On July 15, the Gibson Dunn law firm released a memo to its clients titled Directors and Officer Indemnification and Insurance – Issues for Public Companies to Consider. Since the financial crisis, the increase of SEC investigations and litigation against directors and officers of public companies remain steady. With the wave of litigation and enforcement likely to continue, the memo serves as a reminder the importance of enhancing a company’s D&O insurance policy coverage.
In addition, the memo discusses a recent decision by the 2nd Circuit Court of Appeals decision that illustrates the importance of carefully review the wording of D&O policies. In Mehdi Ali v. Federal Insurance Co., the 2nd Circuit upheld the lower court’s decision finding that the former directors of Commodore International Limited (a public company that ceased operations and filed for bankruptcy in 1994) were not covered by the company’s excess D&O insurance policies based on the court’s reading of those policies.
The memo recommends the companies and boards consider the following when reviewing their D&O insurance policies:
- Look at the whole package of protections for directors and officers by reviewing the provisions in the certificate that limits personal liability to the corporation, indemnification and insurance. Understand the benefits and limits of each and evaluate if any material gaps in the overall protection exist.
- Consider the nature and extent of the indemnification protections the company provides to directors and officers in various scenarios, including protections in the event that a director or officer leaves the company or in the event of the company’s insolvency.
- Consider priority issues in situations where there are multiple sources of indemnification or if the company files for bankruptcy.
- Review specifics of D&O insurance and understand the structure of the D&O insurance program. Policy language is critical and negotiable. Understand what the “state of the art” terms and conditions are for the most effective D&O policy protection.
- Review terms of excess D&O insurance policies carefully. D&O products and language vary and some are available to protect against outcomes like the Second Circuit’s decision in the Commodore company case.
- Consider scope of coverage for cyber liability for cyber risks facing the company and if the insurance provides protection in the event of a major cyber incident.
- Review D&O insurance coverage annually with assistance with a specialist, including insurance and legal advisors.