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Twelve Things Directors and Officers Can Do to Protect Themselves
By James W. Reuter
In the wake of the implosion of companies like Enron and Worldcom--and, more recently, scandals involving the backdating of stock options--directors and officers, particularly of publicly held businesses, are more exposed to risk than they have been at any time in history. Whether or not directors and officers have actually done anything wrong, the costs of defending a lawsuit are high, not to mention lost time and increased stress. Adding further risk and aggravation to the mix, directors' and officers' insurers are more willing than ever to fight vigorously with their own policyholders in attempts to avoid insurance coverage.
Directors and officers can take responsibility for protecting themselves from lawsuits not simply by working aboveboard but by learning about insurance coverage, ensuring that their businesses have appropriate procedures in place both before and after claims arise, and taking steps that will help them demonstrate their innocence in a worst-case scenario. This article presents 12 pieces of advice I provide to my director and officer clients.
1. Do the right thing. It is something your parents probably told you. It was good advice then, and even better advice now that you have more to protect. By doing the right thing you will also likely be following the law, even if you aren't sure exactly what the law is. Unfortunately, two-thirds of CEOs and CFOs report being asked to misrepresent the condition of the company. Don't ask anyone to misrepresent the truth, and don't do it if you're asked to.
2. Your best protection is provided by your own business. Because directors' and officers' insurance policies have exclusions and deductibles and may not provide full or even partial coverage of claims and lawsuits against directors and officers, the business you serve is both your first line of defense and your fallback defense. In some cases your business may be the only line of defense between a claimant and your personal assets. A well-run business naturally will have a low probability of claims compared to one that is poorly run. In addition, if a claim is made, a well-run business will support you and your defense in many ways, including by paying your defense costs and supplying expertise, information and documentation. Finally, the assets of a well-run business are there to stand behind you in a worst-case situation(that is, an adverse result). Therefore, serve only financially stable businesses run by honest, competent people.
3. Pay attention. Know what is going on in your business. Exercise good business judgment. Acting only as a rubber stamp does nothing to protect you and indeed may increase your risk. In appropriate circumstances, it may be advisable to make a record of the fact that you are paying attention by doing your homework, asking questions and documenting your actions. E-mail messages, letters and minutes of meetings, among other things, can serve as documentation.
4. Make certain that your business procures and keeps in force suitable D&O insurance policies. Use a knowledgeable, experienced commercial insurance broker to write and renew policies.
5. Know your D&O insurance policies. Read your policies and applications occasionally. At a minimum, know the definition of "claim," how and when notice must be given to the insurance company, and the defense and settlement sections. Most important, be certain the D&O insurance policy has clauses in it that protect you even if some of the other directors and officers engage in wrongful conduct. Request that your business' broker or attorney review the D&O policies with you and other directors and officers from time to time. Ask questions.
6. Learn something about D&O insurance in general (read articles about it, for example).
7. Stay current with the D&O insurance market. Know what enhancements to your policies are available and desirable and when the optimum time is to ask for them. Your business' insurance broker should be able to help you with this; however, you may have to ask.
8. Make sure your business establishes and maintains policies and procedures for promptly notifying insurance companies of potential or actual claims, complaints, requests for money, administrative proceedings and lawsuits. One or more individuals in each business should have some knowledge of insurance, be designated as the person to receive claims and potential claims, and know how to forward information to insurance companies and brokers.
9. Know what to do when a claim arrives. How is the insurance company notified? Who selects your defense counsel? What should you expect from your insurance company? Do you need to monitor your insurance company's performance? What should you watch out for? How about deductibles or retentions? What if there are coverage disputes?
10. Don't change D&O insurance companies without first finding out what should be done to eliminate or minimize the risk of gaps in coverage. Changing insurance companies is risky; if not done properly, coverage you thought you had may in fact not be available and the "old" and "new" insurance company may each deny coverage.
11. In the event coverage ends because of acquisitions, mergers, changes in control or sale of a substantial part of the assets of your business, make sure appropriate steps are taken beforehand to continue acceptable coverage. Early attention to the insurance aspects of business changes is well worth your time and the time of your business.
12. You or someone at your business should know a good, experienced insurance coverage attorney to call on for questions, periodic reviews, explanations of coverage and assistance if a major claim arises.
Following these 12 suggestions will help directors and officers not only shield themselves from exposure to lawsuits and bad publicity in the event a claim is made, but also preserve their integrity as well as the reputation of the business they serve.
ABOUT THE AUTHOR
Jim Reuter is a partner in the Insurance Recovery practice group of Lindquist & Vennum. He can be reached at 612-371-3519 or firstname.lastname@example.org.
This article is only a general summary for informational purposes and does not constitute legal advice. Consult a qualified and experienced insurance advisor for your specific situation or particular question.
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