Got protection? D&O insurance: a shield against litigious activity.

• Author: Tate, David W.
• Position: Professionalissues

as directors and officers are hit with lawsuits from shaneholders, employees, clients, competitors and the government, insurance is one way to protect against the wolves--whether at home or abroad.

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Consider this: You've been a director and an audit committee member of a company for about a year when you learn that the CEO, CFO and directors are being sued by shareholders for alleged financial fraud that has been ongoing for three years.

Further, the recently fired whistle-blower employee has filed a separate lawsuit against the CEO and the audit committee (which oversees the whistle-blower reporting process) for wrongful termination and retaliation. And the SEC has begun its own investigation.

All of the plaintiffs are seeking compensatory and punitive damages, and the fired employee is also seeking attorneys' fees.

To make matters worse, you've been told that the lawsuit is not covered by the directors and officers (D&O) insurance policy (coverage may be denied for the fraud claim because the company withheld information in the application for insurance, or for all the alleged intentional wrongful acts The fees that are being paid to the defense attorneys are reducing policy limits that could be used to settle the case, and it has been mentioned that you have to pay some of the costs to defend and help settle the case.

As a director or officer, knowledge of D&O and related insurance issues is key to knowing what questions to ask and understanding whether the company's D&O insurance coverage and application process sufficiently protect you from liability.

Tony Galban, vice president with New Jersey-based Chubb & Son, says while most directors and officers have been increasingly focusing on enterprise risk management, more attention must be given to their own liability exposures.

Directors and officers "need to focus on their indemnification protections (individually crafted or otherwise) from the company," he says. "They need to be fully schooled on any D&O liability insurance, understanding that it is common for this insurance to be purchased in a manner that may ultimately benefit the company and the insiders more than outside directors."

Standard D&O insurance covers:

* Liabilities owed by the individual directors and officers, including attorneys' fees (sometimes referred to as Side A liability coverage); and

* Amounts paid by the company as indemnification when the company is able to indemnify the directors and...