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@example.com.