That's worrisome stuff, particularly considering the jumbo penalties being handed out by the SEC of late. In addition, most companies purchase D&O policies annually. Thus, suits involving company activity from, say, 2002, might not necessarily be covered by the policy in force in 2006. "The issue [of what is covered] is confusing for directors," says Robert MacDonald, who sits on the audit committees of Allianz Life Insurance Co. of North America and Buffalo Wild Wings Inc. "You rely on the counsel of the company to review the policy and make sure you're provided with adequate coverage."

Regrets Only
That can create problems, however. Deciding whom to cover — and for how much — has become something of a balancing act for CFOs who are often charged with the task of purchasing D&O insurance. Told by management to buy adequate coverage, they may also receive marching orders to keep premiums down.

The instruction is understandable. Although rates have tailed off of late, annual D&O insurance premiums rose sharply following the corporate scandals of 2001 and 2002. Even with the recent decline, policies for board members of publicly traded companies currently run about $20,000 to $30,000 per million dollars of coverage, according to some brokers. Companies in high-risk industries — such as utilities and financial services — can expect to pay as much as $60,000 per million dollars.

In fact, in a 2005 survey by law firm Foley & Lardner LLP, executives at 147 corporations ranked D&O coverage the third-highest cost of being a public company in the Sarbox era. That was topped only by lost productivity and audit fees.

Hardest hit, the survey found, were companies with annual revenues above $1 billion. Those businesses spent an average of $3.1 million for D&O insurance in fiscal 2004, a sizable increase over the average $2.2 million expenditure in fiscal 2003.

Smaller companies, on the other hand, paid an average of $407,000 for D&O coverage in fiscal 2004. While that represents a drop from the previous year's expenditures, insurance costs for those businesses were still up 24 percent from the pre-Sarbox era. That's an impressive outlay for what is essentially a discretionary purchase. "No one has to buy it," notes Murray.

But given the size of some recent settlements — along with the added compliance risks wrought by Sarbox — businesses would be hard-pressed to attract suitable board members without D&O protection. Korn/Ferry International, a New York–based recruitment firm, found that close to 30 percent of the nearly 1,000 respondents to its most recent annual directors' survey reported turning down board invitations.

The reason? They fear increased personal liability. In pre-Sarbox days, only 13 percent said they declined board seats because of liability worries. In a published report last year, Korn/Ferry managing director Charles H. King said: "More people are saying the reward is not worth the risk."

Rescinders
The risk has become so great, in fact, that Atkins says some directors have resorted to paying out of pocket for their own insurance. But purchasing additional coverage can get pricey, particularly for directors who sit on the boards of several companies. Businesses that require officers to serve on other boards sometimes amend their D&O policies to cover the directors for their additional duties. In such cases, however, an insurer will need to "underwrite" all the other companies before agreeing to extend the D&O policy.

In truth, it's not entirely clear whether board members can ever have enough D&O insurance — even if they've bought added coverage themselves. In a worst-case scenario, directors might find themselves facing a massive settlement or court award that far exceeds the limits of their coverage. And, as with the Enron and WorldCom cases, a director's personal assets may be included in a settlement. "You are really standing there naked," says Atkins of cases filed against directors of insolvent companies. "It's your personal bank account and life savings that are at risk."

Directors who sit on the boards of financially stable companies may find themselves in a similar predicament. Anderson Kill's Passannante points out that insurance companies facing major payouts are increasingly looking for ways to get out from under the claims. In some instances, he says, carriers are asking courts to rescind the policies — that is, void them so the carriers don't have to pony up. Notes the attorney: "In the last three or four years, that's been happening with disturbing frequency — especially in D&O."

Comforting. Very comforting.

Anne Stuart is a Boston-based journalist who covers business, career, and technology issues.

• « previous
• 1
• 2