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| Insuring Our Personal Security |
Directors' Dilemma
04/01/2004
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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.  Back to main article: "Insuring Our Personal Security"
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