Federal regulators, investors and the
public are aggressively seeking to punish directors and officers (D&O) who enrich themselves at the expense of shareholders.
Incredibly, while most directors and officers abide by a code of ethics, you need
only pick up the latest Wall Street Journal
to see the next parade of people under
investigation.
“Some institutional investors have actually provided their law firms with a bounty if
they can get the company directors to pay
personally out of pocket to intensify their
pain,” says J. Glenn Dockery, executive
vice president, Hilb, Rogal and Hobbs, Executive Risk Solutions.
Smart Business recently spoke with
Dockery about why it’s necessary for directors and officers to not only obtain, but
also compare and customize, D&O insurance policies to best protect their personal
assets.
What is the current status of D&O liability
insurance and how has it changed?
We are in an extraordinarily soft market,
so the good news for buyers is that the coverage is extremely reasonable, relative to
price. The coverage terms are exceptionally broad compared to prior periods.
Deductibles are fair, and there is more
capacity chasing fewer premium dollars,
which results in a more competitively
priced product.
Historically, private companies haven’t
worried about D&O liability coverage,
believing they had little exposure compared to public companies. Their largest
exposure is and has been employment
practices liability (EPL). Now, private companies can purchase a bundled insurance
product that includes EPL, and D&O and
may include other coverage, such as fiduciary liability.
What are the first steps to obtaining D&O
coverage?
Am I protected? Anyone who is going to
sit on a board of directors — whether it’s a
not-for-profit, private or a publicly traded company — should request a letter from
outside counsel setting forth those circumstances where the entity cannot offer
indemnity and how that entity would propose to fill those gaps to provide the diligent director with personal asset protection. The initial focus should be on the entity’s indemnification provisions, not the
D&O policy.
Don’t the indemnification provisions provide
adequate protection?
Most companies, general counsel and
risk managers — at even some of the
largest companies — largely overlook
indemnification issues when they’re evaluating their directors and officers insurance.
Indemnification is really the bedrock of
personal asset protection.
D&O insurance works in lockstep with
indemnification. In the event there is a loss
and you are sued as a board member —
and assuming you meet all the standards of
conduct — the corporation will agree to
indemnify you. Now, how is it going to pay
for defense costs, charges, settlement
expenses and judgment amounts? It either
comes from the company’s coffers or D&O
insurance. The D&O policy is an off-balance-sheet asset, which funds, subject to a deductible, the corporation’s indemnification obligation to the director or officer.
D&O fills the gaps when the corporation
cannot legally or financially honor its
indemnification obligation.
Are all D&O policies the same?
D&O insurance policies are written in
English, a very imprecise language, and are
drafted by attorneys. They are one of the
most litigated contracts in the history of
insurance because of the vagaries in policy
language and evolving risks. Consequently,
every client is very concerned about the
wording in these contracts.
Often, although there may be no specific
exclusions, clients think they have coverage when, in fact, they do not because it is
taken away somewhere else. For example,
in the state of Florida, the insurability of
punitive damages is absolutely prohibited.
These policies are not standard and there
are significant differences between and
among policies even within a carrier. It is
important that each company understands
its risk profile to negotiate a best-in-class
insurance contract.
What types of claims does D&O insurance
protect against?
Claims may be brought by past, current
and present employees, competitors, suppliers, contractors, customers, government
and regulatory agencies, shareholders,
investors and other third parties.
Additionally, mergers and acquisitions,
especially in view of the recent spate of
going-private transactions, can be a significant source of claims, public or private.
When a board is sued, three questions are
asked: (1) Do we have insurance? (2) Is the
claim covered? and (3) Why didn’t we buy
more? Are you prepared to answer these
questions?
J. GLENN DOCKERY is executive vice president, Hilb, Rogal &
Hobbs, Executive Risk Solutions, in Atlanta. Reach him at (404)
942-5140 or [email protected].