Are You Covered on D&O?

From D&O Liability Watch - AIG National Union, August, 2004:

Nine Things Board Members Should Consider During The D&O Insurance Purchasing Process

Your professional reputation and personal assets weren't built in a day, but they could be lost in one. As the number of suits and legal tactics targeting directors' and officers' personal assets multiply, so grow the responsibilities of Ds&Os in safeguarding themselves. While the company you serve as a board member will take steps to ensure your protection, it is imperative that you fully comprehend the coverage being offered as well as stay informed on the company offering it. Because a claim opens you up to personal exposure, you should be personally involved in coverage choices and planning. Taking the tips below to heart will help protect you in both good times and bad.

Ensure the financial stability of the provider. Examine the credit rating of the insurance subsidiary providing the D&O policy. Ratings are available through AM Best, Standard & Poor's or Moody's. Your provider must have the financial stability to weather a catastrophic event without scaling back coverage or-worse—declaring bankruptcy. You need your insurer to be in it for the long haul.

Ensure the financial stability of the provider's parent company. If the providing company is a subsidiary of a holding company (as most of the top D&O providers are) then examine the debt rating of the parent. D&O claims can take years to settle or resolve and you need to know your provider will be able to pay out claims when it's all over—no matter how long it takes. In addition, a thorough financial assessment will help you be certain that your provider has adequate liquidity and will be able to remain independent.

Ensure the provider's market leadership. Examine the size of the underwriting staff, the percentage of the market the provider owns and the number of years it has been in the D&O business. The provision of effective, comprehensive D&O protection requires highly specialized knowledge and expertise to manage the increasingly sophisticated—and potentially damaging—tactics of plaintiffs. And because many claims are settled out of court, it's important to have a partner who can help determine whether it's better to fight or settle, and, if the latter, how much to settle for. This is knowledge that can only be gained through experience and market leadership. Don't settle for second best.

Ensure the provider's claims handling capabilities. Examine the size of the provider's in-house staff and its years of experience in managing claims. If a claim is filed, you will need practiced experts to guide you through the difficult, time-consuming and high-stakes litigation process. The best providers handle thousands of cases annually, have been doing so for decades and have longstanding relationships with the nation's top corporate defense firms. Other providers may have little or no claims capabilities and access only to lower-profile defense attorneys, which can seriously compromise your standing right from the start.

Examine the stability of the provider's management team. You need a highly experienced long-term partner to assist you in managing the growing risk and multiplying exposures associated with board service. If the provider's C-suite is characterized by revolving doors and populated by industry novices, you're likely to be left in the lurch.

Ensure that your broker is an experienced, top-quality professional. Your broker can be an invaluable partner in helping you secure your protection, as well as the company you serve. They will help to prioritize what's important to achieve in the D&O insurance purchasing process and structure a D&O program tailored to meet your risks. The best brokers will help you stay abreast of trends and aware of new risks and exposures.

Be familiar with everything being disclosed in the underwriting process—and by whom it's being disclosed. Your provider can't respond to your needs in a time of crisis if the underwriting was based on inaccurate or misleading information. You need to know what's being said by senior management and your fellow board members to ensure that problems aren't being glossed over or hidden.

Be wholly familiar with the policy or policies being considered and understand all terms contained within. It's time to read—and comprehend—the fine print.

Measure the policy limits against a number of benchmarks. Are the limits in line with those of your peers? Appropriate for the company's accepted market cap and cash flow projections? If they're not, something's wrong.