Really?

For how long?

In a recent New Jersey case, Schoon v. Troy Corp., two directors of were sued for breaching their fiduciary duty.

One of the directors named in the suit had retired from the company a year or two before the suit was brought. Subsequent to the suit being filed, the board had negated the bylaw extending insurance coverage to directors who had left the company.

By-laws can be amended at any time by the board. Thus it is vitally important for all directors to know how the by-laws and amendments to those by-laws affect them personally.

It is also vitally important to make sure that D&O coverage matches the prescribed intents of indemnifications contained in the by-laws. If coverage does not match up a tremendous gap could arise.

If you are contemplating retirement from a board how can you protect yourself?

• Have your Attorney draw up a personal indemnity contract whereby the company or its insurer covers you into retirement for legal fees and damages in cases involving your board service.

• Buy coverage against service related torts for a six year period, after that you will have been gone from the board long enough for them to forget about you, presumably. It is available and not that expensive. Well worth looking in to.

• In addition to the above, request that the company up a “minitrust” to pay the director for any deductibles or retentions that may apply in the company’s D&O policy.

Remember, every D&O policy has different terms and conditions. They can be tailored to meet the needs of your company. The bottom line is don’t get a shocker, review and assess your coverage.

The issues surrounding business survival in the event of loss can be nearly insurmountable even with a comprehensive insurance program in place. Keep in mind that insurance does not cover it all, nor is it meant to.

So how then do you protect your company and save money?

Step #1: First, an assessment of a business’s true needs must be performed to identify company risk and exposure to loss.

Step #2: You need to develop a well-thought-out program on how to lessen, mitigate or eradicate potential exposure to those identified risks.

PROTECT AND SAVE

The true purpose of this exercise is to ensure the protection of company assets and the company’s future should a loss occur.

But let’s go even deeper than that. In a real and practical sense it all boils down to Return On Investment. From the actual cost (hard dollars) of the insurance products (policies) you buy … to loss control and safety programs you institute … to deductibles paid and retentions assumed … to uninsured losses to underinsured losses … to a variety of other factors — all these make up what is called your Total Cost of Risk.

Depending on factors such as a company’s risk appetite, exposures, losses, and insurance coverage purchased, the cost of risk can vary from year to year.

Most businesses have cycles. Just like all real world expenses, over the years we have seen significant swings in the cost of insurance.

As a C-Level exec you’re savvy enough to know that the insurance industry has market cycles (soft – meaning insurance company capacity is high, broad coverage terms are plentiful and premiums are low; hard – capacity is diminished, coverage is restrictive and premiums are high).

Here’s the point: The objective of any insurance and risk management program should be directed toward steadying, if not lowering, costs over a long period of time relative to a particular company’s production (revenue).

As you can see, there are many issues to be considered when buying protection for officers and board members.

There are many more coverage concerns in addition to the ones mentioned above that should be addressed as well.

It is in the best interest of the board to have an assessment of what it is that is important to them in terms of appropriate D&O coverage aspects and then to purchase a policy with the terms and conditions that will meet those needs.

This concludes our series. See our Director’s and Officers Liability Coverage tag to read the entire series.

A very common reason to buy D&O insurance is for protection against securities-law violations. Policies provide specific coverage for these claims while at the same time exclude claims related to fraud.

One way to soften this situation is to have clause in the policy that specifies that the fraud exclusion will not take effect until there has been final adjudication by a court of law confirming that in fact a fraud did occur. This at least insures coverage if you settle out of court.

D&O policies may provide international coverage but the fine print reveals that it is only “to the extent possible.”

This is very vague. Some countries including India, China, Russia and Brazil require that companies maintain local D&O policies. It is therefore important to purchase additional D&O coverage outside the US.

The insurance carrier may deny coverage for reasons unrelated to the claim against you. Insurers can rescind a D&O policy – return the premium and pretend as though there had never been coverage – if they conclude at a later time that the application contained false or misleading information.

Seems reasonable. Insurers today require that financial statements be attached to the application. The problem here is that if your CFO cooked the books unbeknownst to you. This could nullify the policy.

To avoid this scenario affecting other board members that have clean hands, it is important to pay attention to the severability clauses contained in the policy. This prevents the insurer from using the acts of one bad actor to disqualify other officers and directors from coverage.

However, an even better scenario is to find an insurer to write a policy that is nonrescindable and noncancelable.

What are the coverage concerns?

D&O policies typically contain three coverage parts: “Side A”, which protects officers and directors when the company does not indemnify them; “Side B”, which reimburses the company when it does indemnify the officers and directors; and “Side C”, which covers claims against the company itself.

Pay attention to the coverage because company or corporate insiders’ interests don’t always coincide with directors and officers interests. That is what happened to five former directors of a defunct company where they were put in the position of having to pay $41.5 million of their own money to settle a lawsuit stemming from a companies bankruptcy.

To avoid this possibility, directors should demand a “Side A” policy of their own. This option has been very popular of late. These types of policies are also referred to as independent director liability or IDL policy; it can’t be exhausted by claims against the company or the officers.

Let’s take the issue of the amount of coverage.

How much is enough?

As an Organization you probably need more of it. There is no simple rule for how much D&O coverage a company should carry. A recent Towers Perrin study indicated that companies with a market cap of between $1 billion and $2 billion are carrying about $40 million in coverage, while $10 billion – plus companies are carrying about $195 million.

The maximum limit available in the market place is in excess of $1 billion. This however would not even be enough for the next Enron or WorldCom. You should seek to discover how your limits were arrived at, what the typical settlements are for comparable-size companies in the same industry.

Over the next few days, we’ll be taking a look at a few of these issues.

• Be sure to discuss terrorism coverage with your agency representative.

• Keep copies of insurance policies and other critical documents in a safe and accessible location (e.g. a fire-proof safe).

• Develop a Disaster Recovery Plan. If you already have one make sure that it is up-to-date.

• Review your policy for off-site back-up of EDP records. Ideally these records should be backed-up and transmitted or sent off-site on a daily basis.

• Have telephone call lists available (include cell phone and pager numbers) for all key personnel so required staff members can be contacted during non-working hours from any location. Review procedures for notifying employees that your facility is closed. Remind employees that they should never attempt to enter areas that are closed by police or other emergency responders.

• Consider establishing an alternate method for your phone service if the switchboard becomes unusable (e.g. switching incoming number to a cell phone or remote number).

• Check available emergency supplies such as flashlights, batteries, emergency generators/fuel, patching materials such as plastic sheeting, wood 2×4s, duct tape, spare fire extinguishers, first aid kits, etc. If you think that some personnel would stay at the facility during/following an emergency, consider stockpiling food and water for their use.

• Be sure your emergency response philosophy reflects that human life is always more valuable than property.