Panel addresses piggy back fiduciary claims

Rough Notes, Oct 2003 by Zinkewicz, Phil

This type of claim has increased significantly

Enron, WorldCom, Tyco-these and other recent corporate scandals have had a great impact on the professional liability insurance arena, both here and overseas. The behavior of corporate executives has been called into question. The attention that these scandals have received in the media is putting pressure on directors and officers and other corporate executives to clean up their act or face regulatory censure (at the very least) or large payouts from lawsuits at the other end of the scale. At the annual conference of the International Insurance Society (IIS) earlier this year, speakers from all over the world talked about the tightening rules and regulations that have come about within the past two years all because of questionable and, in some cases, illegal behavior of corporate leaders. As a result, even top business executives of financially secure companies have had to respond with more corporate "transparency."

"Corporate governance" has become the catch phrase of the day, as corporate directors and officers are being held more accountable in terms of reporting requirements and board membership. Consider, for example, that Lloyd's of London, once a self-regulated body, is now subject to outside authorities. Lawsuits against directors and officers have increased significantly with no sign of letting up as yet. One chief executive at the IIS annual meeting complained that the backlash from Enron and other corporate misdoings has become too much. Chief executive officers are spending too much time trying to satisfy new demands on the part of regulators to the point where the everyday management of companies is suffering, the CEO pointed out.

Nevertheless, it doesn't seem that the situation will change very soon, and it's more than just directors and officers insurance that is being affected. At this year's annual PLUS conference, Nick Conca, president of Liberty International Underwriters USA, will moderate a panel on new claims, which he calls "piggy back" fiduciary claims following D&O lawsuits.

The panel will feature: Joe Monteleone, vice president, Hartford Financial Products; Karen Reardon, attorney, Reardon, Golinkin & Reed; Mark Rosen, senior vice president/chief legal officer, Darwin Professional Underwriters; and Ken Ross, senior vice president, Willis. In addition to discussing piggy back fiduciary claims, the panel will examine legal and regulatory changes that affect ultimate case disposition and other developments that are affecting claims professionals in an "increasingly changing landscape."

According to Conca, the principal exposure that D&O claims professionals face stems from securities class action suits. "A certain class of shareholders will sue a company's board of directors alleging securities fraud, providing false information, artificially inflating the price of a company's stock, etc.," says Conca. "We've seen those situations in some of the scandals that have hit Wall Street. A piggy back claim comes when employees with stock options or 401(k)s-where the employer contribution is in the form of the company's stock-sue under ERISA. So, the stockholders sue under securities laws and the employees sue under ERISA, a completely different legal theory."

Conca points out that the burden of proof under ERISA is less rigid than under securities laws, so it's easier to sue. "In the last 18 months, we've seen a significant increase in such claims," says Conca. "So, companies should be aware that they need fiduciary liability to cover them against ERISA claims in addition to D&O. This will be a very important part of our panel discussion."

The Sarbanes-Oxley law will also be a major part of the panel discussion, according to Conca. "We will be examining the effect of Sarbanes-Oxley on directors and officers litigation and whether certain areas of the law are covered under the traditional D&O insurance policy."

Conca maintains that all of these issues have international consequences as well. "Many international companies have, in one way or another, requirements that must be met under U.S. securities laws," he said. "If a foreign country, such as Germany or Japan, wants to issue stock in the United States and something goes awry, they can be sued under United States securities laws as well," said Conca.