Stewart, Kozlowski Cases Pose A D&O Conundrum

Mr. Shappell said some policies have exclusions when the director or officer invoking coverage has been found to be involved in fraud or criminal conduct or action for personal profit or advantage.

However, "the devil is in the details," he said, explaining that most policies call for a "final adjudication" that such conduct has occurred. Even though there may be a conviction, appeals can string out the case for years, so insurers generally resolve their repayment demands on the firm with a settlement, Mr. Shappell explained.

After Martha Stewart, the former CEO of Martha Stewart Living Omnimedia Inc. was convicted she announced she would appeal. As of Friday she remained a company director and chief creative officer.

"If she's going to appeal it, the insurance company is going to have to wait and see if there is a final adjudication," said Mr. Shappell.

MSL Omnimedia, in its third quarter report for last year, referring to the investigations that led to her conviction, said that a "substantial portion of legal expenses we are incurring related to these matters are now covered by insurance."

That coverage lowered legal costs by $1.1 million for the company, but, "This decrease was partially offset by higher compensation and insurance costs," the firm said.

Ms. Stewart is the target of a shareholder suit filed last August claiming she dumped shares of Omnimedia knowing that she would investigated on suspicion of insider trading.

Mr. Shappell said even when there is a conviction and an insurer might seek a return of legal costs, "one thing we don't see, shockingly, is insurance companies going after that money."

He said in the Stewart case the company could argue it was not their obligation and was now Ms. Stewart's. According to Mr. Shappell, insurers generally do not go after the individual and since "you rarely see final adjudication, these things are settled."

Mr. Shappell said Ms. Stewart might also argue, perhaps unsuccessfully, that the obstruction of justice charges she was convicted of are unrelated to any civil case brought by stockholders and any linkage must be proven in civil court.

As a broker, Mr. Shappell said he was happy to see the recent ruling by a judge in New York that Chubb subsidiary Federal Insurance Co. was required to pay the legal fees for L. Dennis Kozlowski, the former Tyco International accused of looting $600 million from his company.

"I like the ruling. We buy this big insurance to cover this–to force the insurance companies to provide the very best defense," said Mr. Shappell, adding "If he's innocent, he's gotten the benefit of the insurance policy. And if he's guilty he will personally have to pay back his company and the insurance company."

While settlement is generally the way such matters are handled, Mr. Shappell said "This is a new frontier–CEOs so publicly and aggressively prosecuted- this is new" and the upshot could be more court battles.