A new insurance policy from the Chubb Group of Insurance Companies can help independent directors protect their personal assets when they are sued by shareholders and others.
The personal policy provides coverage to independent directors when certain losses are not indemnified by their companies or paid by other directors’ and officers’ liability insurance.
Personal Director’s Liability Insurance is tailored to the needs of individual directors and offers them a personal, dedicated limit, up to $10 million. By contrast, corporate D&O policies offer an aggregate limit shared by all directors and officers and, in many cases, the company as well. The new personal policy can be customized to cover one, all or any combination of boards a director serves on. The policy also allows the insured director the right to choose defense counsel.
The coverage comes at a time when corporate scandals, financial restatements and bankruptcies have created a litigious D&O liability environment and financial uncertainty. In some cases, the financial losses of shareholders exceed the limits of D&O liability insurance.
Independent board members and board candidates are taking a much closer look at their insurance protection and, in many cases, aren’t comfortable with what they see. A recent study by research firm Korn/Ferry International and Corporate Board Member magazine showed that nearly half of the 908 board members surveyed were concerned about their directors’ and officers’ coverage. According to the study, 48 percent said they have turned down a board position because they felt the risk of being sued was too great. And 49 percent said directors’ and officers’ insurance was a very important factor in their decision to join particular boards.
D&O policy limits for bankrupt companies are being tied up by a debtor’s bankruptcy estate and made unavailable to defend individual directors. Policies are also being increasingly rescinded by insurers who feel they have been defrauded by the officers signing applications for coverage, thereby leaving innocent directors uninsured.
“Independent directors need to look out for themselves, not rely on their corporations,” Robert Lynyak, senior vice president and product development director, Chubb Specialty Insurance, said. “This is a new way of buying D&O coverage that will help protect individual directors when qualified directors are in demand. It will provide them with the peace of mind they need to take on a directorship and go about their duties.”
Trends in corporate governance are also fueling the need for this coverage, Lynyak said. The passage of the Public Company Accounting Reform and Investor Protection Act of 2002 (also known as Sarbanes-Oxley) dramatically increases the level of responsibility and accountability for directors of public companies, especially those serving on audit committees. The law requires many companies to reconfigure their board and committee structures to meet new standards for independence and financial expertise. This is creating a significant demand for talented new board candidates, Lynyak said.
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