| Directors and Officers Liability (Part 2) | |||
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Endorsements and enhancements Endorsements The following sample of endorsements comes from the AIG Securities Plus endorsement: Enhancements These enhancements for executive risk depend on the client and the nature of the policy: That's not all. Other possible D&O Liability policy enhancements include the following: To show you a sample, the AIG D&O Liability 5/95 Form contains these enhancements: 4. Other D&O Liability coverage issues "Notice" provision Not only must a claim first be made during the policy period, but also some policies require that the carrier be notified of the claim within 60 days of the insured becoming aware of the claim. "If during the Policy Period or Optional Extension Period, if applicable, any claim is made against any insured, the organization and the insured shall, as a condition precedent to the rights for compensation under this policy, give to the company notice in writing as soon as practicable of any such claim, but in no event later than sixty (60) days after such claim is first made." Risk management on claims reporting As part of risk management on claims reporting, a "due diligence" review of potential claims should be conducted prior to expiration of the policy, especially if the insured is changing carriers. Wording of the claim, or how the claim is defined, is also an issue or risk management. If the court defined the claim as "demand for money damages" it might be missed if you are looking for "lawsuits". Risk management should include creating a climate that encourages the reporting of potential claims and eliminates any penalty against the reporting party. Bills relating to D&O Liability California Immunity SB 2154 California Immunity SB 2154 applies to non-paid officers of a non-profit public benefit corporation (including a non-paid director who is also a non-paid officer) under the circumstances of any alleged failure to discharge the duties as director or officer when the duties are performed in good faith. The criteria for non-monetary liability are as follows: Exceptions to this immunity are self-dealing transactions, distributions, loans or guarantees. Condominium Liability SB2072 Condominium Liability SB2072 addresses claims against condominiums and whether those claims are pointed at the directors and officers of the association or the unit owners. According to this bill, if a cause of action is solely from the common area, the action is to be brought against the association rather than individual unit owner if all the following criteria are met: Coverage is or is not up to legal requirements, and if not, the association may become liable for the entire amount of a judgment, otherwise just their proportional share. Non-profits and D&O Liability Sample Homeowner's policy: Firemen's Fund Concerning personal liability for incidental voluntary employment by a charitable, religious, or community group, coverage is provided for bodily injury, physical disability, and medical pay. This coverage applies to a volunteer or paid worker earning less than $5,000 per year. There can also be personal injury coverage (if covered by endorsement or extended within the policy) for civic or public activities performed for no pay. Sample Personal Excess for non-profit activities Personal Excess coverage could look something like this: Civic activities performed by an insured are not covered, unless performed without compensation. An officer or member of the board of directors of a corporation or organization is not covered, unless the corporation or organization is non-profit. The insured receives no monetary compensation, and underlying insurance applies. Risk management ideas for non-profits Strategies for managing risk for non-profits includes the following suggestions: Application The application serves as a warranty that is made part of the application. The application needs to be signed by the CEO, President, or Chairman and may require polling. Attachments that are required for the application include the following: When it comes to rescinding coverage, remember that an application is a warranty. Misstatements on any part of the application, including required supporting documents, can be problematic. Having said that, it's time to look at a powerful example: Enron. Enron's woes Enron had purchased coverage providing up to $350 million plus another $95 million for ERISA Liability. Enron directors and officers asked the federal bankruptcy judge to let them use tens of millions to pay for mounting legal fees. Royal Insurance Company of America and St. Paul said in separate filings that they want to rescind their policies. If the two are successful, nine other companies in the placement are likely to follow suit, leaving the directors and officers to cover their own legal fees and damages. In these filings, the basis for rescission is material misrepresentations made to the underwriters. "If they were defrauding the public, then maybe they were defrauding their insurers, too," opined Seth Chandler, University of Houston. "If Enron knew of problems at the time of application and did not inform insurers, insurers have a legitimate grievance." The big question now is: Will the "Severability Clause" help directors and officers in lawsuits who were unaware of other directors' malfeasance? Complications As if Directors and Officers Liability weren't complicated enough, there are aspects of federal and state laws directly or indirectly related to D&O Liability that impacts rulings. For example, in bankruptcy, can the policy become an asset of the estate to be shared among creditors? Bankruptcy law is not clear on this issue. It is important to note that Attorneys General from 33 states support the position that state law precludes convicted directors or officers from any payment from Liability policies. Resonance of the Enron case Where do we see resonance of the Enron case, in which directors and officers come under fire as their companies flounder? We need look no further than this handful of examples: In cases such as these, bankruptcy, coverage rescission, and allocation issues will be argued. Resonance from Enron's troubles can also be seen in efforts to improve corporate governance. A Senate bill (Sarbanes) requires CEO and CFO certification of financial statements. Companies such as Bank One Corp. are taking the initiative to prevent Enron-type fiascos from occurring by announced steps to tighten corporate oversight. Coverage premium Premiums on D&O Liability coverage are determined in light of policy features such as claims-made coverage, prior acts coverage, and Discovery Periods. The following issues should also be considered in determining the premium: New trends and coverage issues What are some of the hot topics and coverage issues in D&O Liability Insurance? For one, multiple-year policies are no longer generally available. Exclusions are also a significant concern, such as exclusion of claims arising from investing in derivatives. Heavy on the mind of directors and officers is the issue of punitive damages. Maybe even more frightening is not being able to get insurance coverage at all due to trouble with stock prices and lawsuits. Participation/Coinsurance Some policies contain a participation clause (sometimes referred to as a co-payment or coinsurance clause) in addition to the deductible. This clause can be applicable under either the Directors and Officers Liability or the Corporate Reimbursement insuring agreements. The participation amount is often 5%-20% and is applicable to claims under a specified dollar amount, typically $1,000,000. The participation clause vanished in the soft market and are returning again today's more challenging climate. Sharing the pain You can expect to see the following trends in the current market as insureds share the pain with carriers of shouldering D&O Liability Insurance: Ouch! More protection for the insurance companies, but more pain for the insured. Furthermore, some classes of insureds prove to be more difficult than others. For tech industries, those IPOs and stock failures are coming home to roost. Public health care is another problem area, as Medicare fraud and federal audits and prosecution of companies like HCA create litigation. Yet another difficult class of insured is aviation. AIG D&O Liability Form 5/95 Let's now take a look at key features of the AIG 5/95 Form and how it addresses certain Directors and Officers Liability issues. Entity coverage AIG 5/95 adds the corporate entity as a named insured for securities claims at a predetermined allocation percentage. Note that AIG allows coverage alteration that will include an order of payments endorsement that gives priority to covering a director or officer. Choice of counsel For securities claim, the insured must select a firm impaneled by AIG as defense counsel. Mandatory arbitration The insured agrees to submit all coverage disputes to binding arbitration. Note: The AIG Securities Plus endorsement allows the client to select non-binding mediation as an alternative. Summary of coverage issues This checklist highlights the main considerations for putting together a Directors and Officers Liability Insurance policy that will serve the particular needs of the insured. Employment Practice Liability Insurance as included in D&O Liability Insurance Employment Practice Liability Insurance (EPLI) can be made part of a Directors and Officers Liability Insurance policy, though there are several issues that should be considered before doing so: To learn more about EPLI, take the LunchTimeCE course entitled Employment Practice Liability Insurance after you complete this course and exam. |
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Not only are policy forms, clauses, rules and court decisions constantly changing, but forms vary from company to company and state to state. This material is intended as a general guideline and might not apply to a specific situation. The authors, LunchTimeCE, Inc., CEfreedom, and Insurance Skills Center, and any organization for whom this course is administered will have neither liability nor responsibility to any person or entity with respect to any loss or damage alleged to be caused directly or indirectly as a result of information contained in this course.
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