When a D&O policy could leave you bare: don't presume that your 'mother company' policy offers any protection when you accept an outside board seat.

• Author: Galban, Anthony
• Position: RISK MATTERS

EVEN THE LARGEST and most sophisticated companies may not have consistent procedures that ensure their executives who sit on the boards of outside organizations have adequate directors and officers (D&O) liability insurance for this service. As a result, whether it's joining a new outside board or retaining a long-held seat, many outside directors may face a financial peril they do not realize exists. An outside director may unknowingly have assumed a personal financial risk should they be sitting on the board of a financially challenged company.

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The financial risk is personal because many outside directors are woefully underprotected--regardless of their outside organizations' or mother companies' indemnification provisions and D&O liability insurance limits. In many cases, an executive cannot count on his or her mother company's basic D&O liability coverage to respond at all if the outside company seeks bankruptcy protection and, therefore, cannot cover losses stemming from a D&O liability lawsuit. (Typically the outside company is not an insured under the mother company's policy.) As self-protection, the outside director should investigate whether his or her mother company has outside directors liability (ODL) coverage.

Typically, D&O policies that do provide an ODL extension provide blanket coverage only to executives who serve on limited types of not-for-profit entities. But D&O liability insurance for executives who serve on outside publicly traded or privately held for-profit companies is not an off-the-shelf policy provision. Each executive's outside board service on a public or for-profit private company must typically be scheduled into the D&O liability policy.

The situation is even more serious for an executive who accepted an outside board seat without the mother company's knowledge and consent. It is unsafe to presume that the mother company will offer insurance or indemnification protection for outside service of which they are unaware--regardless of how noble or altruistic the cause. Therefore, this person may not be able to count on any protection from the mother company.

Many outside directors unknowingly have strayed into this risky financial position because relatively few companies carefully managethis exposure. Directors should inquire into whether the mother company has a formal ODL protocol. The director will likely find that either there is no ODL protocol or that no one knows for sure. In...