SWINGLE COLLINS & ASSOCIATES
Directorship Liability Insurance
For years, directors have taken comfort in the protection afforded them by a traditional directors and officers (D&O) liability insurance policy. But in today's world, independent directors are wondering, "Is that sufficient?" The unprecedented number of corporate scandals, financial restatements, and bankruptcies has led to the most litigious D&O liability environment in history. In many cases, the financial losses suffered by shareholders and other constituents far exceed the limits of any D&O liability insurance program. D&O policies have limitations such as insured vs. insured exclusions and application warranties that can make the corporation's policy unable to respond to a claim. Shareholders who believe they have been wronged look for their own form of justice by going after the personal assets of allegedly negligent or deceitful executives and board members.
The policy will also cover "Drop-down coverage" - Coverage under a Personal Director’s Liability Insurance policy applies on an excess basis over existing D&O liability insurance coverage that the corporation already owns. But in the event indemnification is unavailable and the underlying D&O liability insurance coverage proves to be uncollectable—possibly because the insurer is unable to pay, the coverage was rescinded, a nonseverable warranty exclusion is involved on the underlying policy, or the underlying policy is deemed to be part of a debtor’s estate by a bankruptcy court—then Personal Director's policy drops down to apply.*
With evolving legislation and stricter corporate governance standards, directors face greater personal liability than ever before. The time has come for directors to take steps to protect themselves with coverage designed to protect their personal assets. The cost to purchase a personal D&O policy is far cheaper than the exposure to the risk itself.