Maximizing Directors’ & Officers’ Personal Protection: Indemnification and D&O Liability Insurance Presented by: Glen BaileyPeter McKenna Managing DirectorPresident – Public Company Management Liability Aon Financial Services GroupChartis Insurance A Division of Aon Risk Services, Inc.

2  Will D&O Policy Respond?  Policy Exclusions?  Policy Trigger?  Indemnification????

3  By-laws and articles of incorporation = first safety net Financial Protection: Safety Nets  Employment contracts = second safety net  D&O program = third safety net

4 Indemnification  Mandatory vs. Permissive Indemnification  Defense costs  Outside directorships  Employee benefit plans  The role of the board in indemnification, applying coverage  State laws and federal laws  Applying the safety nets outside the United States

5 Indemnification Provision - Example “Any person, his heirs, or personal representative, made, or threatened to be made, a party to any threatened, pending, or completed action or proceeding, whether civil, criminal, administrative, or investigative, because he is or was a director, officer, employee, or agent of this Corporation or serves or served any other corporation or other enterprise in any capacity at the request of this Corporation, shall be indemnified by this Corporation, and this Corporation may advance his related expenses to the full extent permitted by Delaware law. In discharging his duty, any director, officer, employee, or agent, when acting in good faith, may rely upon information, opinions, reports, or statements, including financial statements and other financial data, in each case prepared or presented by (1) one or more officers or employees of the Corporation whom the director, officer, employee, or agent reasonably believes to be reliable and competent in the matters presented, (2) counsel, public accountants, or other persons as to matters that the director, officer, employee, or agent believes to be within that person’s professional or expert competence, or (3) in the case of a director, a committee of the board of directors upon which he does not serve, duly designated according to law, as to matters within its designated authority, if the director reasonably believes that the committee is competent. The foregoing right of indemnification or reimbursement shall not be exclusive of other rights to which the person, his heirs, or personal representatives may be entitled. The Corporation may, upon the affirmative vote of a majority of its board of directors, purchase insurance for the purpose of indemnifying these persons. The insurance may be for the benefit of all directors, officers, or employees.”

6 1.The provisions provide for indemnification “to the full extent permitted by law.” Indemnification – Maximizing Financial Protection to D&Os 2.The provisions require indemnification, rather than merely permit the corporation to indemnify. 3.The provisions require the advancement of defense expenses, subject only to an unsecured obligation to repay the expenses if a court subsequently determines the indemnification was not permitted. 4.The provisions shift the burden of proof to the corporation to prove that the director or officer is not entitled to the requested indemnification. 5.The provisions require the corporation to reimburse the director or officer for any expenses incurred in a claim against the corporation for such indemnification if the director or officer is successful in whole or in part.

7 6.The provisions provide that the director or officer has a right to an appeal or an independent de novo determination as to indemnification entitlement. Indemnification – Maximizing Financial Protection to D&Os 7.The provisions expressly state that the indemnification rights constitute a contract, is intended to be retroactive to events occurring prior to its adoption and shall continue to exist after the rescission or restrictive modification of the provision with respect to events occurring prior to that rescission or modification. Alternatively, a separate indemnification contract could be executed by the corporation and the director or officer. 8.The provisions state that any director or officer who serves a subsidiary of the corporation or any employee benefit plan of the corporation or such subsidiary is deemed to be providing such service at the request of the corporation. Thus, a D&O of a subsidiary will be entitled to indemnification from the subsidiary and the parent company. 9.The provisions require indemnification of expenses incurred by a director or officer as a plaintiff in a suit only if the board of directors approves prosecution of the suit by the D&O. Source: Dan Bailey, Bailey Cavalieri LLC, Columbus, Ohio

8 D&O Liability: Changing Risk Dynamics for Business Leaders Personal risk of business leaders has vastly changed over recent years  Financial Scandals  Changes in the Law  Shareholder Activism  Anti Corporate Sentiment  The Credit Crisis  Globalization and ecommerce

9 How does D&O coverage respond when indemnification is not available?  Standard language –Insolvency  Advancement feature –Advancement of loss within the retention –Triggers – company’s failure to advance for any reason D&O Liability: Improving Personal Risk Protection

10 Behavior of other insureds can jeopardize coverage for individuals  Policy features that impact and preserve coverage for “innocent” insureds –Insured v. Insured exclusion or Entity v. Insured exclusion –Non-rescindable coverage for insured persons –Severability provisions Exclusions Application Claims cooperation D&O Liability: Protection for Innocent Insureds

11 Risks for business leaders are greater and often unclear in foreign jurisdictions  D&O coverage considerations for global businesses –Investigation coverage - triggers and scope –Extradition cost coverage –Coverage for individuals who are the subject of efforts to seize assets –Coverage for individuals who individuals who are detained or imprisoned –Potential coverage gaps of domestic policy Global Liberalization Local policy D&O Liability: Cross Border Risk for Individuals

12  Worldwide investigations  Informal inquiries triggers –Requests for interviews, document production, subpoena, target letters –Coverage pre-claim  Derivative investigations –Coverage for individual insureds –Coverage for the entity D&O Liability: Investigations and Enforcement

13 Business leaders face the potential for serious personal damage even absent proof of any actual wrongdoing  SOX 304 – SEC seeking return of compensation from individuals who are not implicated in fraudulent activity – CSK Auto –Coverage for individual expenses  Personal reputations have become negotiating chips and can quickly become irrevocably tarnished in the media –Coverage for public relations services D&O Liability: Proof of Wrongdoing no longer required