Meet the Expert
SVP & Partner, Woodruff Sawyer & Company
- Counsels on corporate governance matters, ways to reduce exposure to shareholder lawsuits and regulatory investigations
- Board of Directors - Realty Income Corporation (NYSE: O)
- Board of Advisors - Rock Center for Corporate Governance, Stanford University
- Lecturer at Stanford University's Directors’ College
- Law Clerk to the Honorable Judge Frank Magill of the United States Court of Appeals for the Eighth Circuit
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- Companies don't have the right amount of D&O insurance.
- D&O insurance is the third line of defense in mitigating against D&O liability. Nobody wants to pay for something that's not useful, and understanding how much insurance to buy is an important decision. It's a complex decision, and companies often feel like they don't have enough data to make this decision.
- Companies often pay too much for their D&O insurance.
- Is your company paying the right amount for its D&O coverage? People always want to talk about that question. This is a very individualized kind of coverage and it's subject to negotiation. To make sure you are getting the best deal for this coverage, your company needs to build a relationship with an experienced D&O insurance broker.
- Companies have insurance with a carrier that will resist paying on legitimate claims.
- Is your company with a carrier that knows how to pay claims? It's terrible to have paid a lot of money to an insurance carrier only to find out they don't know what the D and the O actually stand for. It's very unfortunate to be with a carrier that is not familiar with the litigation environment and doesn't understand what's normal in terms of defense cost for these kinds of lawsuits.
- Companies have D&O insurance that does not cover the rates charged by defense counsel.
- Will the carrier be willing to pay the rate of your defense counsel if you find youself subject of a lawsuit? In some types of insurance the answer is no. And in D&O insurance the answer is often yes. But your company needs to confirm that.
You may really love a lawyer at a certain firm. But there are carriers that have panel counsel, and if that firm is not on the panel, you can't use that attorney. That's something your company needs to know ahead of time.
- Your D&O insurance coverage may have tricky exclusions that could leave your company and its directors and officers unprotected.
- If somebody is really thinking this subject through, that's by far the biggest question your company may have. Just because you have coverage from a major carrier does not mean your company has optimum coverage.
- If your company has international subsidiaries, your American D&O coverage may not apply.
- Do you need a local policy in all local jurisdictions where you have subsidiaries? The answer to that is maybe. If you don't know the laws, customs, regulatory environment and the litigation environment of each country where you do business, that can be a disaster.
For example, your U.S. policy will say on its face that it's designed to respond worldwide, and that's true, they really mean it. But if you has a subsidiary in Brazil, the laws of Brazil will not allow insurance to respond unless it was placed in Brazil.
So there may be anxiety about whether your insurance coverage appropriately protects your parent company, directors and officers, and subsidiary directors and officers, if you have subsidiaries that are outside the United States.
- Companies don't have key policies in place that can protect against D&O liability.
- This is the first line of defense to mitigate against director and officer liability. You should make sure that your company has policies in place, and implements those policies, to assure that company officers and board members follow the law and the ethical requirements of their positions.
By being able to point to a strong anti-bribery policy and to show that all corporate officers and board members have training about that policy, you may be able to head off a lawsuit, at best, or at least make it easier for your company to defend against a lawsuit and easier to prevail in a suit.
- Your company's indemnification agreements with directors and officers are out of date and are not comprehensive.
- The second line of defense to mitigate against director and officer liability can be found in the indemnification agreements that all directors and officers sign. You should make sure your indemnification agreements are reviewed periodically and that they are revised to reflect new developments in the regulatory and legal environments that affect your business.
Director and Officer Liability and its Mitigation: Common Problems