Directors

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An In-Depth Look at DO
What is Directors Officers Liability?
Directors Officers Liability is the liability
(or exposure to litigation) of corporate board
members and officers arising out of their actions
pertaining to their management duties of the
corporation. Directors Officers Liability
Insurance insures the personal assets of
corporate board members and officers as well as
the companys corporate assets from lawsuits
arising out of their capacity as directors or
officers of the cooperation. What are the
responsibilities of Corporate Boards? Directors
of corporate boards have many duties and
responsibilities. The board of directors of a
corporation generally performs the following
duties Review authorize major corporate
actions. Advise counsel management on corporate
decisions. Review oversee proper audit
procedures. Review the Cooperations
investments. Stay informed about the
Corporations financial status and legal
developments. Assist management in
decision-making. Verify the Corporation is in
compliance with all applicable statutes,
regulations laws. Monitor managements
performance. As the fiduciaries of Corporate
America, Directors Officers of corporations are
responsible for the affairs of their companies.
They must use good faith and prudent judgment in
their service to the corporation. Directors
Officers have certain duties and responsibilities
when acting in the service of the corporation.
These duties are, as follows General Duties -
Directors Officers must act in good faith and
prudent judgment in their service to the
cooperation. Common Law Duties - Duty of Loyalty
Directors Officers must avoid conflicts of
interest, self-dealing, and misuse of corporate
assets. Duty of Obedience Directors Officers
must act within the boundaries established by
statute, corporate charter or by-laws, and
written policies and procedures. Duty of
Diligence and Care Directors Officers must
conduct themselves with the care that an ordinary
person would exercise under similar circumstances
and in similar capacities.
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An In-Depth Look at DO
What is Directors Officers Liability?
Statutory Duties - There are several laws and
statutes that regulate the actions and decisions
of Directors Officers. Securities Laws (both
Federal and State) Anti-Trust Laws Employment
Laws ERISA Violations Racketeering Laws Tax
Laws Environmental Laws Intellectual Property
Patent Laws State Corporation Laws Business
Judgement Rule Directors Officers have
historically been protected from personal
liability against them by a legal principal known
as the Business Judgement Rule. This legal
principal shields corporate directors officers
by applying the rule for mistakes in judgement
(i.e. second-guessing). As long as the director
or officers has acted according to the duties of
loyalty, obedience and diligence, then the
director or officer may be protected by the
Business Judgement Rule. Directors Officers
Liability Claims Directors Officers of both
Public and Private Companies face legal
liabilities in their service to the corporation.
The claims experience between the two varies.
Public Companies experience more frequency and
severity of claims related to shareholder issues,
while both Public and Private Companies face
similar experience for Employment Related Claims.
Below is a partial list of typical
claimants ?Shareholders ?Employees ?Creditors ?C
ustomers/Clients ?Competitors ?Government
Regulatory Agencies According to the most recent
paper by the National Economic Research
Associates, Inc. (Trends in Securities
Litigation and the Impact of PSLRA), the average
Securities Class Action Suit from 1995 to the
first half of 1999 is 8.3 million. This does
not include Legal Defense Costs.
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An In-Depth Look at DO
What is Directors Officers Liability?
Protection for Directors Officers There are
three categories of protection against personal
liability of Directors Officers of
corporations Indemnification The corporation
may indemnify their directors officers for
litigation. This is usually accomplished by
incorporating an indemnification clause in the
corporate by-laws or by a separate written
indemnification agreement. Indemnification is
also often available and governed through state
law. Some conduct by the directors officers is
not indemnifiable, such as dishonest/illegal acts
or intentional misconduct. Indemnification may
not be available to directors officers in cases
of financial insolvency or bankruptcy. Common
Law and Statute Business Judgement Rule Courts
may apply the Business Judgment Rule to protect
directors officers from personal
liability. Liability-Limiting Statutes some
state and federal laws provide limitation of
liability in certain cases. Insurance
Coverage Insurance provides protection for
individual directors officers when the
corporation is not permitted to indemnify or
financially unable to indemnify the directors
officers. When the corporation does indemnify,
DO insurance will Pay On Behalf Of or indemnify
the corporation for payments made to the
directors officers. In some cases, coverage may
be provided for the corporate entity, in cases
where the corporation is being held liable. (for
example, liability under the Federal Securities
Laws) DO insurance provides Balance Sheet
Protection for the corporation. Insurance allows
the corporation to transfer risk from its own
balance sheet to that of the insurer. DO
insurance helps the corporation attract and
retain quality board members.
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An In-Depth Look at DO
Insurance for Directors Officers
Directors Officers Liability Insurance is not a
standardized insurance coverage. No two policies
are alike and no two policies provide exactly the
same coverage. It is important, therefore, to
negotiate the most comprehensive coverage at a
competitive price. There are, however, some
basic similarities in all policy forms. Insuring
Agreements The insuring agreements of most
policies are very similar. There are normally
two or three insuring agreements, depending upon
the extent of coverage provided. Insuring
Agreement A or Directors Officers Coverage
This insuring agreement provides coverage
directly to the Directors Officers in cases
where the Corporation is not allowed to indemnify
the Directors Officers due to statutory
prohibition or limitations in the by-laws or for
reasons of financial inability by the
Corporation. There is generally no Retention
applied in this insuring agreement. Insuring
Agreement B or Corporate Reimbursement Coverage
This insuring agreement pays the Corporation for
indemnifying the Directors Officers for their
legal liabilities. Most claims are settled under
this insuring agreement, since most claims are
legally indemnifiable or the Corporation has the
assets to indemnify the Directors
Officers. Entity Coverage In recent years, DO
policies have been broadened to including
coverage for the Corporation itself as an Insured
under the policy. For Publicly Traded Companies
the coverage is limited to Securities Claims.
For Privately Held Companies, the coverage has
been broadened to include most all types of
claims against the Corporation (such as
employment practices claims and claims by
shareholders) with a few exceptions. Each policy
form needs to be carefully reviewed to determine
the extent of Entity Coverage. Employment
Practices Liability Coverage Many policies now
contain some form of Employment Practices
Liability Coverage. For Publicly Traded
Companies it is recommended that they purchase a
stand-alone policy for Employment Practices.
This will protect the DO limits from being
depleted for EPL claims and saved for traditional
DO losses. For Private Held Companies it is
possible to get a very broad combined DO and EPL
policy at a very competitive price. It is
important to review the wording in the policy to
determine the breadth of coverage being
offered.
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An In-Depth Look at DO
Conclusion
Directors Officers of for-profit organizations
need to consider their liability issues before
agreeing to sit on a board of directors. It is
essential that the director or officer use their
best judgement when making decisions, obey the
common law duties, participate in the decision
making process and seek to protect themselves
(and the corporation) from legal liability.
Each companys directors and officers must
decide whether or not to purchase Directors
Officers Liability Insurance and to what breadth
and amount of coverage to purchase. It is
important that the company choose a policy that
provides broad coverage at a competitive premium.
Since DO policies do not have standard coverage
language, it is very important that the company
utilize the services of an experienced agent or
broker to negotiate coverage on their
behalf. Our team of professionals at S.H. Smith
Company has the experience and expertise to
help local agents and brokers negotiate broadest
terms and most competitive pricing for their
customers. We employ seasoned brokers with
underwriting and sales skills. Our brokers will
assist you and your staff in the proper placement
of your clients Directors Officers Liability
needs. We encourage you to try us out and see
the difference. If you would like more
information or would like to contact one of our
brokers, please contact the following Massachus
etts Office S.H. Smith Insurance Agency, Inc. 661
Highland Avenue Needham Heights, MA 02494 Phone
800-735-1023 Fax [phone] Contacts David
S. Perkins, RPLU Lynn Shimelman