Directors Skittish After Settlement Cash Calls

Latest legal cases could prompt insurers to come up with new D&0 policy terms

Recent proposed settlements of stockholder suits requiring directors to forego insurance protection and pay millions of their own money present both a challenge and opportunity for insurance carriers, industry experts contend.

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

At the same time, underwriters will be called on to devise some new varieties of coverage to deal with the expanded risk that the settlements have spotlighted, according to William Passannante, an attorney with the New York office of Anderson Kill & Olick. Mr. Passannante has represented former Tyco CEO Dennis Kozlowski and other officers and directors in cases where insurers have sought to rescind their D&0 coverage.

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

In the WorldCom Inc. case, the personal payments were reportedly demanded by New York Comptroller Alan Hevesi, whose agency was lead plaintiff on behalf of the state's retirement fund.

Insurers that offer D&O liability coverage say they provide a product that is going to work, “and in this case it didn't,” said Mr. Passannante. With a plaintiff who insists there is value in taking settlement money out of directors' pockets, “what can insurers do except admit they got a windfall?” he added.

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

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

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

Mr. Passannante said that the demand by directors for extended protection has soared. “In the last three years, it's gone up a thousand percent,” he noted.

Steve Shappell, director of the legal and claim practice at Aons financial service group, said since the enactment by Congress of Sarbanes-Oxley corporate disclosure and accounting requirements, directors have been much more interested in how much coverage they have, as well as “who am I sharing it with, how can I lose 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 to have to force insurers to provide maximum protection” for those occasions when directors make mistakes.

He said the settlements effect could be to spur clients to buy expanded protection and demand more concrete coverage. WorldCom insurance D&O policy terms and conditions, he said, had failed to provide severability “to protect innocent directors and officers” from the actions of others with the company.

Mr. Shappell noted that in the WorldCom case, there had been five actions by insurers to rescind the D&O coverage when the settlement arrangement was reached. According to Mr. Shappell, the insurers involved were SR International Business Insurance, Twin Cities Fire Insurance, Star Excess Liability Insurance, Aegis, Gulf and National Union Fire Insurance.

Reproduced from National Underwriter Edition, April 29, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Directors Skittish After Settlement Cash Calls

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