D&O 101: When the CEO Asks: Am I Covered for This?

RIMS CourseCast D&O 101: When the CEO Asks: Am I Covered for This? July 16, 2013 Presented by: Geoff Fallon Priya Cherian Huskins

Presenters Geoffrey Fallon Geoffrey D. Fallon is a Senior Vice President of Risk Audit LLC which provides expert witness testimony and strategic litigation advice for complex coverage litigation. Before joining Risk Audit LLC, Geoff was a Managing Director of Marsh where he was National Director of Training for the Financial and Professional ("FINPRO") practice and also a FINPRO leader in the Midwest Region. He advises and consults with clients on issues involving Directors & Officers liability; mergers & acquisitions risk mitigation; and other financially-oriented risk solutions. Geoff has published more than two dozen articles and spoken many times on these and other professional liability issues. Formerly, Geoff was a partner of Arter & Hadden a large national law firm where he was a member of the D&O Practice Group. This firm has been involved in drafting several professional liability insurance policies. Geoff received his law degree from St. Louis University where he was a member of the Law Review, and has Masters of Laws degrees from New York University in Corporation Law and the University of Houston in Tax Law. Priya Cherian Huskins Listed as one of the Most Influential Women in Bay Area Business by the San Francisco Business Times in 2012, Priya Cherian Huskins is a partner at Woodruff-Sawyer & Co., a full-service insurance brokerage and risk management consulting firm headquartered in San Francisco, CA. Priya is a recognized expert in D&O liability risk and its mitigation. In addition to consulting on D&O insurance matters, she counsels clients on corporate governance matters, including ways to reduce their exposure to shareholder lawsuits and regulatory investigations. Priya is a frequent speaker nationally and internationally on D&O issues and a regular guest lecturer at Stanford s Annual Directors College, among others. She has authored articles for publications as diverse as the Directors & Boards, Stanford Law Review, and Insurance Journal. Priya is on the board of directors of Realty Income Corporation, The Monthly Dividend Company, (NYSE: O), where she serves on the Strategic Planning Committee and is the chair of the Corporate Governance and Nominating Committee. She is also on the advisory board of the Stanford Rock Center for Corporate Governance as well as the board of directors of the Silicon Valley Directors Exchange (SVDX), Priya began her career as a corporate and securities attorney at Wilson Sonsini Goodrich & Rosati (WSGR), one of Silicon Valley s leading law firms. At WSGR, Priya worked with public and private companies through all stages of their development, including IPOs, ongoing public reporting and M&A transactions. A member of the California Bar, Priya earned her undergraduate degree with high honors from Harvard University. She was awarded her juris doctorate with honors from the Law School at the University of Chicago, where she was managing editor of the University s Legal Forum publication. Following law school, Priya was a law clerk to the Honorable Judge Frank Magill of the United States Court of Appeals for the Eighth Circuit. 2

Agenda I. Introduction II. III. IV. Section 1: Risks Faced by D&O s a. Duties of D&O s : b. Business Judgment Rule c. Common Claims d. Discussion Questions Section 2: D&O Policy Terms and Issues a. Insuring clauses b. Indemnification c. Structure of the D&O policy d. Conduct exclusions in D&O policy i. Fraud, personal profit and unlawful remuneration e. The importance of the wording in exclusions: i. Preamble wording broad form or narrow form ii. Triggering wording in fact or final adjudication Section 3: Pricing Parameters a. Considerations and Options V. Questions and Answers VI. Final Thoughts/Conclusion 3

Pre CourseCast References It is suggested that you take a moment to read through these valuable references before you begin the course. Private Company D&O Claims http://www.usxs.net/uploads/files/private%20co%20claim%20scenarios_20110301163716.pdf Private Company D&O Claims Examples https://www.beazley.com/documents/management%20liability/private%20do/who_needs_private_ %20DOCoverage_VolI.pdf Executive Protection: Private Company D&O Insurance http://www.dandodiary.com/2010/09/articles/d-o-insurance/executive-protection-private-companydo-insurance/ Why on Earth Would a Private Company Need D&O Insurance http://www.muchshelist.com/knowledge-center/article/do-insurance-why-earth-would-privatecompany-need-it 4

CourseCast Study Aid Materials Please follow along with the presentation. The instructor will provide ample time to complete the following exercises. Discussion Questions (Slide 9) Mr. Jones is a D&O of a corporation engaged in drilling for oil and gas. One day while in his office, Mr. Jones receives a call from a person offering to sell leases for drilling certain oil and gas properties. Mr. Jones figures out that the seller is under financial duress and that the price offered is very low. 1. May Mr. Jones buy the leases personally? 2. If Mr. Jones buys the leases personally does the corporation have a cause of action against him? 3. Alternatively, how could Mr. Jones have handled this situation? 5

True or False Questions (Slide 13) CourseCast Study Aid Materials To use the advice of counsel defense must a Director/Officer (D&O): Speak with counsel? TRUE FALSE Get a written opinion from counsel? Disclose the primary issues to counsel? Completely disclose all the issues to counsel? Obtain counsel s advice that the action is legal? Act upon counsel s advice to a significant degree? Follow counsel s advice scrupulously? 6

CourseCast Study Aid Materials Discussion Questions (Slide 18) 1. Where does the corporation get its authority to provide indemnification? 2. What is the significance of this for risk managers? 7

Discussion Questions (Slide 22) CourseCast Study Aid Materials 1. What is the rationale behind conduct exclusions? 2. If one D&O commits a fraudulent act, is this fraudulent intent imputed to all D&O s? 3. If the corporation commits fraud is that imputed to the D&O s? 8

CourseCast Study Aid Materials Scenario (Slides 24-27) A hazard has been on a corporation s property for more than six months and management is aware of the hazard and knows it may injure someone. One day a shareholder comes onto the corporation s property and sustains bodily injury as a result of the hazard. Questions: 1. The shareholder sues for the bodily injury sustained. Assume the corporation s D&O policy contains a broad form preamble to the bodily injury exclusion, which states, for example: This policy shall not cover Loss based upon, arising out of or in connection with bodily injury. Choose the best answer below. a) The claim is covered. b) The claim is not covered. c) Defense costs are covered but not any damages for the bodily injury per se. 2. Same facts as above but assume the shareholder makes a second claim for mis-management alleging that the D&O s failure to remedy the hazard in a timely fashion caused the corporation to incur damages (bodily injury claims) it would not have incurred but for the mismanagement. Assume a broad form preamble. a) The mis-management claim is covered. b) The mis-management claim is not covered. c) Defense costs only are covered for the D&O s personally but not for the corporation. 9

CourseCast Study Aid Materials 3. The shareholder sues for the bodily injury sustained. Assume the corporation s D&O policy contains a narrow form preamble to the bodily injury exclusion, which states, for example: This policy shall not cover Loss for bodily injury. a) The claim is covered. b) The claim is not covered. c) Defense costs are covered but not any damages for the bodily injury per se 4. Same facts as above but assume the shareholder makes a second claim for mis-management alleging that the D&O s failure to remedy the hazard in a timely fashion caused the corporation to incur damages (bodily injury claims) it would not have incurred but for the mismanagement. Assume a narrow form preamble. a) The mis-management claim is covered. b) The mis-management claim is not covered. c) Defense costs only are covered for the D&O s personally but not for the corporation. 10

Insured Exclusion Rationale (Slide 30) The rationale behind this exclusion is to: (Choose the best answer) a) Provide the carrier with another reason to deny coverage. b) Prevent the carrier from becoming involved in internal disputes among D&O s. c) Prevent two insureds from suing one another for the purpose of tapping the limit. NOTES: 11

Post CourseCast References The following references continue the D&O conversation and are recommended by the instructors of this course. In-depth Discussion of D&O Policy Terms www.baileycavalieri.com/102-d&o%20pol%20com(2).doc Blog Series: Directors & Officers Liability Blog_DO_Liability_Priya.pdf Cyber Risks: New Focus for Directors http://www.baileycavalieri.com/144-cyber%20risks%20-%20new%20focus%20for%20directors.pdf D&O Glossary http://www.baileycavalieri.com/41-d&o_glossary.pdf Mergers & Acquisitions: A Minefield for Directors http://www.baileycavalieri.com/79-mergers_acquisitions.pdf 12