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The Need for D&O Insurance

Class Action claims Shareholder actions Employee claims

The Need for D&O Insurance Merger & Acquisition claims –Inherent conflicts of interest –Duty to shareholders to ensure fair/maximum share price –Protect best interest of corporate entity –Self-serving interest of preserving personal jobs and security –Bump-up claims

The Need for D&O Insurance Third-party claims –Creditors –Customers –Vendors and suppliers –Competitors –Government

The Need for D&O Insurance D&O insurance benefits: –Costly defense expense payment –Provides coverage for non-indemnifiable loss –Protection of personal assets –Allows Ds & Os to remain focused on managing the company –Enhances the recruiting efforts of qualified outside directors –Balance sheet protection

D&O Policy Components

D&O Policy Features Common Insuring Agreements: Insuring Agreement A Company pays Loss on behalf of the Insured Persons resulting from Claims against Insured Persons for Wrongful Acts except for Loss which the Insured Organization pays as indemnification Insuring Agreement B Company pays Loss on behalf of the Insured Organization resulting from Claims against Insured Persons for Wrongful Acts which the Insured Organization pays as indemnification and Loss resulting against the Insured Organization for Wrongful Acts Insuring Agreement C Company pays on behalf of Insured Organization for Wrongful Acts

D&O Policy Features Important definitions: –Claim –Insured –Insured Persons –Insured Organization –Subsidiary –Loss –Defense Expenses –Wrongful Act –Outside Directors (Outside Entity and Outside Position)

D&O Policy Features Important features: –Final adjudication v. finding in fact –Absolute v. for language –Severability of Exclusions –Retentions –Limit of Liability –Claims Made Extension clause –Cancellation Clause & Non-Renewal –Changes in exposure –Extensions –Conditions

D&O Policy Features Common features: –Punitive damages – most favorable jurisdiction –Modified Defense and Settlement –Third-Party discrimination – sexual harassment and discrimination –Private placement coverages –Acquisition threshold amended to 25% –Pollution Exclusion – Insuring Agreement A –Leased Employees and Independent Contractors coverage

D&O Policy Features Common Exclusions: –Bodily Injury/Property Damage –Pollution –Prior and Pending Litigation –Prior Notices –ERISA –Nuclear –Antitrust –Plagiarism, Copyright –Insured v. Insured

D&O Policy Features Common exclusions: –Outside Director Liability – Insured v. Insured –Subsidiary Prior Acts –Contractual –SEC –Dishonest/Fraudulent Acts –ADA compliance expenses –ERISA/Employee Benefits –Future pay in failure to rehire situation

SAMPLE D&O CLAIMS

D&O Claim Examples Claims Example: –The officer of a small electronics company solicited and then hired four employees from a large conglomerates subsidiary. The subsidiary manufactured and sold electronic switches. Subsequently, the small company began selling similar electronic switches, but at a substantially lower price. The conglomerate filed suit alleging the officer and his company had misappropriated trade secrets and customer lists by hiring its former employees. After two and a half years of litigation, the case was settled for more than $1 million. Defense expenses for the officer alone were approximately $500,000.

D&O Market

Types of D&O Policies/Insureds Publicly owned (stock companies & public debt) Privately owned Not-For-Profit Government controlled Financial Institutions

D&O Market Market conditions: –Package policy approach is common –Significant competition –Centralized v. local markets –Broad policy terms –Loss control services available

How To Sell D&O

Selling D&O Why do Main Street (Private Companies) need D&O Insurance? –Exposures from customers, clients, ratepayers, students and consumers: Extension/refusal of credit Debt collection (including foreclosure) Lender liability Deceptive trade practices Trade restraint Dishonesty/fraud Cost/quality of product/services issues

Selling D&O Why do Main Street (Private Companies) need D&O Insurance? –Exposures from other third-party claimants Environmental/safety Fiduciary duty breach Contract disputes Other third-party claimant issues

Selling D&O Why do Main Street (Private Companies) need D&O Insurance? –Exposures from competitors, suppliers and other contractors Antitrust Copyright/patent infringement Contractual disputes Deceptive trade practices Business interference Creditor

Selling D&O Why do Main Street (Private Companies) need D&O Insurance? –Exposures from governmental and regulatory agencies Antitrust Dishonesty/fraud Other governmental issues

Underwriting D&O What is the underwriter looking for?

Underwriting D&O Asset Size Employee Count

Underwriting D&O Industry –High-tech/bio-tech –Financial institutions –Retail –Manufacturers –Professional organizations –Non-Profits

Underwriting D&O Geographic location

Underwriting D&O Ownership –Public –Private –Private Placements

Underwriting D&O Financial condition –Balance sheet –Income statement –Financial statements notes

Underwriting D&O Management –Experience –Length of services –Track Record

Underwriting D&O Corporate structure –Board –Officers

Underwriting D&O Claim history

Questions/Comments

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