04/01/2004
Serving on a corporate board is an honor and challenge many of us relish. But the corporate governance scandals of the past several years, beginning with Enron’s implosion in 2001, have focused shareholder ire at board members and put us, in some cases, in legal jeopardy. Insurers say there is now more than a one in 10 chance that a member of a corporate board will one day find himself served with an investor lawsuit.
About 18 months ago, the insurance industry introduced directors and officers (D&O) policies for individuals who serve on corporate boards. These differ from typical D&O policies purchased by corporations for their boards and top executives; they are designed to protect the assets of individuals beyond the coverage provided by the corporate policies. AIG and Chubb are two of the principal underwriters of these policies.
Despite investors’ calls for blood, these D&O policies have not been extraordinary successes. “Only about 100 of these policies [have been] sold,” says Carter Brydon, managing director of Aon Private Risk Management, a division of the insurance broker Aon in Chicago. One reason the policy has not taken off is simply that many of us are no longer eager to serve on boards—indeed, corporate board recruiting woes have been business-page fodder for the last few years. This has worsened since the 2002 passage of the Sarbanes-Oxley Act, under which boards may be held liable for corporate misdeeds. Some companies are having a hard time recruiting directors for that reason, Brydon says.
Insurance brokers like Brydon argue that those of us who choose to serve on boards really should have additional D&O coverage. “The increased fiduciary responsibility and increased scrutiny for boards of directors mean that a board member can be sued and find that his personal assets are at risk,” Brydon says. “If a corporation has purchased $5 million worth of coverage for its board, that coverage is shared by the entire board,” he says. Half a million for each member of a 10-person board will not go far to protect our assets, he argues.
Insurers predict that the white-collar fraud trials slated for later this year will cause a spike in demand for the coverage. A recent study by PricewaterhouseCoopers finds that the average D&O settlement rose to $25 million last year, compared with $20 million in 2002, the year Sarbanes-Oxley was enacted.
Those of us who sit on the boards of nonprofit or charitable organizations and foundations should also have this type of coverage. Henry Greenberg, director of wealth strategies at Fleet Private Clients Group, says that these board members often face frivolous lawsuits, commonly brought by people who have accidents on the organization’s property. But more and more, they face suits from disgruntled grant-seekers who were turned away.
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