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Presented to:
Jenifer M. Robbins General Counsel FPL Advisory Group
Finance 341 Property & Liability Insurance Professor Stephen D’Arcy April 24, 2003 Presented by:
BackgroundBackground
University of Illinois, B.A. in Finance & Political Science - 1995
Harvard Law School, J.D. - 1998 Corporate Attorney, Katten
Muchin Zavis – 1998 – 2002 General Counsel, FPL Advisory
Group – 2002 - Present
FPL Advisory Group Europe Ltd.
Serving the Real Estate and Financial Services Industries
Ferguson Partners Ltd.
FPL Associates L.P.
Executive Recruiting ConsultantsCEO Succession Planning
Board Assessments / Recruiting
FPL Associates ConsultingManagement Consulting
Corporate Real EstateRestructuring / Turnarounds
FPL Associates FinanceTransactional Advisory
Merchant BankingFinancial Consulting
200 West Madison Street Suite 3500 Chicago Illinois 60606Other locations London Los Angeles New York
www.fpladvisorygroup.com www.fergusonpartners.com www.fplassociates.com
FPL Associates CompensationBenchmarking and Assessment
Design and ImplementationContracts and Long Term Incentives
FPL ADVISORY GROUP
What is Director and What is Director and Officer Liability Insurance Officer Liability Insurance
(“D&O”)?(“D&O”)?
Broadly speaking, D&O insurance is insurance designed to shift to the insurer the risk of certain third-party liabilities arising from the acts or omissions of the directors and officers of a corporation acting in their official capacity.
Why Should D&O Be Why Should D&O Be Important to You?Important to You?
Importance to insurance companies
Importance to all companies in terms of attracting talented directors and officers
Service as a director or officer Networking conversation
Why is D&O Such a Hot Why is D&O Such a Hot Topic?Topic?
Economic downturn Corporate scandals: Enron,
WorldCom, etc. Increased potential for liability:
Sarbanes-Oxley Act of 2002 Enormous judgments and settlements
involving director and officer liability Under-pricing in the D&O market in
the 1990s
LiabilityOf
Directors and Officers
The Issue of “Agency”The Issue of “Agency”
A corporation has most of the legal rights of an individual person.
But think about how those rights are exercised - how actions are carried out by a “person” that cannot act for itself.
Delaware Corporate LawDelaware Corporate Law
Delaware is the premier jurisdiction for incorporation.
DE Section 141: “The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors…”
DE Section 142: “Every corporation organized under this chapter shall have such officers with such titles and duties as shall be stated in the bylaws or in a resolution of the board of directors…”
LiabilityLiability
It’s EVERYWHERE!Contract liabilityTort liabilityRegulatory liability
Distinguish between the liability of the corporation and the liability of directors and officers.
Directors and officers have additional worries that arise from the agency issues already discussed.
Shlensky v. WrigleyShlensky v. Wrigley
Minority stockholder sued (on behalf of the corporation) the directors of the corporation that owns the Chicago Cubs.
Suit alleged that the directors were negligent and were mismanaging and wasting corporate assets by failing to install lights and schedule night games at Wrigley Field.
Business Judgment RuleBusiness Judgment Rule
“The judgment of the directors of corporations enjoys the benefit of a presumption that it was formed in good faith and was designed to promote the best interests of the corporation they serve.”
Francis v. United Jersey Francis v. United Jersey BankBank
Trustees in bankruptcy sued director to recover funds taken out of a reinsurance company by the other directors.
Suit alleged the director was negligent in failing to prevent the misappropriation of funds where the director had taken no interest in the business.
Fiduciary DutiesFiduciary Duties
Duty of Care: Directors must “discharge their duties in good faith and with that degree of diligence, care and skill which ordinarily prudent men would exercise under similar circumstances in like positions.”
Duty of Loyalty: Directors may not take advantage of the corporation, its shareholders or other beneficiaries by means of fraudulent or unfair transactions.
Director and Officer Director and Officer LiabilityLiability
Indemnification Indemnification andand
Insurance Insurance
Indemnification (Delaware)Indemnification (Delaware) Mandatory: “To the extent that a . . . director or
officer of a corporation has been successful on the merits or otherwise in defense of any action . . .such person shall be indemnified against expenses (including attorneys’ fees) . . . reasonably incurred by such person in connection therewith.” DE §145(c)
Permissive: “A corporation shall have the power to indemnify [a person party to a lawsuit by reason of being a director, officer, etc.] against expenses (including attorneys’ fees), judgments, fines . . .if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful.” DE §145(a)
Limits on IndemnificationLimits on Indemnification
Behavior not meeting the standards of mandatory or permissive indemnification under state corporate law cannot result in indemnification.
Corporate law in different states may prohibit indemnification for certain matters including damages in a shareholder derivative suit.
Typically, corporate law does allow D&O insurance to provide director reimbursement even when corporate indemnification would not have been permissible.
Parts of D&O Insurance Parts of D&O Insurance CoverageCoverage
Side A: Insures directors and officers as individuals when they are not indemnified by the corporation for losses.
Side B: Insures the corporation, reimbursing it for losses it incurs as a result of indemnifying officers and directors.
Side C: Insures the corporation for losses caused by actions taken by directors and officers but attributed to the corporation itself (“entity coverage”).
CoverageCoverage
Typically, the D&O policy covers liabilities arising from third-party claims against an insured that arise from the insured’s “wrongful acts.”
“Wrongful Act” is defined in the policy, but a common formulation is: “any error, misstatement, misleading statement, act, omission, neglect, or breach of duty committed, attempted, or allegedly committed or attempted by [an insured in his or her official capacity].” - FPL’s Chubb D&O policy
Typical Coverage Typical Coverage ExclusionsExclusions
Illegal personal profit
Regulatory exclusion
Intellectual property claims
Securities violations (frequently insider trading)
Unauthorized remuneration
Insured vs. Insured
Established fraud, dishonesty or criminal acts
Bodily injury
Other Coverage IssuesOther Coverage Issues
Fraud in the inducement theories Severability Issues “Claims-made” policies “Wasting” policies
Defense IssuesDefense Issues
Selection of defense counsel Control of defense strategy Control over settlement –
“hammer clauses”
Allocation IssuesAllocation Issues
In the early 1990s D&O policies only offered Side A and Side B coverage.
Lengthy battles ensued over what part of the loss would be allocated to the directors and officers (and thereby be covered by the D&O policy) and what part of the loss would be allocated to the corporation itself (and thereby not be covered by the D&O policy). The D&O industry’s answer was to offer the Side C coverage: entity coverage.
Bankruptcy IssuesBankruptcy Issues
In the wake of recent corporate scandals, entity coverage has been revealed as a potentially damaging component of D&O policies in a bankruptcy setting.
Entity coverage may mean that the D&O policy is deemed an asset of the bankruptcy estate, making it difficult for directors and officers to collect under the policy.
Questions and AnswersQuestions and Answers