Directors' new attitude toward D&O insurance

D&O INSURANCE Directors' new attitude toward D&O insurance Are you — and your assets — adequately protected? More directors than ever are interested and engaged in knowing the answer. BY STEPHEN J. WEISS AND SHANNON A. GRAVING A FTER YEARS OF HEADLINES highlight- ing claims against directors and offi- cers, many directors have determined that they need to be more involved in ensuring their D&O insurance is up to par. Gone are the days when they would accept on faith that they had sufficient coverage. Today, most directors realize they should be engaged in protect- ing their assets, which includes more than just ask- ing if their companies maintain D&O insurance. What steps are they taking? What can you do to protect your assets? Plenty. 1. Arm yourself with information Directors should ask about the specifics of their D&O insurance program. For instance, what is the scope of coverage, what constitutes a "claim." and who is an "insured"? It may be helpful to pose pos- sible claim scenarios and ask whether you would be covered. For instance, are losses arising out of an SEC investigation covered? What happens to your coverage if your company declares bankruptcy? Other important questions concern your compa- ny's D&O insurance program's limits: • What is your company's current limit? • Wliy was that limit chosen? • Would the limit be sufficient if the company were hit with a securities class action claim? • Fiave there been changes in the company's mar- ket cap or other factors that could affect the suf- ficiency of your limits? Failing to have sufficient limits could result in an out-of-pocket payment by the directors, like that paid by certain outside directors of Just for Feet Inc., which totaled almost $25 million. 2. Request an independent expert review Directors should request an independent review by professionals who specialize in D&O insurance to ensure that their program provides the best cover- age available. Such professionals should be indepen- dent, meaning that they are not the primary party responsible for structuring tbe program and contracting with insurers, and high- ly experienced, meaning that they review scores of policies each year, not simply answer a few questions here and there in conjunction with their main practice. The request for an independent ex- pert review should be made each year. Market conditions change from year to year. It is now possible to obtain im- provements that were unavailable last Stephen J. Weiss is a partner in the law firm of Holland & Knight LLP and is one of the nation's leading authorities on D&O and man- agement liability insurance ( Shannon A. Graving practices insurance law with Holland & Knight, with a focus on D&O coverage counseling end policy negotiation. FOURTH QUARTER 2007 45 D&O INSURANCE New insurers are entering the market and existing insurers are offering new policies. year. In addition, new insurers are entering the market and existing insurers are offering new poli- cies. As a result, if your company renews its policies without considering alternatives and without fresh negotiations, you most certainly will not have the maximum value for your insurance dollars. 3. Consider policy options In recent years, many directors have insisted that their companies purchase insurance policies with limits dedicated to the losses of individual insureds, as opposed to policies that also cover the company. Such policies provide additional protection of your persona! assets in the event your com- pany goes bankrupt or is otherwise unable to provide indemnification. Also, traditional D&O in- surance may not cover all of the risks associated with your service on a board. You may need or desire employment practices (EPL) and/or fiduciary liability (FL) in- surance. EPL insurance protects against employ- ment-based liabilities. FL insurance covers losses arising from claims made against the fiduciaries of a company's employee benefit plans. If your D&O insurance program does not cover these exposures, EPL and FL coverage may be added by endorse- ment or purchased via separate policies. 4. Be vigilant about coverage Negotiating the best policy will not ensure pay- ment of covered loss. Companies must also com- ply with the notice and cooperation provisions in their policies. Providing notice is often not the first concern when there is a lawsuit, but if your company does not provide prompt notice (some policies require notice within as little as 30 days), you risk losing coverage. The same is true if your company does not comply with the cooperation requirements. As a director, you are not responsible for such activities. Nonetheless, when management reports a claim to the board, it is in your interest to ask if your insurance policies have been consulted, whether the applicable insurers have been notified, and if someone is responsible for complying with the policy conditions. This is particularly impor- tant it the insurance program is about to expire. More directors are taking active roles in protect- ing their assets by asking detailed questions about their company's D&O insurance program, consult- ing independent experts, requesting that additional types of policies be purchased, and confirming that the conditions necessary to obtain coverage are being fulfilled. If you are not taking one or more of these steps, your assets may he unnecessarily at risk. • The authors can be contacted at and 4.6 DIRECTORS & BOARDS

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