Tricks and Traps of Directors, Officers, and Managers InsuranceThe Basics You Need to Know

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Tricks and Traps of Directors, Officers, and
Managers InsuranceThe Basics You Need to Know

• Presented by Peter J. Elliott, CPCU
• President and CEO
• Telcom Insurance Group

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Tricks and Traps of Directors and Officers
Insurance

• Seminar Goals
• Review Recent Claims and Trends
• Analyze Three Major Coverage Areas of the Policy
• Explore the Challenges of Accepting the Wrong
  Policy Terms and Conditions

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Tricks and Traps of Directors and Officers
Insurance

• Trends and Statistics
• The number of securities fraud suits filed
  against issuers and their directors and officers
  - 122 in 1996 to 224 in 2003
• The industry that faced the largest exposure from
  securities fraud suits through the 1990sboth by
  frequency and settlement valuewas the high
  technology industry

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Tricks and Traps of Directors and Officers
Insurance

• Trends and Statistics
• The number of SEC enforcement actions increased
  from 484 in 2001 to 598 in 2002. In fiscal year
  2003 (ending September 30, 2003), the SEC filed
  679 enforcement actions, and 199 of those
  involved financial fraud or reporting violations

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Tricks and Traps of Directors and Officers
Insurance

• Trends and Statistics
• The costs of shareholder class-action settlements
  have increased the average settlement increased
  from 7.0 million in 1996 to 24.3 million in
  2002 and the median settlement increased from
  3.5 million to 6 million. In addition, the size
  of "mega-case" settlement has increased
  dramatically. Two of the largest securities
  class- action settlements in history occurred in
  2003 Lucent (563 million) and Oxford Health
  (300 million).

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Tricks and Traps of Directors and Officers
Insurance

• Trends and Statistics
• At least six major companies in 2003, including
  MCI, announced significant corporate therapeutics
  as part of shareholder settlements, including
  bolstering board independence levels and better
  oversight of executive compensation

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Tricks and Traps of Directors and Officers
Insurance

• Trends and Statistics
• It is becoming more common for corporations that
  have been sued by shareholders for securities
  fraud to also be sued, in separate litigation, by
  pension funds or employees for either Employee
  Retirement Income Security Act (ERISA)
  violations, state law securities violations, or
  common law fraud

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Tricks and Traps of Directors and Officers
Insurance

• Trends and Statistics
• Employees who have lost retirement savings as a
  result of their investment in company stocks have
  filed ERISA class-action cases against the
  company that parallel the pending securities
  class-action on behalf of all investors. The
  actions typically allege that the company and its
  officers violated their fiduciary duties under
  ERISA by making false statements that induced
  employees to invest in the stock at artificially
  inflated prices

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Tricks and Traps of Directors and Officers
Insurance

• Trends and Statistics
• Some plaintiffs' securities law firms have also
  been working to persuade pension funds to opt out
  of class-actions in favor of pursuing individual
  securities actions
• Plaintiffs may wait for the class settlement to
  be negotiated and then press for opt-out rights
  while negotiating a separate settlement

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Tricks and Traps of Directors and Officers
Insurance

• Three Major Coverage Parts
• Directors and Officers and Entity Coverage
• Fiduciary Liability
• Employment Practices Liability Insurance

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Tricks and Traps of Directors and Officers
Insurance

• Directors and Officers Entity Coverage
• Protects the Directors/Officers and Managers for
  Claims that they did not Fulfill the Duties of
  their Position
• Duty of Care
• Duty of Loyalty
• Duty of Obedience
• Statutory Duties
• 1933 SEC Act
• Sarbanes-Oxley 2002

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Tricks and Traps of Directors and Officers
Insurance

• Directors and Officers Entity Coverage
• Coverage A- Protects Directors that are not
  indemnified by the Entity
• Coverage B- Covers the Entities obligation to
  indemnify the Directors and Officers via by-laws
  or state law
• Entity Coverage- Protects the entity itself

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Tricks and Traps of Directors and Officers
Insurance

• Directors and Officers Entity Coverage
• Common Sources of Claims-
• Merger and Acquisitions
• Financial Performance
• Executive Compensation
• Conflicts of Interest
• Inadequate Disclosure
• Faulty Financial Reporting
• Deceptive Trade Practices
• Contract Disputes
• Restraint of Trade
• Dishonesty
• Anti-Trust
• Tax Issues
• Regulatory Problems

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Tricks and Traps of Directors and Officers
Insurance

• Fiduciary Liability
• With the enactment of the Employee Retirement
  Income Security Act (ERISA) in 1974, fiduciaries
  assumed new responsibilities relating to the
  management and administration of employee benefit
  plans

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Tricks and Traps of Directors and Officers
Insurance

• Fiduciary Liability
• ERISA defines a fiduciary as any person
  exercising any discretionary authority or control
  of the management or administration of a
  retirement plan or assets
• Wrongful Act any violation of responsibility or
  duty as defined by ERISA
• Coverage protects the plan sponsor, the plan
  itself, and any administrator of it for wrongful
  acts

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Tricks and Traps of Directors and Officers
Insurance

• Fiduciary Liability
• ERISA mandated that fiduciaries may be personally
  liable for breach of certain responsibilities or
  duties imposed upon them under the law. Today,
  more and more, companies and its directors and
  officers are reportedly breaking their fiduciary
  duties under ERISA by knowingly issuing false and
  misleading public statements about the company's
  financial condition, which induces employees to
  invest and maintain their plan assets in company
  stock at artificially high prices

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Tricks and Traps of Directors and Officers
Insurance

• Employment Practices Liability
• Protection against claims from employees-
• Wrongful dismissal
• Violation of employment laws
• Sexual and workplace harassment
• Discrimination
• Failure to employ or promote
• Wrongful discipline
• Failure to grant tenure
• Negligent evaluations
• Failure to provide adequate work conditions

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Tricks and Traps of Directors and Officers
Insurance

• Employment Practices Liability
• Federal Acts that Impact
• Civil Rights of 1964 Title VII
• Age Discrimination of 1967
• Civil Rights of 1991
• ERISA 1974
• FMLA 1993
• ADA 1991
• COBRA
• Fair Labor Standards Act
• OSHA

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Tricks and Traps of Directors and Officers
Insurance

• Employment Practices Liability
• What Increases the Probability of a Claim?
• Aging Baby Boomers
• Impact of Technology
• Merger and Acquisitions
• Contingent Workforce
• Economic Downturn

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Tricks and Traps of Directors and Officers
Insurance

• Employment Practices Liability
• Sex Discrimination, according to the EEOC, is the
  third leading cause of EPLI claims behind Age and
  Disability, but it grabs the most attention
• First case heard in 1976
• Other well known cases

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Tricks and Traps of Directors and Officers
Insurance

• Employment Practices Liability
• Sex Harassment can be in one of two forms
  according to Title VII of Civil Rights Act
• Quid Pro Quo
• Hostile Work Environment

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Tricks and Traps of Directors and Officers
Insurance

• Employment Practices Liability
• Can the way you ask your receptionist to answer
  the phone create a claim?

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Tricks and Traps of Directors and Officers
Insurance

• Key Terms
• Prior Acts Coverage
• Prior and Pending Litigation
• Third Party Claims-EPLI
• Outside Director Liability
• Indemnification Retention

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Tricks and Traps of Directors and Officers
Insurance

• Critical Terms
• Duty to Defend vs. Reimbursement
• Fiduciary Liability
• Comprehensive EPLI
• Punitive Damages
• Tie-in Sales

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Tricks and Traps of Directors and Officers
Insurance

• Enhancements that Exist
• Publishers Liability
• Third-party ELPI
• Limited Hammer Clauses
• Risk Management and Legal Service

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Tricks and Traps of Directors and Officers
Insurance

• One Enhancement Gone Bad for Directors
• Entity Coverage
• Coverage that was developed originally for
  Directors and Officers is now being watered down
  and in some cases eliminated, due to the claims
  defense and payments for the entity
• Individual directors have reached into their own
  pockets to cover settlements

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Tricks and Traps of Directors and Officers
Insurance

• One Enhancement Gone Bad for Directors
• Entity Coverage
• In the event of bankruptcy of the entity, the
  courts have seized DO Polices and claimed they
  are an asset leaving the directors bare (without
  coverage)

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Tricks and Traps of Directors and Officers
Insurance

• Final Tips to Avoid Disaster
• Recognize that insurance gaps that lead to
  diminished value of a business can give rise to
  claims against directors and officers
• Report all incidents regardless of the
  probability that they will develop into any kind
  of real claim

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Tricks and Traps of Directors and Officers
Insurance

• Telcom is the Program Administrator for the NTCA
  DO Program and has the official endorsement of
  the Association that allows us to offer coverage
  as part of our product that others need to
  endorse on for additional premium
• McDonough Telephone like many cooperatives and
  small rural telephone companies, has seen our D
  O rates increase every year - much of the
  increase due to actions of executives and boards
  of bigger national companies. We found Telcom to
  offer a product which will expand our coverage at
  a reduced premium rate.-Norm Welker- and
  McDonough Telephone joined the NTCA Program as a
  new insured January 1, 2005. Norm is the
  President of NTCA

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Telcom Insurance Group

• Contact us
• 6301 Ivy Lane, Suite 506
• Greenbelt, MD 20770
• 800-222-4664
• 301-474-6196 (fax)
• www.telcominsgrp.com
• Peter Elliott pje_at_telcominsgrp.com