It's a difficult time to be a director - or a risk manager responsible for securing the quality D&O insurance the company needs to recruit, retain and protect board room talent. The frequency of securities class action suits is up more than 130 percent over the past several years; severity has also been soaring. Since 1996, the average cost to settle securities litigation has risen 459 percent. The frequency of financial restatements - which inevitably trigger litigation against directors and officers - was skyrocketing even pre-Enron, and continues upward. Corporate bankruptcies, another event certain to put corporate directors in the litigation crosshairs - have increased nearly 200 percent since the late 1990s. Meanwhile, the significant new boardroom responsibilities introduced with the Sarbanes-Oxley Act of 2002 have created a road map for an aggressive plaintiff's bar. And the future looks even bleaker.
All signs point to an even more treacherous D&O liability environment in the years ahead. First, regulators at all levels - including the Securities' & Exchange Commission (SEC), US Department of Justice and state Attorney Generals - are determined to prove their commitment to new legislation and corporate governance standards. The SEC alone added nearly 700 people last year, mostly to initiate investigations. Second, courts are scrutinizing corporate America more closely. As examples, consider two recent Delaware court decisions in which the court questioned whether the business judgment standards used by board members should be elevated and challenged the very definition of director independence. Other rulings indicate that executives are newly vulnerable to expensive fiduciary liability suits - regardless of whether they exercise any direct control over a company's employee benefit plans.
Additional factors - including a lackluster equities market that does nothing to bolster shareholder confidence and juries that are "desensitized" to the value of a million dollars - are also working against directors and officers. And finally, the plaintiffs bar is eagerly testing new legal theories, which could add banks as targets of multi-billion dollar securities litigation.
It is in the best interest of all parties - the risk manager, the corporation and indeed the company's shareholders - to make talented directors comfortable with the protection available to address their D&O exposure. When board members are aware of the issues and the thought-processes driving the D&O insurance purchase, they can be confident in the protection they gain - and in their decision to serve.
Acting as an independent director for a public company is an important and worthwhile responsibility. Unfortunately, it is also a position that comes with risk. It is critical that you take an active role in safeguarding your personal assets. And that means knowing how the company and its D&O policy are covering you.
Ask the following questions of the company to find out if your D&O policy will adequately protect you and your personal assets.
- Will my D&O policy cover me if I am sued as a result of being an independent director of this company?
It depends. Now more than ever, we anticipate independent directors to become favorite targets for shareholder lawsuits. D&O insurance is meant first and foremost to protect you, but often independent directors are surprised to learn – usually at claim time – that their D&O policy is not quite that simple. In certain situations the policy may not be available. The increasing frequency of fraud, bankruptcy and financial restatements and a new regulatory environment can all affect your protection. You have a vested interest in knowing how your D &O policy will respond, or not, in all situations.
- How do the new SEC regulations, the Sarbanes-Oxley Act of 2002 and the financial markets’ new standards increase the chances that I will be implicated in a lawsuit as an independent director?
The emphasis on accountability and increased penalties for noncompliance resulting from these regulations puts independent directors at greater peril for shareholder litigation than ever before. Additionally, these new regulations and specifically the Sarbanes-Oxley Act of 2002 define new responsibilities which increase the likelihood that the plaintiffs bar will name you – the independent director – in a lawsuit. You should ask the company exactly how the new regulations impact you and if any adjustments have been made to the D&O policy to address the increased risk.
HUB International Insurance Services Executive Risk Management provides creative solutions to these and other D&O issues you may face. HUB International Insurance Services ERM has the expertise, creativity and commitment and stands ready to serve your organization with client focused executive risk liability products and services.