Risks facing directors & officers


Financier Worldwide Magazine

August 2013 Issue

August 2013 Issue

The role of the director or officer comes laden with personal risk. Individuals taking on these positions place themselves in the frame for intense attention from regulators, shareholders and the general public. In recent years, this risk has increased significantly, a result of technological change, greater regulation and requirements, enhanced stockholder scrutiny and amplified governmental oversight. Despite this, an unhealthy number of D&Os fail to appreciate the impact of potential liabilities, and the effects on both their firms and themselves. Going forward, they must take a proactive approach to risk management and embrace liability insurance as an essential tool.

Snow: Could you outline some of the ways in which the personal risk to directors and officers (D&Os) has increased in recent years?

Head: The personal risk to directors and officers has increased as a result of heightened scrutiny by the SEC, DOJ and other regulatory bodies. The recent announcement by the SEC chairman that the Commission will begin seeking to exact admissions of liability by individuals who engage in certain fraudulent actions ups the ante regarding personal liability.

Page: The greatest single rise in legal risk has been in relation to regulatory investigations. The global financial crisis has led to much more active regulation around the world but most particularly in actions by regulators in the countries which have more developed financial markets. It is now a much more serious responsibility to take on the role of director for any regulated entity. A director of a financial entity is placing him or herself in the frame for very focused attention by regulators. This applies equally to non-executive directors. Indeed it is clear that the corporate governance guidance expects the highest standards from non-execs, even though their remuneration and the expected time commitment in their contract may be fairly modest. For example, it is not uncommon for the contracted time commitment of a non-exec to be in the region of 16 days, even for a listed company. However, their potential exposure is substantial. We recently undertook our second annual survey on directors’ own sense of exposure to risk to find out where directors perceived the greatest risks to lie. Regulatory risk continued to top the list. This was then followed by the risk of failure to ensure appropriate anti-bribery procedures and their application. An area which came in for less focus, although I believe it will increasingly be a major risk, is in relation to antitrust prosecutions. The US and EU have been very active in antitrust enforcement for many years but other countries have chosen to begin very substantial investigations. Brazil has recently introduced a very fierce law and enforcement is expected to be fierce too. India has recently imposed some eye-watering antitrust fines. For a multinational corporate, the risks to its directors are now greater than ever. Since these prosecutions can lead to custodial sentences, this carries considerable risk. Leaving aside regulatory risk, the experience in Europe is that a personal director’s exposure to civil claims from the company for poor management is, if anything, on the wane, since companies are choosing to exercise rights through contractual clawbacks which enable bonus payments to be recovered. The period over which such clawbacks can be made is lengthening.

Cox: The personal risk facing D&Os has increased in recent years as a result of many factors, including the pace of technological innovation and resulting privacy and data management implications; increased regulation and requirements for companies operating across multiple jurisdictions; increased governmental oversight in many industries; and enhanced stockholder scrutiny made easier by greater and more immediate access to information from a variety of sources. These changes have resulted in increased oversight responsibility on D&Os and require them to take a more hands on approach to managing the affairs of the companies they represent.

Lichtenstein: Activist shareholders, regulators and a creative plaintiff’s bar of attorneys have focused a white-hot spotlight on the actions of D&Os. The actual and perceived duties of care owed by D&Os are now used to explain any loss of shareholder value regardless of the attenuated relationship between action or inaction and result.

Kurshan: In the wake of the financial crisis, there is increased focus on holding individuals accountable. Examples of this emphasis include the UK Financial Conduct Authority’s agenda for credible deterrence, which includes pursuing more cases against individuals and holding members of senior management accountable for their actions; as well as the SEC’s recent announcement that it will be changing its policy to seek admissions of wrongdoing from more individuals as a condition of entering into settlements. Also, economic uncertainty and instability creates risk for D&Os. This occurs on several levels. Claims against individuals are more likely to occur when investors lose money. When there are insolvencies, it leaves D&Os without the expected protection of indemnity from their institutions. When governments are pressed for funds, there is an added incentive to investigate activity to which fines and penalties potentially apply.

Monteleone: The two most important ways in which D&O personal risk has increased is through, first, the heightened level of corporate bankruptcies in recent years, and second, the increased frequency of large shareholder derivative action awards and settlements. In each case, the personal risk increases because of the corporation’s inability to provide indemnification. In the former case, the inability is due to financial insolvency; in the latter, it is because most jurisdictions prohibit indemnification for a settlement or judgement amount in a derivative action.

Snow: In your opinion, are D&Os doing enough to manage potential risks and liabilities that could damage their firm’s reputation and create a consumer backlash, leading to decreased sales and stock prices?

Page: A board will know that it has slackened its vigilance when something bad happens. Directors are ready with stories about how a carefully maintained risk register can still fail to pick up the big risk which comes – seemingly – out of nowhere. Directors, particularly of listed companies, have to contend with so much in these troubled economic times. There has to be active management of all risks, including the ‘known unknowns and unknown unknowns’. The principal focus has to be on safeguarding quality and maintaining – if not growing – the business. Most corporates are getting it right and the level of professionalism is much higher than even 10 years ago. Against the economic pressures, many directors say that the level of regulatory development is a huge burden, as is the quickening pace of technology – and how to use it – and the tightening of labour law requirements. Perhaps the bad news is that poor performance can be found out so quickly, but some directors argue that this is in fact good news since the swift feedback enables action to be taken speedily to remedy the situation.

Cox: As a general rule, D&Os have responded well and responsibly to the new challenges and risks facing their companies. While company failures and director excesses garner the most headlines, the practical reality is that most D&Os ably perform their duties with appropriate skill, devotion and oversight. Given that many D&Os have personal stakes in the companies they oversee, they have an added incentive to make decisions that they believe will benefit the company and its stockholders. 

Lichtenstein: D&Os are not doing enough. On the most basic level, a surprising number of D&Os never even review their insurance program to make sure that all risks are properly being managed by insurance policies or other risk transfer mechanisms. They take it on faith that there will be coverage when they need it. This is a dangerous approach and one that D&Os must avoid. In today’s insurance market, terms and conditions of coverage are undergoing constant change. Proactive and comprehensive risk management is essential and should be routinely discussed by the entire board. It is also critical for D&Os to assemble a knowledgeable team of insurance professionals who understand the nature of the company’s business and the potential risks presented by its operations. 

Kurshan: It does seem that it is becoming more difficult to say what ‘doing enough’ is. D&Os are trying to ensure that their companies comply with new laws and policies that have not been tested or interpreted before. They are trying to manage evolving risks that are new and not always fully understood. When a board looks at what it should do to protect its organisation from risks – like the possible implications of a country leaving the euro, or cyber crime – finding the point where you are comfortable that you have done enough must be quite difficult. 

Monteleone: The answer here is mixed. There is increasing use of crisis management firms, and at least one major D&O insurer actually encourages their use and provides a sub-limit of liability to cover crisis management costs. However, most crisis management occurs in the area of product liability. Corporate governance abuses may catch the attention of the financial and legal media, but rarely have a consumer impact. 

Head: I think that directors and officers are doing a better job at enterprise risk management and are taking risk management and corporate governance issues more seriously than they ever have; however, there is still much progress to be made in these areas. Companies are doing a better job with respect to the quality and independence of the board and board committees and the utilisation of outside experts around corporate governance issues – for instance, executive compensation, FCPA, whistleblower and insider trading policies. 

Snow: To what extent are ‘new’ risks and liabilities, such as cyber threats, combining with more traditional risks, such as fraud, to raise the stakes for D&Os and their firms?

Cox: The risk profile for a company is rarely static and risk managers must deal with myriad changing risks and potential liabilities. Changes in the risk profile may result from changes in the business, business environment, geographic diversification, acquisitions or the introduction of new product lines. They also could result from regulatory changes or the emergence of new risks and liabilities, such as cyber threats and privacy issues. The important takeaway is that a strong risk management team needs to continuously evaluate such risks, and develop and update company policies and procedures to respond to and mitigate these new threats. 

Lichtenstein: Every company has a website and most handle some form of confidential information. Given the recent focus of regulators on protecting peoples’ privacy and the prevalence of illegal hacking, D&Os and their companies are open to potential liability. Fortunately, there are excellent niche insurance products designed to protect against these risks but, again, there must be vigilance during the underwriting process to secure favourable terms and conditions as there is substantial variation in the market today with respect to these products. 

Kurshan: There have always been people willing to commit extortion and fraud and to steal intellectual property. Now those people have new tools available to them for committing those crimes which increase the potential financial and reputational impact. From a management liability point of view, the risk is that D&Os will be accused of not having managed these risks properly. That is a fairly fine line to walk with this type of risk where: the risk is evolving, there is a potentially huge impact, it is unclear how effective the potential solutions will be, and most firms have pressures on their balance sheets. 

Monteleone: New risks, particularly cyber threats, call for an examination of the enterprises’ entire insurance portfolio. While a traditional commercial general liability policy may offer some protection, and D&O policies may offer some protection – to the individual directors and officers only – many of these new exposures will fall into coverage gaps and call for the purchase of one of the many variations of cyber liability insurance emerging in the marketplace. 

Head: We have yet to see D&O liability impacted by cyber exposure, but it is rightfully receiving a great deal of attention and concern. The SEC has issued guidance to registrants regarding the disclosure of cyber security risks and cyber incidents. Failure to adequately disclose these risks and their potential financial impact creates a risk of both derivative and securities class action litigation. Social media is another emerging area that creates exposure to D&O liability – reputational and disclosure issues in particular. The Affordable Care Act will also present challenges to companies inside and outside of the healthcare space that may increase the likelihood of D&O litigation.

Page: A number of companies have suffered breaches of their IT security and this is now definitely on the agenda for many international corporates. I suspect that this is happening even more than is reported. Many corporates have detailed procedures in place to maintain the integrity of their systems but there is acknowledgement that no system will be foolproof. Even when there is a risk of attack but no breach of security, there is substantial risk in relation to an appearance of breach since counterparties fear for the integrity of their own systems. Thus far, this has not led to increased risk for directors. IT failures may have damaged the reputation and business of a company but a diligent IT director has, in the UK, not been seriously in the crosshairs for prosecution by a regulator or shareholder activism. This may change as it becomes clearer what the standard of security needs to be. A further area of risk is in relation to director action in responding to a cyber threat. Whilst regulators may have some sympathy for the fact that a cyber attack is the work of a malevolent third party, they will have less sympathy for a sluggish or incompetent response to such an act. Similarly, where the cyber attack is made with the intention of defrauding shareholders or others, a swift and effective response to warn those who might be affected is required, coupled with appropriate reporting to regulators. 

Snow: Have there been any recent legal and regulatory changes in your region of focus, affecting the personal risks to D&Os?

Lichtenstein: D&Os must be aware that ‘informal’ regulatory activities – such as investigative subpoenas and Wells Notices – may be subject to coverage under their D&O policies. Understanding the nature and scope of coverage available for these types of proceedings is particularly important when evaluating whether an obligation to give notice has been triggered or whether coverage extends to both individuals and the company. D&Os must also consider whether their D&O policies provide coverage for alleged violations of the Foreign Corrupt Practices Act (FCPA) and the Fair Labor Standards Act, and, if so, whether coverage is subject to any applicable sub-limits. 

Kurshan: The change I see as affecting the personal risks to D&Os is the way in which companies are interacting with regulators. The trend towards companies self-reporting to regulators is creating a different dynamic than in the past. Companies understandably mitigate their risks by self-reporting to and cooperating with regulators. D&Os understandably need to consider their own interests when they are asked to provide information to and cooperate with these investigations. D&Os are sometimes forced to make difficult decisions between reserving their potential legal rights and privileges – as advised by their attorneys – or cooperating with their companies’ requests. 

Monteleone: A developing area of exposure lies in the heightened risk posed by the ‘bounty provisions’ for whistleblowers under the Dodd-Frank Act. If these provisions are successful in attracting more whistleblowers, we can expect to see an increase in the frequency of corporate governance claims against company management. Another area of potential new claims lies under the JOBS Act, but it is still way too early to assess the impact of this 2012 legislation. 

Head: A recent decision, Boilermakers Local 154 Retirement Fund et al. v. Chevron Corp. et al., No. 7220-CS; IClub Investment Partnership v. FedEx Corp. et al., No. 7238-CS, 2013 WL 3191981 (Del. Ch. June 25, 2013), upholding a company’s right to require shareholders to file derivative suits in a specific jurisdiction, should aid in defence strategy and costs associated with those actions. Also, Dodd-Frank continues to work its way through the rule finalisation process. 

Page: There appears to be a much greater focus upon the individual in all aspects of regulation. The US has for many years focused on winning ‘scalps’ and regulators there lean toward the view that behavioural change is best achieved by highly public prosecution and jail sentences for individuals. Now other regulators are catching up. Sometimes this is more in the rhetoric than in the prosecutions achieved. For example, the UK’s Serious Fraud Office (SFO) has threatened prosecutions many times but the conviction rate is modest. The relatively new director general of the SFO is determined to change that. 

Snow: With mergers and acquisitions presenting numerous potential pitfalls, what advice would you give to D&Os undertaking M&A, in terms of protecting themselves from personal liabilities connected to the transaction?

Kurshan: Mergers and acquisitions are scenarios that often give rise to D&O insurance claims. Before the transaction takes place, make sure that you understand and are comfortable with the insurance protection that will be in place for claims that may arise from acts that occurred before the transaction. In addition to being satisfied with the terms of the cover, be knowledgeable about whether the insurance proceeds available to you are also available to individuals from the acquiring or acquired company. It is also important to understand whether those insurance arrangements are subject to change, who will have the ability to change them, and for what period the terms are fixed. There are good risk solutions available for M&A situations, for example, companies can purchase ‘run-off’ cover for the D&Os of an acquired company – sometimes for an unlimited period. But if you don’t ask about the arrangements, you may not be happy with the protection you get. Also, think about the practicalities. Make sure you know how to call on your D&O insurance if a claim relating to acts prior to the transaction is made against you.

Monteleone: The problem area in the new wave of M&A litigation is that virtually every transaction now draws litigation demanding that there be additional disclosures to shareholders before the merger can be voted upon and approved. These suits are often specious and are disposed of by making additional disclosures and paying the plaintiff law firm a fee in the vicinity of $400,000 to $500,000.Thus, the exposure to D&Os is minimal as these expenses are easily absorbed through indemnification or insurance. In other cases, the best protection is to have more than adequate amounts of D&O insurance, including Side A Only protection. 

Head: Boards should seek the advice and assistance of outside experts in a transaction process and, wherever possible, minimise conflicts of interest – or perceived conflicts of interest – with related parties to the transaction. Companies should also consider a process that encourages open bidding and should disclose as much as possible about the process in public filings. D&Os should make sure that they will have coverage for pre-transaction, during-transaction and post-transaction acts, errors and omissions. For Old-Co activities, they should make sure there is run-off coverage to protect them from claims that may arise long after the transaction has been completed. Some coverage is excess to indemnification or coverage on other forms, so they also should review with their legal and insurance advisers which source of protection is expected to pay when, and whether insurance will advance payments if there is a disagreement. 

Page: In the UK and Europe, the exposure of directors is perhaps overestimated in this area. In a large company, which has the benefit of good professional advice, the risks to an individual director or officer of personal liability will be small. Indeed, in the absence of fraud, the risks should be very small. It is very different in smaller companies where the history of the company and, to a degree, the secret of its success can reside in the heads of the principal executives. Where it is those individuals who are the shareholders selling their stake, then the risk of claims can be much higher. There are of course contractual mechanisms to safeguard against this, such as earn outs and completion accounts procedures. But the risk of exposure to claims remains. Warranty and indemnity insurance can be very valuable in providing peace of mind to the outgoing shareholder directors. The best protection otherwise for a director is to take care in the due diligence and to ensure that the company is professionally advised. In the US it is a different story. 

Cox: A February 2013 study by Robert M. Daines and Olga Koumrian for Cornerstone Research found that lawsuits were filed challenging 96 percent of the merger transactions announced during 2011 and 2012 with a value over $500m. As a result, D&Os should expect to face stockholder scrutiny in almost every public company transaction. The best way to ameliorate the risk to D&Os is to run a conflicts-free process guided by competent legal and financial advisers, buttressed by robust disclosures, independent director involvement and a market check. 

Lichtenstein: It is essential for D&Os to be proactive. They must work with qualified brokers and specialised insurance coverage counsel to fully understand the insurance products upon which they are relying, and how those products respond to the potential problems presented in the M&A scenario. D&Os should take a particular interest in understanding ‘tail’ coverage in terms of availability, pricing and responsibility for purchasing it. D&Os should also keep a close eye on the nature of the M&A transaction and its potential impact on accessing coverage after the transaction is completed. In some instances, it may be important to notify insurers about the contemplated transaction to ensure a smooth transition of coverage once the transaction is complete. 

Snow: Against the backdrop of a heightened focus on identifying and prosecuting corporate fraud, what issues should D&Os take into account in relation to whistleblower provisions and related regulations?

Monteleone: The best defences are sound corporate governance principles and adequate levels of D&O insurance. That said, the plaintiff’s bar is very creative and enterprising. Even the best corporate governance schemes will be tested, and that is why it is important to have adequate amounts of insurance in place. 

Head: From a claims handling perspective, whistleblowing incentives and jail time can make a real difference in the dynamics of claims resolution. Both can impact whether the defendants will fully cooperate with a common defence. There is a heightened potential for even the closest friends to sell the other out to get more lenient treatment from prosecutors.

That can dramatically impact downstream investigations, prosecutions and civil litigation. So, the defendants may find themselves racing to cooperate with authorities. That behaviour may not just hurt co-defendants by weakening their defence, but may also have coverage implications. Make sure your D&O policy does not have an insured vs. insured exclusion that would trigger due to an individual’s cooperation with authorities and, similarly, make sure the cooperation clause has ‘claims cooperation severability’ to avoid having one insured jeopardise everyone’s coverage by whistleblowing or cooperating with authorities.

Page: Whistleblowers have to be taken seriously. This can be a huge headache not least since, whilst there are many whistleblowers who are genuinely bringing attention to a problem or even unlawful activity, there are some who are not and some who are seeking to further their own interests. The only response for a director is to ensure that there are systems in place to take all whistleblowing allegations seriously, meanwhile also ensuring that the rights of the whistleblower, the other potentially affected employees, and the company’s business and reputation are attended to. Failure to react promptly to a whistleblower can be more damaging than the original allegation and suppression of an allegation can be explosive. 

Cox: The simple takeaway for D&Os in this area is to make sure the matter is being handled by independent internal or external counsel, as appropriate, and then to avoid any interference or meddling in the process. Companies must take whistleblower enquiries seriously and should retain competent legal advisers to help them navigate the process. 

Lichtenstein: D&Os need to be keenly focused on the scope of coverage provided to them under their D&O policy. They need to ensure that the policy provides broad ‘severability’ for innocent insureds who cannot be imputed with knowledge or wrongful conduct committed by any other insured. They need to carefully evaluate the ‘insured v. insured’ exclusion and the related exceptions to that exclusion that carve back coverage when a whistleblower claim is asserted. They need to scrutinise the ‘priority of payment’ provision in their policy to ensure that the claims of the individual directors and officers get paid first and foremost. Finally, they need to make sure that there is dedicated and non-rescindable D&O coverage available to the individual directors and officers of the company. 

Kurshan: The way that claims, and particularly investigations, come about is changing. Recognise that there may be investigations going on that you may not become aware of until they are well progressed. It’s important to make sure that both your policy language and disclosures to insurers are appropriate to this situation. The scope of cover available for ‘insured v. insured’ claims is particularly important. Luckily the cover available under both conventional D&O policies and side A DIC policies has really improved over the past few years.  Some side A DIC policies do not exclude ‘insured vs. insured’ claims at all. Incentives for whistleblowers now mean that it’s more crucial than ever for D&O policies to contain the appropriate safeguards for someone accused of wrongdoing. Take a close look at the scope of your D&O policy’s exclusion for intentional wrongdoing and when it takes effect. Consider whether the provisions describing your obligations to cooperate with the insurer and report claims, as well as those stating how your defence will be conducted, are still appropriate. Making sure that your insurance policy is appropriate may require the support of an internal or external lawyer and a sophisticated insurance broker. 

Snow: What major themes have you seen in recent claims against D&Os? Can you highlight the main sources of these claims?

Head: We continue to see securities class action filings that, of late, have been driven by improper disclosures around financial results and guidance expectations; FCPA litigation in the form of securities class actions and shareholder derivative actions; breach of fiduciary duty claims brought as derivative claims alleging mismanagement of various types; and M&A cases continue to be brought as a result of almost all corporate transactions. 

Page: The main theme is regulation. We are seeing claims against directors and officers in countries throughout the world, including countries on the European continent as well as in the US. Antitrust exposure is, I believe, the burgeoning risk, since many countries have become alive to the need for closer enforcement in their own territory – and perhaps more conscious of the revenue earning capability that it can provide.

Cox: One recent trend that seems to be emerging is the increased number of post-closing damages cases being pursued by stockholders in M&A litigation. The result is that cases that used to last a few months now last years. The near term impacts for D&Os are increased management time and attention, legal expense and potential exposure. If this development continues, it likely will impact the cost of D&O insurance to account for the increased risk and expense of these types of lawsuits. 

Lichtenstein: We see a few important and recurring themes with respect to D&O claims. First, many policyholders continue to struggle with providing timely notice for asserted ‘claims’. Companies and their insurance professionals must understand that D&O policies are broadly written so that communications other than a lawsuit can and do trigger a notice obligation. Second, we see policyholders and insurers engaged in allocation debates because most complaints today include both covered and uncovered claims. Companies need to know that they can, and should, have their policies written in a manner that requires a complete defence to those ‘mixed’ claims and that indemnity allocation disputes are resolved at the appropriate time. Finally, we see disputes regarding the selection of defence counsel and the ability to conduct a robust and unfettered defence. Again, companies need to know that there are steps that can be taken in the underwriting process to minimise such disputes after a claim is presented.

Kurshan: A major theme that we have seen is more investigations. The way that investigations arise is different than in the past. The source is companies self-reporting infractions or possible infractions to regulators and prosecutors. In many cases, this is followed by attorneys for the company conducting an internal investigation. This situation doesn’t fit squarely with the way that D&O policies are constructed. It creates difficult claims reporting, disclosure and confidentiality issues that can be very difficult for clients to navigate. As the company is then investigating its own people in cooperation with its regulator, this situation raises the potential for conflicts of interest that need to be carefully identified and managed. 

Monteleone: There have been a rash of claims for increased disclosure in the M&A context. There has also been increased claims activity by the FDIC and others against directors and officers of failed banks, although the frequency of bank failures has ebbed considerably since their peak in the wake of the recession. Other than that, there is no other single class of claims that is driving the current frequency levels. 

Snow: What impact are increased regulation, penalties and settlement figures having on the costs associated with defending claims against D&Os?

Page: Many claims can be addressed, but in the meantime directors face the terrifying prospect of defence costs. These can spiral exponentially in large investigations and reach sums of £1m within a short time. These costs are not necessarily increasing but the number of prosecutions is on the rise. The launch of a prosecution, and the worry that the costs will be too great for a private individual to afford, place an unthinkable burden on most directors and officers. A well worded contractual indemnity from the company, coupled with well drafted directors and officers insurance cover, can provide some peace of mind. Such an indemnity will, of course, never cover fraud or indeed any criminal conviction but it can provide some protection to enable a case to be properly defended. 

Cox: Increased regulation, settlements and penalties all impact the cost of defending claims against D&Os and ultimately the cost of D&O insurance which must account for the increased risk profile presented by the insured. The risk impacts both the cost of defending the specific claim at issue, and the attractiveness of D&O claims to stockholders and regulators more generally. 

Lichtenstein: These factors are driving up litigation costs and increasing the pressure on companies and their D&Os, as policyholders must invest more time, effort and money defending lawsuits that include allegations of fraud and mismanagement and claimed losses in the multimillion dollar range. Of course, all of that legal spend causes an erosion of the available policy limits to satisfy any resulting settlement or judgment entered against the policyholders. We also see manifestation of this pressure through the selection of defence counsel issue. Most companies would prefer to use counsel of their own choosing when they are presented with a substantial liability. Increasingly, however, policyholders are being forced to use ‘panel counsel’ chosen and paid for by insurance companies. Although the vast majority of panel counsel are fully competent, many D&Os are troubled by the inability to use ‘their own lawyer’ when they need that lawyer most to protect their reputations and their assets. 

Kurshan: From my perspective, it’s too soon to tell for sure. Anecdotally, it’s my perception that these factors are causing clients to be more cautious and that caution is driving more legal work and higher defence costs. 

Monteleone: The effect has been indirect. Regulators often seek penalties and other amounts that are not within the scope of the insurance, but defence costs in these actions are typically covered. Moreover, the regulatory authorities can obtain discovery that is useful to the plaintiffs in private civil actions. Thus, the regulatory actions must be vigorously defended, and adverse findings there can enhance the value of the private civil claims. 

Head: In my opinion there are a number of things contributing to increased defence costs. First, the stakes are higher, thus time and effort to defend increases. Second, the regulatory environment is making cases more complex and in some cases requiring additional counsel – multiple law firms – or involving multiple jurisdictions. Third, e-discovery costs continue to rise. 

Snow: How important is D&O liability insurance as a tool to mitigate the personal risks to board members? What affect is the general increase in corporate regulation, and associated penalties, having on D&O liability insurance? 

Cox:D&O liability insurance serves as an important tool, both in recruiting board candidates and in mitigating personal risks to them resulting from a liability-triggering event. By definition, as compliance costs and penalties increase, the cost and availability of insurance covering those activities increases. 

Lichtenstein: The availability of D&O insurance is critical to mitigating the personal risks to board members. Given the recent dramatic increase of liability exposure to board members, and the frequent financial weakness of companies subject to claims, D&O insurance is often the only barrier standing between significant financial loss and the board members’ personal assets. The increase in corporate regulation and penalties has resulted in many insurance carriers restricting or eliminating coverage for these losses. In turn, this has created a premium on obtaining advice before purchasing or renewing D&O coverage and working with an experienced team of insurance professionals to secure the best and broadest coverage terms. 

Kurshan: D&O insurance is very important to mitigate personal risk. The protections available to D&Os are: first, best practice, second, indemnities from their companies, and third, D&O insurance. Where D&Os are the subjects of claims or investigations, there will be situations where their companies cannot indemnify them or fail to do so. In these situations, the D&O insurance is the last line of defence for the D&Os’ personal assets. In the situation where a company cannot or does not indemnify D&Os, absent responsive D&O insurance, those D&Os will have to use their own funds to pay their legal expenses and potentially settlements or judgements as well. The legal costs associated with D&O claims and investigations are well beyond most individuals’ financial tolerance and can consume individuals’ personal assets very quickly. In real terms, this means D&Os using retirement savings or selling their homes to finance their defence. So far, for companies other than financial institutions, the general increase in regulatory activity has not resulted in higher premiums for non-US companies. There is a great deal of D&O insurance capacity available in Europe. If anything, insurers have been trying to compete by expanding cover to better respond to evolving risks. Even in the US, where there has been some increase in rates for primary D&O, the abundance of capacity has meant that excess rates have remained relatively stable. 

Monteleone: D&O insurance is of critical importance. While indemnification may be limitless in amount and extremely broad in scope, it is only as good as the solvency of the corporation. D&O is an invaluable backstop for the individual D&Os, in addition to protecting the corporate balance sheet when indemnification does in fact take place. Although heightened regulatory activity should result in upward pressure on premiums, the keen competition among insurers in the marketplace, including a number of new entrants, has tempered that. 

Head: In financial insolvency or other non-indemnifiable situations, D&O insurance is critical to mitigating the personal risks of board members. In an indemnifiable claim situation, the coverage is important in giving the corporation and individual more security and capital to defend the claim. The longer tenured primary D&O carriers provide expertise to this type of litigation that serves as an important complement to outside defence counsel. In all cases D&O insurers can and should provide guidance with respect to defence costs and overall litigation management strategy. Primary D&O rates have increased by roughly 5 to 10 percent over the last 12 months in part due to the increase in corporate litigation.

Page: D&O cover is vital. D&O insurance is a necessary cost to corporates to ensure that they can recruit committed directors. There was an increase in the cost of such cover after the first wave of the global financial crisis, particularly for directors of financial institutions, but some would say that this has evened out more now. D&O insurance cover remains overly complex and virtually impenetrable to most mortals but there are moves amongst some brokers and insurers to provide simpler cover. 

Snow: What are some of the issues and challenges that need to be considered when setting limits and buying Side A D&O insurance?

Lichtenstein: The most important issues associated with Side A coverage are making sure that the policy offers maximum severability and that it is non-rescindable. In addition, companies must carefully consider how many individuals are likely to be sued and how many will need to retain separate counsel. One of the big benefits to Side A coverage is that it offers dedicated limits to individual directors and officers which are not shared with the company in any respect. The concern is that in many policies, and in most large companies, there are hundreds of individuals who will qualify for Side A coverage. The company must make sure that the overall limits are sufficient to handle this level of demand. 

Kurshan: D&O insurance, generally, is not commoditised. The terms and conditions under different offerings will vary significantly. When selecting Side A D&O insurance – or any D&O insurance – someone representing the D&Os’ interests needs to get to grips with the terms and conditions of the different options. Navigating the choices will be much easier if you have a sophisticated broker and possibly an internal or external legal adviser. Another issue to consider is how many people are covered under the policy and potentially sharing in the policy limit. Unless specifically amended, most D&O policies will cover the boards and senior management of the parent company and all the subsidiaries as well as employees acting in a managerial capacity and employees appointed to outside boards. That is quite a large class of people and the limit purchased should be considered on that basis. It is possible to restrict the cover under the policies, or some subset of them, to a smaller group – for instance the board of the ultimate parent company – but that decision has to be made at the time the insurance is placed. 

Monteleone: The prevalence of Side A insurance continues to increase over the years. While most companies need a solid foundation of traditional D&O insurance, building an additional tower of Side A above that is often advisable. This has been illustrated recently in the $139m News Corp settlement, which has been the fifth derivative settlement in recent years to exceed $100m. Under applicable Delaware law and similar law in most other US jurisdictions, these settlements cannot be indemnified and are covered solely under Side A of D&O insurance.

Head: Buyers should consider larger blocks of capacity from single carriers as a more effective way to manage litigation than smaller blocks from multiple insurers. Buyers should also give close consideration to the claims expertise of excess carriers who are becoming more important to the resolution of litigation due to increasing defence and settlement costs in these claims. From a Side A purchasing perspective, a buyer should think about their lead Side A carrier in very much the same way they think about their primary carrier and seek the same qualities with respect to litigation management expertise and experience. 

Page: A good broker is critical and will ensure the full disclosure required, so that there is a clear understanding between insurer and insured as to the nature of the potential risks, and, further down the policy cycle, that all the requirements of notification are met. D&O policies are very complex and it requires care to get the terms right, including as to whether the shared limits are realistic and how notification is to work.  Too little attention is paid to this when the policy is being taken out and this can be a complete waste of the money invested in the premium. 

Cox: The purchase of D&O insurance almost always presents a tension between cost and ensuring a sufficient level of protection for D&Os under different scenarios. Among the issues that should be considered are amount of overall coverage, portion of coverage that is Side A coverage, retention level, participants in the tower, scope of claims, exclusions on claims, and provisions concerning selection or designation of approved counsel. 

Snow: What advice would you give to companies and their D&Os when assessing the terms, coverage and pricing of a D&O insurance policy? What are the key areas to negotiate in such documentation?

Kurshan: Everyone understands that price is an important factor. However, if you purchase insurance that does not respond in the way you need, it is a false economy. The extensive amount of D&O insurance capacity available means that insurers have to compete for your business. Use that to your advantage. Don’t just negotiate price, negotiate for better coverage as well. Key areas to negotiate are the basis of the limit, the extent of the investigation cover, the scope of the exclusions, reporting requirements, severability and non-rescission provisions, and the conditions relating to the insureds’ obligations under the policy and how defence of claims will be conducted. 

Monteleone: The best advice to bear in mind is that everything is negotiable in a D&O insurance policy. So-called standard form policies of insurers are frequently endorsed to match the best features offered by their competitors. Even though pricing may periodically ‘harden’ in this market, wording has become ever more expansive over the past 20 years. Buyers should take advantage of this and purchase additional limits and broader protection with the same amount of premium as in years past. 

Head: My first piece of advice from a carrier’s perspective would be to hire a broker that excels in the area of policy language. As for key areas to consider when negotiating in today’s market, I would note the following: first, the scope of coverage for investigations for individuals and the entity; second, the fraud and conduct exclusions; and third, how the program responds to international claims – both the master and local policies.

Page: Key challenges lie in ensuring that the triggers to cover are clearly expressed and that the notification clauses contain no traps for the unwary. It is not unknown for insurers to quibble over whether the circumstances notified have reached a development which enable them to be notified so as to trigger cover. That can lead to a situation whereby a circumstance cannot be notified but then the insured is then unable to secure cover for the potential issue in the following year since any new insurer will exclude existing issues from cover. This is really unhelpful to an insured and potentially leaves a director caught without cover. Another regular trap is in the failure to recognise that directors may be competing for policy limits. 

Cox: Companies and their risk managers should not view D&O coverage as a static issue tucked away for review only on the policy renewal date. Instead, they must more frequently evaluate their policies in light of changes in their risk profile, which could result from events such as changes in the business, business environment, geographic diversification, acquisitions or the introduction of new product lines. A collateral benefit of increased review is a closer relationship between company, risk manager and broker which can only help at the time of policy renewal or initiation of a claim. 

Lichtenstein: First, it is important to remember that there is no such thing as an ‘off the shelf’ policy any more. All policies are amended by endorsements that can limit or eliminate coverage for risks traditionally protected against by D&O policies. Therefore, companies and their D&Os must read their policies carefully to determine whether adequate coverage is being provided. Key areas to watch out for include personal conduct exclusions – what triggers it and is it imputed to other insureds; the definition of ‘claim’ – it should be broad enough to include coverage for responding to government subpoenas and shareholder derivative suit demand letters; narrowly tailored exclusion for insured v. insured claims – this is most important in the bankruptcy context when a trustee appointed to represent the debtor may bring claims against the D&Os; and cancellation of the policy due to application errors – only intentional and material errors in the policy application can be used to invalidate coverage, errors made by one insured may not be imputed to another insured who did not know about the errors. Side A coverage should be non-rescindable for any reason.

Snow: Going forward, do you expect more companies to take a proactive approach to risk management tailored specifically to protecting board members? What might such strategies entail?

Monteleone: Unfortunately, I am not optimistic that independent board members will always get the best insurance protection. That is because the insurance purchaser is the CFO or risk manager on behalf of executive management. The best policies for independent directors are Side A only policies that cover only them, without any coverage for officers or the corporation itself. They have to proactively demand that this type of D&O insurance be purchased on their behalf, so that they have adequate in protection in place that cannot be eroded by coverage for corporate and executive management liabilities. 

Head: I foresee more companies providing their boards with third-party resources to manage corporate governance matters – and more boards asking for the additional resources. I think companies want to be smarter about the way they approach risk holistically, and boards are one of the first groups within the company to provide that perspective. 

Page: The key change that is happening, and needs to continue to develop, is that companies should devote substantial resources to securing D&O cover which is suited to its business. This should take as much time as putting in place a new finance facility rather than, as some companies do, merely accepting an off the shelf product from an insurer. Frequently, such products are shown to contain inconsistencies and errors when a claim does occur. A properly focused insurance product requires work both on the extent and nature of the disclosure and the terms of the policy. This takes an experienced and dynamic risk manager, a good broker and a lot of time. It may cost quite a bit more than an ‘off the shelf’ product but then again it is more likely to respond in the event of a claim. Investing in good quality legal advice will also pay off.

Lichtenstein: Companies have no choice but to take a more proactive approach to risk management to protect their board members and to remain competitive in the marketplace. All companies are striving to attract and retain highly qualified board members to lead their organisations. Having a D&O coverage program that protects individuals’ personal assets provides a strong recruitment tool and can help to differentiate the company from the competition. In order to ensure that the company has the most competitive terms and conditions available in the insurance market, companies must assemble an experienced team of insurance professionals, including both brokers and specialised coverage counsel, to advocate on behalf of the company and its D&Os. 

Kurshan: I expect a more proactive approach. Given the risks that board members face I expect that D&Os will be driving this trend. From an insurance perspective, this entails a few things. One is to take a careful and critical look at indemnity arrangements for D&Os and the D&O insurance and to make sure that there is adequate protection for both individuals and the company, and that the balance between those interests is appropriate. Another is to examine how the purchasing process is handled – are the right people involved in preparing disclosures to insurers, negotiating the terms, and selecting between the various offerings? Finally, make sure that there is sufficient awareness of the D&O insurance within the group for the company and D&Os to be able to meet their obligations under the policies. If a D&O is the subject of a claim or investigation, your legal and compliance teams will be focused on resolving that claim or investigation favourably. Reporting and consent obligations can easily be breached, potentially prejudicing your ability to recover under the D&O insurance.

Carolyn Snow is treasurer and director at the Risk Management Society (RIMS) and director of Risk Management at Humana Inc. On the RIMS board she has served as liaison to Conference Planning, Marketing and Communications, Quality, and Technology. As director of operational and clinical risks at Humana, Ms Snow manages the corporate insurance program, including Humana’s captive and RMIS system.

Brady Head is president of the Public Company Commercial Accounts Group at AIG, with responsibility for the company’s management liability product lines: Director’s & Officer’s Insurance, Employment Practices Liability Insurance, Fiduciary Liability Insurance and Fidelity Insurance. Mr Head also serves as the Regional Executive for Financial Lines’ Southwest region. He joined AIG in 1994 as an Underwriter with National Union in the New York office.

Joanna Page is a partner at Allen & Overy LLP. She is head of the Corporate & Commercial Litigation Group and also developed the firm’s Insurance Litigation Group. Ms Page acts for large corporates including many financial institutions, typically non-UK, and regularly advises directors. In addition to her day job, she taught Company Law at Cambridge for many years and writes widely on the challenges facing boards of directors and corporates. 

Charles Cox is a Los Angeles partner in the firm’s Securities Litigation and Litigation & Trial Practice Groups. His practice focuses on complex business disputes, including securities class actions, derivative litigation, fiduciary duty cases resulting from mergers and acquisitions, corporate control disputes and commercial litigation.

Michael Lichtenstein is universally known, by clients and adversaries, as a practical lawyer who achieves results. For the past 21 years, Mr Lichtenstein has focused his practice exclusively on insurance and environmental issues. In insurance matters, he exclusively represents policyholders and prides himself on balancing aggressive representation with an ability to maximise insurance recoveries without engaging in expensive and time-consuming litigation.

Leslie Kurshan is the Product and Client Advocacy Leader for Management Liability and chairs the Product Development Group for Financial and Professional Lines for Marsh London. Ms Kurshan is a California attorney and a qualified, non-practising solicitor of England & Wales. Prior to joining Marsh, she represented insurers in complex insurance coverage disputes in the US.

Joseph Monteleone has more than 30 years of experience in the insurance arena, both in the private practice of law and as an insurance company claims executive. He represents various insurers in coverage litigation, regulatory matters and arbitrations, as well as provides coverage advice and monitoring of underlying litigation in the areas of professional liability, errors and omissions, directors and officers, employment practices liability and other claims-made insurance products.

© Financier Worldwide



Carolyn Snow

Risk Management Society (RIMS)




Brady Head



Joanna M. Page

Allen & Overy LLP


Charles Cox

Alston & Bird LLP


Michael David Lichtenstein

Lowenstein Sandler LLP


Leslie Kurshan



Joseph P. Monteleone

Tressler LLP

©2001-2019 Financier Worldwide Ltd. All rights reserved.