Overcoming prospective directors' D&O concerns: In today's legal climate, consider commissioning a D&O 'report card' when recruiting directors.

• Author: Weiss, Stephen J.
• Position: D&O Insurance Update - Directors and officers insurance

HOW DOES A prospective candidate determine if a corporation's directors' and officers insurance is adequate?

One way is for the prospective director to ask the CEO who is trying to recruit him or her. The problem with this approach is that many CEOs won't be able to supply a detailed answer and so may respond by saying something like, "I'm subject to the same risks as you. Would I accept anything short of the best coverage?" A CEO simply can't be expected to have the level of detail concerning the corporation's D&O insurance program necessary to satisfy the probing questions of a concerned prospective director.

Another approach is to ask probing questions of the risk manager or other official responsible for negotiating the corporation's D&O coverage. This is problematic, too. The CEO wants to sell the prospective director on joining the board, and as a result the risk manager might refrain from offering a candid assessment. A second concern is that by asking the risk manager's opinion of the quality of the D&O program, the prospective director would be asking the risk manager to judge his or her own efforts. A third concern is that the risk manager, while more familiar with the policy than the CEO, still may not have the necessary depth of experience with this complex policy to identify -- and try to eliminate -- some of its shortcomings. There is a limit to the expertise one can develop when negotiating only one D&O policy a year. Michael Jordan did not hone his jump shot by playing one basketball game a year.

What about posing this question to the corporation's insurance broker? A broker specializing in D&O insurance would be knowledgeable about the policy, but this approach suffers from the first two concerns described in the preceding paragraph.

The approach that avoids many of these shortcomings -- and that corporations are using with increasing frequency -- is to bring in an independent insurance expert to prepare a "report card" on the corporation's D&O insurance program. While there is no standard name or form for this evaluative tool, an effective report card should have the following characteristics.

First, the report card should briefly describe the 40 or so provisions in a typical D&O policy that are the best measures of the quality of the coverage. These provisions include selected definitions, exclusions, carve-outs to exclusions, and conditions to coverage.

Second, the report card should evaluate how your policy looks in...