Directors: protect your personal assets; The more personal assets you have, the greater your financial risk. What you can do to protect against creditors.

• Author: Isdale, Holly
• Position: LIABILITY AND LITIGATION

THE TERM "board of directors" has traditionally called to mind a certain honor, prestige, and status. Today, however, we're just as likely to associate the term with pressure, exposure, and risk. Board service since the passage of the Public Accounting and Investor Protection Act of 2002, more commonly known as Sarbanes-Oxley, creates clearer and perhaps greater risk to a director's personal assets and reputation. Like any risks, these warrant careful analysis and management. Taking steps before the fact to mitigate exposure can often make a significant difference later on.

While directors have always been accountable to shareholders, Sarbanes-Oxley has codified many director responsibilities into law, thereby increasing the possibilities for lawsuits involving claims against public company boards. Directors and officers (D & O) insurance covers this liability to a degree. As the number of D & O claims paid rose from $9.62 million in 2002 to $23.35 million, the premiums for this insurance increased by as much as 500 percent. For any given policy, if the premiums didn't go up, chances are the coverage was reduced. In the same Pearl Meyer survey, 63 percent of respondents said they believed Sarbanes-Oxley had made it more difficult to get adequate D & O insurance.

Further straining the ability for directors to limit their personal liability are rising legal defense costs. According to a recent Reuters report, "Hefty legal defense bills are now frequently consuming the bulk of funds provided by a D & O policy, leaving plaintiffs responsible for covering the shortfall with personal assets."

First line of defense: Know your coverage

As a director, your first responsibility to yourself is to understand what your D & O insurance covers and how that compares with your personal net worth. You may know, for example, that the policy's liability limit is $100 million, but do you know whether that limit applies to each individual director or to the board as a whole? Would your defense costs be included in that limit or separate from it? Does the policy allow you to choose your own legal representation? Under what conditions might you be excluded from coverage?

It's a good idea to have an attorney (perhaps your personal attorney or one who has securities law experience) review the D & O policy for you. He or she should assess whether you run the risk of having to pay to sue the insurance carrier while simultaneously defending yourself from a class action. You may also want to have the attorney look at the company's indemnity obligations. Also, check the company's bylaws and the statutes of the state where it is incorporated, which may offer some additional protection.

Your second step is to retain that healthy paranoia you may have developed in the wake of Sarbanes-Oxley. The threat of suits is both real and perceived. The Delaware Court of Chancery, which has jurisdiction over companies incorporated in Delaware (as most are), is hearing (as this issue...