Mistake Costs Directors Plenty
We can all learn from past mistakes to prevent history repeating itself. It is especially important for directors of corporations — The principle is the same whether it be a charitable Board or a high profile , publically trading corporation . All directors need properly arranged Directors and Officers Liability insurance.
The emphasis being on “properly arranged” D and O insurance. No two D and O policies are identical in scope , terms of coverage, and exclusions . To illustrate just how critical proper coverage is we will share some little known facts about one of the highest profile real life cases involving directors and officers .
Enron, which was once of the darling company of the Fortune 500 , had a board of directors comprised of several prominent and wealthy businessmen . D and O insurance was arranged by a large international broker who claimed to have expertise in this specialized area of insurance. Several policies were arranged with different insurance companies forming layers of coverage to provide total coverages in excess of a $100 million limit .
The Sad Tale:
The various D and O insurance policies were arranged with various insurers. Enron fell from grace when it was eventually discovered that the officers of the company — namely the CEO and CFO had been involved in fraudulent accounting practises. We will politely refer to this fraud as “misconduct”. Claims from shareholders ensued naming the entire Board for its role in the entire scenario. The outside ( independent) directors had no knowledge of the misconduct as they had relied upon the info they had been furnished with by the officers of the company .
Were they relieved that they had D and O insurance ? Unfortunately , at least one of the insurance policies in force contained an exclusion that read different from all the other policies . This one policy voided coverage for all directors because of the misconduct that took place . The remaining policies had different exclusion which only voided cover for the actual perpetrators of the misconduct but would still cover the “ innocent” directors . Because of this gaff over $10 million was uninsured leaving the independent directors on the hook personally for this uninsured sum. In hindsight, there is a sad lesson — the wording of the exclusion on the one policy — that removed all coverage — likely could have been amended at no added cost , to conform with the other policies , keeping the all coverage in place .
The Expensive Lesson:
This costly oversight in not putting together proper D and O liability insurance cost the independent directors dearly . It is estimated that the directors of Enron lost over 1/3rd of their personal wealth for their role on the Enron board. The lesson is that directors of corporations regardless of size should be more involved in the D and O insurance they so heavily rely upon . Be sure the broker you use knows and understands in this important cover .
Kip Van Kempen