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Posted: September 24, 2010

A head’s up to boards

Unprecedented liability faces directors today

Tracy E. Houston

With increased scrutiny by shareholders, courts and regulator directed at public company boards, I sat down with Jeff Van Gulick, Executive Liability Practice Leader - Hubb International Insurance Services, to get the scoop on D & O insurance.

What is the environment like for directors since the Financial Meltdown of 2008?

Today there is an unprecedented amount of 'potential' liability facing a director. When you look at the passage of the Frank-Dodd Bill and its 2,300 pages of potential new regulation including the "whistleblower Bounty" in combination with the new rules from the SEC on climate change disclosure and more enhanced disclosures around risk, compensation & governance, directors are subject to many more disclosure rules and guidelines than ever before in history. More rules and regulations mean more opportunity for mistakes and therefore opportunity for the plaintiffs bar to file lawsuits. Except for the larger companies who pay directors more significant amounts, most directors only get a small amount of compensation in comparison to the potential liability they face. The only hope for directors is if they do the "right things" that the business judgment rule takes precedent over much of the new liability in this increased prosecutorial environment.

Do you see a rise in lawsuits agains directors of public companies?

Here are a few facts on federal securities class action suits by filings per year:
Year Number of Suits
2008 222
2009 169
2010 104 through end of August - 156 if straightlined to the end of the year
Yearly average since 1997 is roughly193 - 2010 will most probably end in a lower than average year for lawsuits for directors of public companies.

That said, what type of insurance are directors of both for-profit and non-profit purchasing?

We are seeing an uptick in directors purchasing Personal Director Liabilty (PDL) policies. This policy is attractive because it covers just the individual and not the group and is portable. To do this in a thoughtful manner, directors look at the limits on each policy for each board they sit on and then determine the level at which to purchase a PDL policy.

Can you provide a quick refresher on traditional D & O policies and any new pertinent thoughts you have for review of current policies?

Keep in mind that D & O insurance, first introduced in the 1930s, has evolved as times change. During the 1960s changes in the interpretation of the securities laws created the realistic possibility that directors and officers themselves, and not only corporations, could face significant liability
As a reminder traditional D&O comes in three different forms - Side A (which covers claims against an individual when there is no indemnification ...), Side B (which covers claims against individual where there is indemnification...) and Side C (which covers only the entity).
If a director sits on a public company board it is very prudent to look into purchasing Side A DIC (difference in conditions) or Side A IDL (independent director liability) coverage to protect just the individual Officers and or Directors as a group. Entire policy towers can be consumed by the corporate entity or inside officers in defense of a complex claim and leave the individuals without any coverage when the most need it.

Any last bit of wisdom for directors on any type of board?

In facing today's challenges, keep in mind some cowboy wisdom "Country fences need to be horse high, pig tight, and bull strong."

Jeff Van Gulick can be reached for in-boardroom presentations at jeff.vangulick@hubinternational.com

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Tracy E. Houston, M.A. president of Board Resource Services, is a board advisory consultant and executive coach headquartered in the Denver area. She conducts board evaluations and assists boards with a variety of issues that increase effectiveness. She can be reached at hello@eboardmember.com  or  http://www.eboardmember.com
www.eboardmember.com ;eBooks: www.amazon.com/author/www.eboardguru.com


 

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