Finger-Pointing During Uncertain Economic Times:

New Reasons to Assess Whether Your Company's

Directors and Officers are Adequately Insured

The finger-pointing related to the international financial meltdown that has occurred over the last few months has already begun. Corporate losses have resulted in lawsuits being filed against company directors, officers and managers, alleging carelessness, mismanagement and other misdeeds. On September 15, 2008, for example, Merrill Lynch shareholders filed a complaint against the company's board of directors alleging that the directors breached their fiduciary duties over the proposed buyout of Bank of America. On September 18, 2008, shareholders of AIG followed with a complaint against the CEO and board of directors of AIG, alleging that the directors' mismanagement and "grossly negligent risk taking" led to the insurer's $85 billion government rescue. These are just a few of the many cases that have been filed.

The accusations of wrongdoing are not limited to high profile or blue-chip corporations entrenched in the financial industry. Recently, directors and officers of companies only indirectly related to the financial sector have apparently become the target of such claims as well. On September 22, 2008, a securities class action was filed against Baltimore-based utilities provider Constellation Energy Group. The complaint alleged that Constellation's directors and officers did not fully disclose to shareholders their exposure to the credit problems of one of Constellation's trading partners. Numerous other similar lawsuits will likely be filed by shareholders or receiverships of failed companies whose expectations of success have been crippled.

As economic pressures continue to mount, lawsuits targeting company executives may continue to be filed. Many corporate executives will likely look to their company's Directors and Officers (D&O) insurance policy hoping to find a blanket of protection from shareholders' claims, only to be disappointed to learn that the coverage provided is far less than what is needed. The uncertainty of these economic times should prompt company decision-makers to reassess the extent of protection afforded to their directors, officers and executives as part of their preparations for handling new risk management issues brought on by the current economic climate.

D&O liability insurance is typically purchased by companies to insure their directors, officers, managers, and executives from claims brought against them by shareholders, employees, clients, regulators, competitors and others. Although coverage varies among policies, D&O liability insurance typically provides insurance coverage for claims alleging errors, omissions, misstatements, neglect, breaches of fiduciary duty and similar unintentional actions.

One of the biggest challenges facing companies with respect to D&O insurance is how much coverage to purchase. Although some company executives might typically purchase D&O coverage by focusing only on the "limits" of coverage provided, there are actually a variety of other critical factors that play into the determination of how much coverage is sufficient. The legal interpretation of the provisions of the insurance policy can have significant impact on the amount of coverage actually available to the policyholder, and often cannot be adequately addressed by insurance agents with no legal training.

For example, if company executives are the target of a number of lawsuits that make similar allegations, the amount of insurance coverage provided by the insurer may depend on whether those lawsuits are legally considered "one" claim or "multiple" claims.

Another example involves the consideration of defense costs. Unlike typical commercial general liability policies, the amount of insurance coverage available under D&O policies typically includes the cost of defense. This means that the amount the insurer will be willing to pay to settle a claim or pay a judgment will be reduced by the amount the insurer pays to the defense counsel. An illustration of this is if a two million dollar D&O policy is purchased, and the liability claim alleged is complex or otherwise results in significant legal fees of one million dollars, then there will only be one million dollars in insurance coverage available to settle the plaintiffs' claims. These effects can be exacerbated if numerous directors, officers, or managers are all sued and drawing from the same pot of funds. In some cases, just the cost of defending the liability claim has the potential to consume the entire limits of coverage.

Fortunately, there are a number of solutions available to mitigate the risk of insufficient insurance coverage. Ice Miller has attorneys well-versed in helping company executives determine their company's exposure based on their current policies, and examining options for additional protection, such as purchasing auxiliary insurance products or supplemental coverage for a certain group of individuals like outside directors.

For questions about this article, please contact Rabeh M. A. Soofi or Michael A. Wukmer.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.