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| 2002 News and Press Releases |
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HEADLINE ARCHIVED:
D&O Entity Cover Had Its Downsides; Entity Coverage; Shareholders' Class Action Lawsuits On Rise
By: Keogh, John
National Underwriter Property & Casualty-Risk & Benefits Management
No. 45, Vol. 106; Pg. 29, November 11, 2002
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EXCERPT: With shareholder class actions against corporations and their boards rising unabated, the corporate scandals of the past year have made the personal assets of directors and officers even more of a target for securities litigation. In many cases, innocent directors and officers are seeing their personal assets jeopardized by corporate crimes they did not commit. As a result, the directors and officers liability insurance policy is more important than ever to the directors and officers of Corporate America. Accordingly, it is critical for all involved in the development of a D&O insurance program--risk managers, chief financial officers, brokers, carriers, and the directors and officers themselves--to comprehend the scope of D&O coverage and to obtain coverage that protects and defends the personal assets of directors and officers. To do this, they need to ensure that the policy provides appropriate incentives for all concerned to work together towards a common end in defending a claim. To achieve this, however, the industry must first address the presence of entity coverage in the D&O policy. Introduced in the mid-1990s, entity coverage was originally designed to protect the liabilities of corporations named in securities class actions, which prior to that did not have coverage for its own liabilities. This lack of coverage caused the defendant companies in securities suits to aggressively negotiate how much the D&O policy would contribute to the settlement (be "allocated" to individual covered directors and officers) and how much of the loss would be "allocated" to the corporation for its own exposures. By including entity coverage in D&O, carriers intended to align the interests of insurers and insureds in defending and settling securities claims and to avoid disputes over allocation of loss. Unfortunately, the addition of entity coverage was not without significant, unintended consequences. For example, in situations where the policy limit is less than the total amount of the loss, a conflict may still arise between the individual directors and officers and the corporate entity over the allocation of the policy limit, since the individuals' personal assets are often at risk. The adoption of entity coverage removed the incentives for insured corporations to manage the costs of litigation. With entity coverage available, corporations possess a vested interest, only, in settling cases within policy limits, which are often quite large. This has caused settlement amounts to skyrocket and removed incentives to control defense costs as well. And by settling the claim to address the liability of the corporation, often at a level higher than the carrier believes necessary, the limits dedicated to addressing the needs of the individual directors and officers would erode, exposing their personal assets. As a result, the inclusion of the corporation as an insured in the D&O policy undermined its original intent as a means of operating exclusively for the benefit of individual directors and officers. Entity coverage has also caused bankruptcy courts to interfere with the payment of defense expenses and settlement costs in shareholder cases.
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