Did the availability of directors and officers liabilityinsurance products contribute to the credit crisis fueled byinvestment firms that securitized subprime mortgages and other debtobligations?

Richard Bortnick, a coverage attorney for Cozen O'Connor in WestConshohocken, Pa., posed the question to an insurance companyexecutive during the annual meeting of an association ofprofessional liability underwriters and litigators last month.

During a session of the international conference of theMinneapolis-based Professional Liability Underwriting Society–whichcovered hot-button D&O issues ranging from executivecompensation to global warming–Mr. Bortnick specifically askedwhether the availability of insurance provides "an incentive forexecutives to maybe not entirely play by the rules."

Addressing his question to a fellow panelist–Steven White, vicepresident of executive assurance claims for Arch Insurance Companyin New York–Mr. Bortnick reasoned that "the perception of insuranceis moving more towards a financial guaranty product."

"It's not, but directors and officers are looking at it that way[as a guaranty],"
Mr. Bortnick suggested, basing his assessment on conversations hesaid he has had with insurance brokers and policyholderadvocates.

Mr. White responded that "there are moral hazards with anyinsurance product and D&O [insurance] is no different."

Mr. White said he believes, however, that the capacity tocompletely cover both settlement (or judgment) dollars and defensebills for lawsuits arising from "what is alleged to have happenedin some of these incredible financial meltdowns" actually isn'tavailable from the insurance marketplace.

"You're not thinking about your insurance when you start to godown that path" of reckless behavior, Mr. White asserted. "At best,with the way defense costs are, your insurance tower probably isgoing to get you a defense, but it's not going to protect you tothe extent that you're going to want to take those kinds ofrisks."

The exchange followed a discussion by legal and corporategovernance experts about the roles that executive-pay practices,shareholder pressures, and board and regulatory lapses have playedin fueling the credit crisis.

After one governance expert–Gary Brown, a lawyer for Baker,Donelson, Bearman, Caldwell & Berkowitz in Washington–gaveadvice on how directors can stay out of trouble with somecommon-sense practices, Mr. White jumped in to give what he himselfdescribed as a "shameless plug" for two specialized D&Oproducts–Side A policies and independent director liabilitypolicies.

These products cover non-indemnifiable D&O losses, providingseparate towers of limits for separately identified groups ofindividuals. (Side A and IDL policies respond when a corporationcannot indemnify directors because of statutory prohibitions in astate, because the corporation is financially impaired, or for someother reason.)

"I'm not sure…discussions" about the need for these ancillaryD&O products are conducted "as much as they should be," Mr.White said, adding that they are needed "in the event thateverything Gary [Brown] is talking about somehow didn't happenright–something goes a little bit sideways and they get sued."

The panel moderator–Ivan Dolowich, a partner with KaufmanDolowich Voluck and Gonzo LLP in New York–led off the session byasking about experts to weigh in on the causes of the creditcrisis. "Are recent economic developments the result of poorbusiness decisions or a systematic breakdown of business ethics?"Mr. Dolowich asked.

Ric Marshall, chief analyst for The Corporate Library inPortland, Me., a firm that analyzes corporate governance practices,said that "if you really step back, nearly everyone involved in themarket system has some culpability here"–listing corporationsthemselves, boards of directors and management teams, shareholderswho wanted more profits, and regulators for failing to exerciseneeded enforcement.

Mark Lebovitch, a plaintiffs' lawyer for Bernstein LitowitzBerger & Grossmann LLP in New York, said there was "a massivefailure for regulators and the law to put limits on what happened."Rejecting the idea that shareholders should shoulder any blame, healso pointed to pay practices as a key driver of the meltdown.

"Shareholders have been clamoring for years for greater rightsto act like owners of their companies," Mr. Lebovitch said, notingthat they have been seeking a "say on pay" (which would allow themto vote on compensation packages annually, and proxy access ("thereal right to remove the board").

"If by the time of the next crisis, they have greater rights,then it's fair to blame them," the lawyer said.

Pointing to guiltier parties and "the culture that got us to thecredit crisis," he said, "Wall Street [professionals] createdproducts…they knew they shouldn't."

"People had incentives to act in ways to put their companies atrisk–and ultimately the entire economy," Mr. Lebovitch said,referring to remarks by former Citibank chief executive, CharlesPrince, who reportedly said his firm would "dance until the musicstopped" when asked about the risks of collateralized debtobligations.

Wall Street bankers no longer spend their entire careers at onefirm, instead moving around to obtain ever-more-lucrative paypackages, he said, so they work "to create earnings today [and]don't really care about where the company is five or six years [inthe future]."

Such an environment makes it difficult for one company at a timeto improve pay practices, he said, underscoring the need forgovernment intervention in the area of executive compensation.