Independent directors serving on the boards of publicly owned,privately held and not-for-profit organizations all face numerousliability exposures, any of which can threaten their personalassets, said a D&O expert.

In the post-Enron era, independent directors are given a varietyof responsibilities, including strategic planning, monitoring theactions of management to prevent abuses of power and providing amore balanced perspective on important issues.

Because of the Sarbanes-Oxley Actof 2002 and a stream of increasingly expensive shareholder claimsagainst directors and officers, the financial and reputationalrisks to independent directors have never been greater. As aresult, those considering service as independent directors areinsisting on information concerning preventive measures, defensivetactics and financial protection.

“We're in an interesting place in the marketplace,” said Evan J.Rosenberg, senior vice president, Chubb & Son, and globalspecialty lines manager, Chubb Specialty Insurance in Warren,N.J.

“What's been getting a lot of press is the financialdifficulties of some of the big players,” he said. “So I think riskmanagers and boards are probably taking a much harder look at thecounterparty risk. They're looking at the financial strength oftheir carriers as never before.”

He said organizations looking to protect independent directorsare looking at the amount of limits they buy. In the last five orsix years, he said the trend has been to buy “some traditionalD&O coverage and some excess A-side only. The next trend we'restarting to see is they're starting to buy independent directorshipliability coverage or coverage for the outsiders,” although thisstill is not widely purchased, he said.

Where are boards vulnerable right now?

“The issues most companies are facing have to do with financialdistress. You almost can't open the newspapers everyday withoutseeing a large company filing Chapter 11. You're seeing an ongoingtrend of financial difficulty.”

He noted “an interesting phenomenon” that follows thesecircumstances related to the obligations of board members.

“Traditionally with a publicly traded company, the boards owetheir loyalty to the shareholders and have to act in the bestinterest of the owners,” he said. “What happens when you get intothis zone of insolvency [is that] your loyalty switches from theshareholders to creditors” as a board member, he said.

In addition, directors of financially struggling firms face adifferent set of risks, when obligations to creditors may overridetheir duties of loyalty to owners.

“It's not like there's a big sign in the road, but I thinkthat's a very tricky point in a company's evolution,” he noted.

At this juncture, he said, organizations must determine whenthey are really in trouble. They now must protect the company'sassets for the benefit of creditors, “which is different than whatthey've been doing all along.”

“That's where I think boards have really got to be focused,” headded, noting that they have to “stay on top” of not only theircompany's operations, but what's going on “up and down the foodchain.”

He said boards need to look at competitors of the company,suppliers and creditors. “So their job has gotten so much morecomplicated, because all the people in their supply chain and theirfinancial are struggling.”

All of this has created “a lot of anxiety and a lot of demands.I'd say their board meetings are probably a lot longer, tougherthan they were two years ago, because the financial crisis hasspread so widely.”

Right now, he said, board vulnerability “is coming to the fore.When times are good, the stock market is increasing at a slow,steady pace.” People aren't as concerned, “as long as everybody'smaking money,” he said, adding that upon entering “a volatile stockmarket, all of a sudden, all the things you weren't watching asdiligently start to show up.”

In addition, “if you start getting into that change of loyalty”issue, he said, “it's very tricky.”

To help directors deal with the many issues they are facing, hesaid Chubb has updated its handbook for independent directors,titled “Loss Prevention Guidelines For Independent Directors.”

Chubb publishes a variety of guides to help instill “a sense ofrisk management and good behavior,” he said. “You can be the bestcompany in the world, do everything right, [but] it doesn't meanyou're not going to get sued. You want to have the procedures andthe documentation, so you have a good defense.”

He emphasized that being a good, well- managed, well-run companyisn't always enough. “But if you are doing the right things andfocusing on director education, board attendance, getting outsideexperts and all the things we talk about, it does make it easier todefend the case and to make sure you can resolve the litigationwith little or no cost, other than defense costs,” he said.

Ultimately, he added, “it's good for us as an insurer and it'sgood for our customers to try to find ways to mitigatedamages.”