D&O DOLDRUMS

Rough Notes, Apr 2005 by Zinkewicz, Phil

PLUS meeting explores current corporate environment and other issues impacting D&O liability

In February 2005, the New York State Common Retirement Fund reached what was described as a "landmark" settlement with 10 former directors of WorldCom, the telecommunications company whose bankruptcy became the largest in history. Under the settlement, the directors agreed to pay $18 million of their own money to settle a class action lawsuit by investors who lost hundreds of millions of dollars when the company folded in July 2002. That $18 million was part of an overall $54 million settlement, the remaining $36 million to be paid by insurers of WorldCom.

What has made this settlement stand out is that it is extraordinarily rare for directors to pay money out of their own pockets in matters of investor litigation, and it could set a precedent for other directors who are in litigation with investors in similar cases. There was immediate speculation among those involved in the directors and officers insurance community whether this settlement would portend a diminishing number of executives willing to sit on company boards.

If that weren't enough to send shock waves through corporate halls, a subsequent ruling by a judge overseeing the case scuttled the settlement. Judge Denise Cote of Federal District Court in Manhattan said that one aspect of the deal was illegal because it would have limited the potential liability of directors and also would have exposed the investment banks that are also defendants in the case to greater damages. Lawyers for the investment banks applauded the decision, but the ruling might mean that the directors will have to pay more than the $18 million originally agreed upon, again out of their own pockets.

The trials and tribulations of company directors in today's corporate scandal-ridden environment were, in large part, the subject of a recent two-day PLUS symposium held in New York City. The meeting featured panels that: explored current developments shaping the securities litigation landscape, offered perspectives on defending and resolving securities litigation, and presented key issues facing insurance brokers and underwriters in an evolving D&O market.

One panel, titled "Current Trends in the Handling and Resolution of Complex D&O Claims," discussed issues such as whether insurers can invoke the existence of corporate fraud to rescind D&O policies, and the impact of current governmental claims investigations on the claims process. Heading the panel was James A. Skarzynski, chairman of the law firm of Boundas, Skarzynski, Walsh & Black, LLC. Panelists included: Jack S. Flug, managing director of Beecher Carlson; Mike Mitrovic, Esq., president AIG Claim Services, Inc.; Duane F. Sigelko, Esq., partner, litigation, Sachnoff & Weaver, Ltd.; Daniel J. Standish, Esq., partner Wiley, Rein & Fielding, LLP; and Kathryn M. Walker, director, public company liability, St. Paul Travelers.

All panelists agreed that the D&O insurance market is in a state of flux. "The world of directors and officers liability is changing every day," said Mitrovic. "The industry is in a state of crisis. Any underwriter who writes a policy without severability or the right to rescind is nuts, because it's almost like asking insureds to commit fraud. It's possible to write a nonrescindable policy, but you'd better price it properly. Today, carriers are not getting enough premium on the front end."

Walker said that, with many policies, if there is no admission of liability or fraud on the part of the insured, consent decrees will not allow insurers to refuse payment of a claim. "And," she said, "an underwriter has to be very careful about policy wording. Improper wording could have a negative impact on a carrier's ability to rescind. Carriers are living or dying, when dealing with the rescission issue, on policy wording," she said.

Panelists were also asked what the insurance broker's role should be in a situation involving a carrier's attempt to rescind an insurance contract. Flug said that, in trying to understand a carrier's underwriting philosophy, there are three things that are important: trust, experience and knowledge of the business. "I always feel that if neither party in a negotiation-the carrier and the insured-is satisfied, then the broker is doing a good job. The broker has to have a rapport with the insured so that he can explain that some coverages just don't exist in the policy. And, he has to have the trust of the carrier to get across that some coverages should be honored. If both parties are sufficiently miserable, then a successful compromise has been reached."

Another panel at the PLUS symposium, titled "Corporate Governance and Corporate Risk: Implications of Sarbanes-Oxley for Underwriting and Claims," discussed the various types of insurance reform legislation and regulations in the last few years that have changed fundamental aspects of corporate governance. The panel was moderated by Boris Feldman, Esq., partner in the law firm of Wilson Sonsini Goodrich and Rosati, and panelists included: Jack C. Auspitz, partner in Morrisson & Foerster; John C. Coffee, Jr., Adolf A. Berle Professor of Law at Columbia University Law School; Nell Minow, editor of The Corporate Library; Ariana J. Tadler, partner, Milberg Weiss Bershad & Schulman, LLP; and Carol A.N. Zacharias, senior vice president of ACE USA. The panel was asked to explore whether legislative and regulatory reforms have made any difference in the quality of management or oversight of public companies. The panel was also asked to render opinions as to whether such reforms have reduced the likelihood of major frauds.