Meeting Summaries

DIRECTORS AND OFFICERS LIABILITY INSURANCE

Panelists at the Babson College meeting were Rob Spofford of The Spofford Group Insurance Brokerage and Carl Metzger Esq. of Goodwin Procter LLP.

One quarter of public companies raised their D & O limits last year from an average of $80 million to $87 million. Many major companies lacked sufficient coverage. Directors should ask whether the company has as broad a coverage as state law (often Delaware) permits. All policies are renewed on an annual basis therefore potential or outstanding risk will play a role in future pricing.

Types of coverage:                                                        

Side A: Covers directors-only claims, not indemnifiable by the company, e.g. insolvency and derivative suits.

Side B: Reimburses the company when it has indemnified the director for a claim.

Side C: Coverage (since 1995) for claims against the company, such as a securities claim.

Some larger companies because of their significant cash balances will self-insure and indemnify, carrying only Side A coverage.

Directors should know what D & O insurance costs are.  Underwriters determine the actual costs for each level. Ranges for public companies could be $15,000 – $25,000 annually per million dollars of coverage, so $250,000 might pay for $10 million plus in coverage. Private companies might pay $5,000 to $7,500 annually per million of coverage. If a company is engaged in M & A, premiums and retentions may be higher since most deals bring with them a legal court challenge. Nonprofit boards should also carry D & O Insurance and directors should understand the relevant liability caps that exist in various states.

Directors should also be aware of any retentions (deductibles) that are included in a D & O policy and who is responsible for the payment thereof. Directors should be aware that retentions relative to Side A coverage are not paid for by the company.

There is recently available, a new Independent Director Liability (IDL) policy, which covers board service on multiple boards. There is no established trend yet relative to who pays for this policy.

To qualify for D & O insurance payments, there requires: a “claim,” notification, a monetary loss and a “wrongful act” which might be the actions of a rogue officer, such as the CFO.  It does not cover one director suing another.  During the claim process, the board may need to conduct an independent investigation of wrongful acts and actors.

Directors on occasion (World Com) have been directed by a regulatory body (i.e.  SEC or DOJ) to contribute to paying penalties personally, however this is rare. The FDIC may require bank directors to share in paying for civil penalties coverage.  Mutual Fund boards are highly regulated and have access to the assets of the funds. Mutual Fund board’s interests are different from those of the fund advisers and the board may wish to have a separate policy. Policies should include a “priority of payments” endorsement which allows directors and officers to be indemnified before the company when both are defendants in covered claims.

Directors should insist that the company utilize a highly experienced, quality carrier such as Chubb, Chartis, XL, The Hartford, Travelers, ACE and Arch versus newer underwriters who may cut prices but lack the track record of paying claims and the long term commitment to the D & O market.

Directors may want to consider having an excess policy in place that only covers Side A (non-indemnifable) claims coverage for D&Os and not the corporation).  If the company blows up (think Lehman and Bear Stearns), this limit is for the exclusive use of the directors and officers.

Directors of multinational companies should check on coverage for overseas sites and affiliated companies who may require coverage in host countries as well.

A corporate scandal often brings penalties, damage to stock prices and reputation, and an increase in the next year of D & O rates. Shareholder derivative lawsuits may lead to both state and federal court cases, but most of them are settled with shareholders before going to trial.