Protecting Corporate Directors and Officers in Uncertain Times
By Kelly Morrison


Georgia’s wave of bank closures following the subprime mortgage crisis gave this state the dubious distinction of first place, with a whopping 70 banking institutions (and counting) folding under the weight of the financial crisis. 

While it may be difficult to find a silver lining in a failure rate upwards of 25 percent, the resulting litigation has offered some positive opportunities in the form of clarified business judgment standards, as well as providing motivation for planning critical components of a comprehensive executive protection program that was not a priority during prosperous times.

In response to the recent collapses and the resulting litigation, the ABA Business Law Section has released a Corporate Counsel Checklist for Executive Protection. The extensive checklist and accompanying commentary emphasize multiple tiers of protection, beginning with essential revisions to the articles of incorporation and bylaws: (1) legal immunity from claims for damages resulting from directors’ failure to exercise due care; (2) advancement to selected executives of defense costs and expenses until any claim is resolved and then relieving them from any duty to repay the amounts advanced; (3) indemnifying them for any additional amount they may agree to pay in settlement of such a claim or that they may be compelled to pay by judgment; and (4) a credible program of D&O insurance coverage.

The bulk of the checklist and commentary is devoted to D&O insurance coverage. This is not surprising, given the developing nature of the law in the area, which often features contradictory holdings from district courts, which lack appellate guidance on these issues of first impression. The checklist offers an extremely thorough list of 27 essential questions to present to a corporate insurance professional when making decisions regarding policy limits and structure. 

Although a comprehensive approach is important when considering a policy, here are a few takeaways for those with a shorter attention span:

  • “Consent clauses”: most D&O policies have consent clauses that require the consent of the insurer before costs are incurred. Insureds must keep their insurer informed of potential claims as well as the defense costs they are incurring through outside counsel or otherwise.
  • Definition of “Defense Costs”: Policies vary in their definition of covered “Defense Costs.”
    • In Office Depot v. Nat’l Union Fire Ins. Co., the Eleventh Circuit ruled that administrative proceedings were not covered by the “defense costs” definition set forth in the insured’s policy, leaving Office Depot on the hook for more than $25 million in legal fees and costs in connection with an SEC investigation.
    • Some courts have distinguished between coverage for general “claims” and “securities claims”; it is vital to know what claims and investigations are covered under your policy when assessing your risk tolerance.

In response to demands for new approaches to coverage, some carriers are offering new insurance products to cover costs traditionally excluded from coverage, including pre-claim investigation costs.

For more information, contact Kelly Morrison at 770.818.1298 or [email protected].

 

 



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