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Feature
Do Independent Directors Need IDL Coverage? A look at independent director liability insurance and the added protection it offers.Did you know that there are liability policies solely for independent directors? This insurance product, offered by just a few insurers, is generically referred to as independent director liability (IDL) insurance and can be purchased by companies or individual directors themselves. IDL is a type of D&O policy but, unlike other D&O policies, IDL coverage is limited to independent directors. Although IDL insurance offers some benefits to independent directors not afforded by other types of D&O policies, IDL has not sold well since it was introduced several years ago. That may change soon. A leading D&O insurer has recently introduced an improved version of its IDL policy and is marketing it aggressively with letters to all public-company directors. Should you consider adding an IDL policy to supplement the D&O policy or policies that already cover you? This largely depends on cost considerations and the specifics of your existing D&O insurance, particularly the amount of the aggregate policy limit. To help you determine whether IDL is right for you, a brief history of D&O insurance is in order. Diluted Coverage In the mid-1990s, most D&O insurance policies were rewritten to provide companies with direct protection for securities claims (so-called entity coverage) in addition to the traditional protection for directors and officers. While entity coverage eliminated the problems that arose from allocating loss between insured individuals and an uninsured entity, it had the adverse effect of diluting the coverage afforded insured persons. Worse yet, under some of these new policies entity coverage increased the likelihood that the policy proceeds would be unavailable to the directors and officers if their company filed for bankruptcy. (Bankruptcy courts might determine that policy proceeds are the rightful property of the bankruptcy estate. In that event, the proceeds are subject to the bankruptcy court’s jurisdiction and might not be available to pay directors’ and officers’ defense costs, settlements, or judgments.) Many insurers responded to these two shortcomings by creating a Side A policy, another type of D&O insurance that covers only directors and officers and typically is in excess over traditional D&O insurance. This policy eliminates the bankruptcy concern as well as the dilution that are undesirable side effects of entity coverage. However, entity coverage is not the only source of dilution, so Side A insurance does not completely eliminate that problem. Remember, Side A covers all directors and officers, and officers are more likely to incur multimillion-dollar defense tabs and settlements, eroding and possibly exhausting policy limits. If policy limits are exhausted, the personal assets of the insured persons will be at risk. No Exhaustion of Limits IDL insurance can reduce that risk for independent directors by providing dedicated policy limits that cannot be exhausted by claims made against the company, or its officers or inside directors. The degree to which IDL insurance reduces the risk of exhausting policy limits depends on the number of independent directors insured under an IDL policy. The more directors, the greater the risk. If your company’s independent directors decide that they want the added comfort of IDL insurance’s dedicated limits, they must next decide which independent directors should be covered. IDL insurance is flexible on this point. Coverage can be provided for: (i) all independent directors on a board, (ii) one or more committees of a board, (iii) one independent director on a board or (iv) one independent director on all of the boards on which he or she serves (sometimes referred to as a “portable” policy). These options are not mutually exclusive. For example, a company could purchase one IDL policy for all of its independent directors, and one of those directors could purchase his or her own portable policy. Determinative Factors Choosing among these different options generally comes down to cost constraints and the independent directors’ tolerance for the dilutive effects of covering all independent directors by a single pool of insurance dollars. IDL insurance is a first cousin to traditional D&O insurance. Therefore, it should be no surprise that there is no standard IDL policy form. Another family trait that D&O and IDL policies have in common is that the forms are negotiable -- more akin to a commercial contract than an off-the-shelf insurance policy. Consequently, as with any D&O policy, it is imperative that you negotiate the definitions, exclusions, conditions, and other terms of an IDL policy if you want to achieve the insureds’ objectives and obtain the most for your insurance dollar. |
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| Stephen
J. Weiss is a partner in the law firm of Holland & Knight LLP, http://www.hklaw.com. He is one of the
nation’s leading authorities on D&O and employment practices
liability insurance, and is the author of the “D&O Insurance
Update” column in each edition of Directors
& Boards. Shannon A.G. Knotts is an associate with the firm
specializing in the same practice areas. The authors can be contacted
at steve.weiss@hklaw.com
and shannon.knotts@hklaw.com. Copyright © 2005 Directors & Boards, P.O. Box 41966 Philadelphia, PA 19101-1966. All rights reserved. Contact the webmaster. < Privacy Notice > |
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