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