For the many directors and officers at the hundreds of companies that get sued each year, it has to be hard to accept opinions like those expressed in Steven M. Davidoff’s article in The New York Times DealBook on June 8th, headlined Despite Worries, Serving at the Top Carries Little Risk. Thanks in large measure to insurance, Prof. Davidoff incorrectly concluded that directors and officers seeking to be compensated for their risks are making much ado about nothing.
Without effective insurance, the risk of uninsured personal liability would be much greater. However, directors and officers should not assume, as Professor Davidoff does, that they have insurance that adequately responds to the real, developing exposures facing today’s directors and officers. Effective, responsive directors and officers liability coverage is the product of hard work from experienced lawyers, brokers and insurers, with vigilant attention paid to legal, litigation and cost trends.
In our world of D&O claims, the risks of being sued or investigated as a director or officer of a public company have never been greater. What’s changed? To name a few factors:
- Unprecedented breadth of new regulations, creating heightened uncertainty.
- Aggressive government enforcement agencies armed with new tools, like Dodd-Frank whistleblower bounties, and several recent criminal convictions.
- Escalated corporate derivative suits generating settlements exceeding $100 million and a verdict in excess of $2 billion.
While indemnification and insurance can help mitigate liability, the many personal costs of getting sued or investigated by the government should not be underestimated. Even the directors and officers of BankAtlantic, whose trial outcome the professor trumpeted as evidence that the coast is clear for directors and officers, had to suffer through years of litigation, a full trial, a jury finding of more than $40 million in liability and several months of additional briefing and waiting before the trial judge struck down the verdict against them. The financial exposures and the peril of criminal liability, even for those who may ultimately be vindicated if they have the nerve to see it through to the end, are knee-buckling. These considerations alone may justify the demands of directors and officers seeking to be compensated for their risks.
Perhaps the biggest risk Prof. Davidoff overlooks is that statements like his feed complacency, and complacency is likely to result in uninsured personal liability. To enjoy the comforts of effective insurance protection, stay attentive to your insurance, and work with experienced, proven lawyers, brokers and insurers.
Rob Yellen is chief underwriting officer, executive liability at Chartis.
It is also important to point out that serving as a Volunteer Board member (ie. a credit union) often will have protection afforded by state law which also may serve to mitigate a credit union Director’s personal liability. Be aware that there are some exceptions for personal acts but this legislative protection combined with solid insurance coverage, and a good indemnification by the institution to its Board members, will provide a solid foundation for protecting you while you serve.