Whether you are volunteering for a
small not-for-profit organization or
have been appointed to the board of one of the largest companies, you need to
know about potential personal liability. You
also need to know how to obtain protection
from potential litigation in those positions.
“Whenever you are involved in making
decisions that affect other people or organizations, it is important to recognize that
those decisions expose you to litigation,”
says James M. Fasone, division senior vice
president at Arthur J. Gallagher Risk
Management Services Inc. “Directors and
officers (D&O) insurance is the best form
of protection, after due diligence, against
claims of omission or alleged misconduct.”
Why do the majority of organizations of any
size buy D&O insurance?
Most buyers of this product are looking to
protect their personal liability arising from
their fiduciary duty to third parties as directors and officers. While most corporations
allow for the indemnification of directors
and officers, both the corporation and directors and officers appreciate the added security of insurance protection against personal litigation for any alleged mismanagement.
Many buyers merely look at the economics involved and the potential exposure to
high-net-worth independent directors, and
migrate to the lowest cost alternative. As
this is a very personal protection, more
savvy buyers look to benchmarking studies, peer review and complex limit analysis
tools to support this important decision.
There are some limited publications
available that provide generic data sets that
can provide some guidelines. Many buyers
rely on various third parties, including
insurance brokerage specialists, that have
expertise in the product line.
Who are some of the common litigants
against directors and officers?
Though employees bring the majority of
claims against private and not-for-profit
companies, shareholders bring the most claims against publicly traded companies.
Litigation can be brought from numerous
other sources, including debt holders, customers, suppliers, competitors and regulatory agencies, to name a few.
What are the current market conditions for
purchasing D&O insurance?
This is an excellent time to be a buyer for
D&O liability insurance. Pricing has significantly softened the past few years.
Increased capacity, more sophisticated
underwriting tools and a recent decreasing
trend in claims have all lead to more
aggressive pricing for buyers.
The average cost of defense of litigation
is about $600,000. While settlement
amounts vary, employment-related claims
can exceed $2 million and securities litigation settlements average over $18 million.
For privately held and not-for-profit
organizations, the policy is purposely written in a broad fashion. Typically, directors
and officers, employees, temporary staff,
and the organization itself are protected under the policy. The policy can be negotiated to protect independent contractors,
volunteers and even certain third parties in
some instances.
Is any particular industry sector more at risk
for D&O liability than others?
While underwriters look to assess the
risk of each individual company on its own
merits, some industry sectors have a higher risk profile and are prone to more litigation. Among these sectors are technology
companies, energy-related corporations
and those involved with the delivery of
health care services. These particular sectors can have highly volatile financial
results due to changing technology, shifting
competitive landscape and unmanageable
regulatory influence.
Does an initial public offering or the raising
of public debt increase the potential liability
of directors and officers?
Any public filing with the Securities and
Exchange Commission, whether to raise
debt or equity, significantly increases the
potential for personal liability of those
involved. The SEC Acts 33 and 34 have
very specific provisions regarding the
types of representations that can be made
about the sale of securities to the general
public. Any and all disclosures made to the
public are often sited in misrepresentation
cases to support securities litigation when
a company fails to meet its financial projections. Securities litigation represents the
single largest cost of claims to the insurance companies, making the cost of premiums for public companies significantly
higher than their privately held peers. <<
JAMES M. FASONE, ARM RPLU, is division senior vice president at Arthur J. Gallagher Risk Management Services Inc. Reach him at
(303) 889-2516 or at [email protected].