Independent Director Exposure To Post Sarbanes-Oxley Claims Requires Revisitation Of Directors & Officers Insurance Coverage
I. INTRODUCTION
Most Directors & Officers policies include a number of new exclusions. The most troublesome is the “severance” clause which precludes innocent directors and officers from procuring policy benefits where other directors and officers are found liable for wrongful acts in shareholder derivative lawsuits or governmental lawsuits.
Directors and officers, however, need not put their own personal assets at risk. New forms of insurance, like that offered by ACE through its CODA program, offer individual directors independent insurance opportunities that are far more comprehensive in coverage than that offered through the corporation.
These policies should be procured by directors and officers as part of their compensation for taking on the risks associated with serving as an officer or director of public corporations in the new hostile environment. This is especially the case where the Sarbanes-Oxley provisions make procedural compliance critical and where directors, even those highly informed about the company’s operations, may not be able to assure proper procedures are followed in each and every situation. Protection against exposure from these risks is essential, especially for directors who sit on audit committees.
II. INDEPENDENT D&O POLICY COMPARISON
A. Standard D&O Policy
AIG - National Union Fire Insurance Co. of Pittsburgh
www.aig.com/directorsofficers
Features:
? Limit of liability eroded by coverage for company indemnification and securities claims against company;
? Exclusions relating to pollution and ERISA violations;
? Exclusion for most claims brought by or on behalf of company or any D&Os (i.e., “insured v. insured” exclusion);
? Exclusions for fraud, dishonesty, willful violations of law, or illegal remuneration;
? Policy may be rescinded if company restates financial statements included in application;
? Large deductible (at least six figures) applies to D&Os if company wrongfully fails to indemnify D&Os;
? Policy cancellable by insurer;
? Policy may be an asset of company’s bankruptcy estate, in which case policy proceeds cannot be accessed by D&Os without bankruptcy court approval.
B. Independent Director Policy Providers
1. ACE Insurance Company
CODA - A Subsidiary of ACE
Independent Director Policy
www.acelimited.com
Features:
? Limit of liability eroded only by coverage for non-indemnified loss of outside directors;
? No pollution or ERISA exclusions; bodily injury/property damage exclusion not applicable to pollution claims;
? “Insured v. insured” exclusion applies only to claims brought by or on behalf of company with the assistance of at least two senior executives; exclusion not applicable to (1) claims by or on behalf of D&Os, (2) claims outside the U.S. or Canada, or (3) claims made after a change in control;
? No exclusion for fraud, dishonesty, willful violations of law, or illegal remuneration;
? Policy cannot be rescinded based upon restatement of financial statements;
? No deductible applies to D&Os even if company wrongfully fails to indemnify D&Os;
? Policy not cancellable by insurer;
? Policy not an asset of company’s bankruptcy estate, and policy proceeds are immediately available after bankruptcy filing.
2. Chubb
Personal Director’s Liability Ins.
www.chubb.com
Features:
? Protects the insured’s personal assets for independent directorship that he or she chooses to designate for insurance purposes;
? Protection designed solely for the insured person;
? Broad definition of directorship;
? Insured directorship can be at publicly traded, privately owned, or nonprofit corporations;
? Tailored coverage;
? Coverage applies for loss excess of any other insurance and indemnification from any source but before an insured taps into his or her own assets. This can occur when the underlying insurance is financially unable to pay, has been rescinded, or coverage is precluded by breach of a nonseverable warranty or is deemed part of the corporation’s bankruptcy estate and the corporation is unable to indemnify;
? Policy applies on an excess basis over existing D&O liability insurance coverage. In the event indemnification is unavailable, and the underlying D&O liability coverage proves to be uncollectible, then Chubb’s policy drops down;
? Freedom to choose defense counsel;
? Spousal coverage included – policy insures executives, as well as their spouses or domestic partners if they are named as co-defendants;
? Policy limits of up to $10 million available.
3. AIG - National Union Fire Insurance Co. of Pittsburgh
Independent Director
Liability Package (“IDL”)
www.aig.com/directorsofficers
Features:
? Makes non-rescindable limits available exclusively for independent directors to pay defense costs, settlements and judgments in D&O claims when the primary and excess D&O policies do not advance payments and are either actually rescinded or threatened to be rescinded;
? Coverage despite financial reporting restatement;
? Funding when a nonseverable warranty is breached;
? Protection if the corporation declares bankruptcy;
? If enhanced to include “difference in conditions” coverage via an endorsement, IDL Premier will respond as follows:
? Financial inability by the underlying carrier to indemnify insured persons – policy drops down to provide nonindemnifiable loss coverage in the event the underlying insurer is financially unable to indemnify the insured persons;
? Application of an exclusion in the underlying D&O program – policy provides primary nonindemnifiable loss coverage to the insured persons who have been denied coverage due to the application of inconsistent terms and conditions of the underlying policy;
? Policy will drop down and fill in the retention amount, which the underlying carrier wrongfully applied.
