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| Best Practices: On the Board |
Bonfire of the Indemnities
Suzanne McGee
06/01/2005
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John Rafferty, New York-based vice
president and national D&O product manager at Hartford Financial Products,
explains that “Side A gives more cost-effective coverage for individuals and, in
the event of a bankruptcy, it won’t get tied up in courts because it’s not
considered a corporate asset.” Persuading a company to boost its coverage by
adding a Side A policy may not be too difficult a task. These policies are
typically less expensive, relatively speaking, than traditional policies. For
example, Salter says that recently one of his clients—a regional bank—bought
$100 million in traditional D&O coverage, at an annual cost of $1.5 million.
It added a $10 million Side A policy covering the additional risk to directors
and officers—which kicks in only when the basic policy is exhausted—for an
additional $125,000. “The additional attraction of these policies is that they
are often sold as nonrescindable,” Salter adds.
Some insurance underwriters
are specializing even further, offering policies that cover only outside
directors. “If I were asked to join a board today as an independent director, I
would want a pool of insurance that is available just for us, that no one else
can access and that won’t be eroded by anyone else’s wrongdoing,” says John
Keogh, chief executive of National Union Fire Insurance of Pittsburgh.
Independent directors, he says, often place substantial personal assets at
risk—and are more likely to become innocents caught up in corporate
scandals.
To enhance their risk management, some directors also buy a
personal policy, a product that covers them for the risks associated with their
own board positions. Galban says Chubb has started selling this to affluent
individuals who sit on several boards and whose tolerance for exposing their
personal assets to the risk of a class action suit is particularly low. He
admits the process of underwriting the policy is labor intensive because every
policy must be customized for each individual’s set of risks and be based on
each policyholder’s specific board assignments. A $5 million policy may
currently cost $10,000 to $30,000; costs, however, are expected to rise
soon.
As more board members attempt to take an active role in the D&O
policy process, calling in their own attorneys to scrutinize policy language and
questioning details, some carriers are taking the customization process to yet
another level. RLI Insurance of Peoria, Ill., recently sent letters to 7,000
independent directors designed to whet their appetite for new types of D&O
insurance offered only to independent directors.
“There are products that
didn’t exist a year or two ago that can protect just those outside directors
today,” says Skip Orza, vice president of executive products at RLI. “That is
the future.”
Suzanne McGee, a former staff reporter for the Wall Street Journal, writes
about corporate finance and governance. suzanne.mcgee@gmail.com
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