New Insurance for Outside Directors
from
September/October 2003
by Susan Caminiti
The life of an outside director used to be, if not a walk in the park, at least a nifty business experience. Lately it’s more like a military excursion. New regulations and laws in the wake of the Enron-Tyco-WorldCom fiascoes spell new potential liabilities; the post-Sarbanes-Oxley world demands more, and longer, director meetings; and the likelihood of a director’s being vilified in the press—or named as defendant in a lawsuit—has gone from nearly nil to . . . well, how anxiously do you pick up the morning paper?
Says Tom Wamberg, chairman and CEO of the executive compensation company Clark Consulting and a director of the Cleveland Clinic Foundation: “It’s amazing to me that people still go on boards of big multinational companies. You can’t be sure what you’re stepping into. And if it’s taken 20 years to build up your net worth, why would you want to risk it like that?”
Insurance companies such as Chubb and AIG think they have the answer: directors’ and officers’ liability policies tailored specifically to board members. Until now, inside and outside directors were covered by identical D&O insurance. But with cooked books and bankruptcies rendering a lot of these primary D&O policies null and void, independent directors are worried that their personal assets may be at risk. The new policies are designed to be an additional and separate layer of protection for the independent director who may be in the crosshairs. The insurers claim that these new policies are nonrescindable and take over when the primary D&O can’t. Jeff Ryan, vice president and product manager at Chubb, says his company’s Personal Director’s Liability (PDL) insurance, introduced at the end of 2002, is the last “thing that stands between the plaintiffs’ attorney and a director’s personal assets. Think of it as the moat surrounding the castle.”
It’s not that traditional D&O policies don’t work, but lately they are becoming much more restrictive. Caveats and exclusions now allow insurers to deny payment of claims under certain conditions. For instance, if a policy does not have a severability clause—which it should—all the directors lose coverage even if an insider did the damage. Says Hal Reiter, CEO of Herbert Mines Associates, an executive search firm in New York City: “Can an independent director be lazy or stupid? Sure. But they’re usually not in on the crime.” In other words, if there’s no severability, an innocent director suffers the same fate as a guilty insider.
That’s just where these new policies kick in—when certain losses are not indemnified, or paid by other D&O liability insurance. The policies differ from company to company: For instance, Chubb’s version covers any or all of the boards on which a director sits with a total of up to $10 million in insurance. Think of it as portable coverage. Ryan explains that the policy’s premiums are typically paid by the director (but often reimbursed by the company), and that the cost is determined by how many boards a director sits on and the sizes of the companies. A director of an outfit with a market capitalization of under $1 billion, say, would pay between $7,500 and $10,000 a year in premiums for $1 million worth of coverage, up to $30,000 for $5 million, and up to $50,000 for $10 million.
AIG’s product, Independent Director’s Liability (IDL) insurance, also introduced at the end of last year, has a group orientation. Unlike Chubb’s, AIG’s policy is taken out by a company on behalf of all its independent directors and covers them only for service on that board.
Not everyone thinks these policies are necessary. Steven Shappel, who directs insurer Aon’s financial-services group, calls them “a complete waste of money” for all but the most crippled companies.
The real test, says Boris Feldman, a partner at the law firm of Wilson Sonsini Goodrich & Rosati in Palo Alto, California, and a strong proponent of additional and separate insurance for high-net-worth independent directors, will come when they are triggered. “The proof of the pudding is always in the claim,” he says. “Are the insurers going to stick by the marketing materials, or look for loopholes when an independent director files a claim?” Given what’s going on these days, we may not have to wait long for an answer.
