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LJN NewslettersNewsSectionsThe Corporate Counselor

Time To Check Your D&O Coverage

By William L. Floyd
June 27, 2005

It has become clear that not all D&O insurance coverages are created equal. And, in many instances, your policy may not provide the coverage that you count on. Clearly, in recent years, liability exposure for corporate directors has significantly increased. Earlier, outside directors not only were thought to be shielded by the application of the business judgment rule, but also protected by liability exculpation provisions contained in articles of incorporation, indemnity provisions providing up to the maximum allowed by state law (and in many instances individual indemnification contracts), as well as D&O insurance coverage on top of or to supplement or fund those protections. The erosion of protection not only for outside directors but also directors and officers generally, is a direct result of the corporate scandals that have erupted over the last several years, in one case creating the largest corporate bankruptcy in history, all due in large measure to fraudulent activity on the part of some.

Personal Accountability

A review of the recent case, In re Emerging Communications, Inc. – Shareholders Litigation in the Delaware Chancery Court, and the recent settlement activities involving WorldCom and Enron class action litigation provide a sample of the rather significant change in the landscape for corporate director personal liability. The call for “personal accountability” may become a new mantra, with resulting higher risk of personal liability. Of course, on top of these issues squarely sits the requirements of Sarbanes-Oxley, the enhanced duties and functions of the audit committee, particularly specialized expertise, the clear exposure for compensation practices arising out of Disney and Tyco and a host of other issues. Very recently, Abercrombie & Fitch Co. and certain of its directors were sued for corporate waste, breach of fiduciary duties of loyalty and good faith and the duty of disclosure, as a result of compensation arrangements with the CEO. Portions of the complaint, and virtually the entire case against directors, are based on the Compensation Committee Report contained in the proxy statement of the company. All of these events create the potential for enhanced liability exposure for directors. Given the recent hue and cry over executive compensation, compensation committee functions, like the functions of the audit committee, are coming under sharper focus.

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