Latest Legal Cases May Alter D&0 Coverage

By Daniel Hays

NU Online News Service, Jan. 14, 3:45 p.m.EST?Recent proposed settlements of stockholder suitsrequiring directors to forego insurance protection and pay millionsof their own money present both a challenge and opportunity forcarriers, experts said.[@@]

The views were offered by a major brokerage executive and aninsurance practice attorney, who said the cases are likely toincrease a trend for expanded directors and officers coverage.

At the same time, underwriters will be called on to devise somenew varieties of coverage to deal with the expanded risk that thesettlements have spotlighted, said attorney WilliamPassannante.

Mr. Passannante, with the New York office of Anderson Kill &Olick, has represented former Tyco Chief Executive Dennis Kozlowskiand other officers and directors in cases where insurers havesought to rescind their D&0 coverage.

He made his comments in the wake of disclosures that 10 formerdirectors of the bankrupt WorldCom Inc. would have to pay $18million from their own assets, and 10 directors at Enron Corp wouldhave to pay $13 million with their own cash as part of proposedsettlements.

In the WorldCom Inc. case, the personal payments were reportedlydemanded by Alan G. Hevesi, the New York State comptroller, whoseagency was lead plaintiff on behalf of the state retirementfund.

Insurers that offer D&O liability coverage say they providea product that is going to work, "and in this case it didn't," saidMr. Passannante. With a plaintiff who insists there is value intaking settlement money out of directors' pockets, "what caninsurers do except admit they got a windfall?" he commented.

The attorney speculated that insurers, seeking to deviseprotection for directors against the eventuality of a personalpayment demand, might craft a policy that creates a trust fund fora director's wife and children.

Underwriters generally are able to come up with coverage whenthere is a market for it, he noted. The insurance industry whenchallenged, he said, "does come up with a product to fill the gap.It's an interesting opportunity for them."

The question, according to Mr. Passannante is whether there isgoing to be "a product response that meets the fears of directors,or are they not going to serve anymore?"

Mr. Passannante said that the demand by directors for extendedprotection has soared. "In the last three years, it's gone up athousand percent," he noted.

Steve Shappell, director of the Aon brokerage's financialservice group's legal and claim practice, said since the enactmentby Congress of Sarbanes-Oxley corporate disclosure and accountingrequirements, directors have been much more interested in how muchcoverage they have, as well as "who am I sharing it with, how can Ilose it, and what kind of behavior will cause me to lose it?"

He predicted that if insurers are not able to protect directors,"we're going to have a flight of talent from boards."

Brokers and customers, according to Mr. Shappell, are "going tohave to force insurers to provide maximum protection" for thoseoccasions when directors make mistakes.

He said the settlements' effect could be to spur clients to buyexpanded protection and demand more concrete coverage. WorldCominsurance D&O policy terms and conditions, he said, had failedto provide severability "to protect innocent directors andofficers" from the actions of others with the company.

Mr. Shappell noted that in the WorldCom case, there had beenfive actions by insurers to rescind the D&O coverage when thesettlement arrangement was reached.

According to Mr. Shappell, the insurers involved were SRInternational Business Insurance, Twin Cities Fire Insurance, StarExcess Liability Insurance, Aegis, Gulf and National Union FireInsurance.