Does Sarbanes-Oxley gore your coverage? Ensuring that your D&O policy rises to the challenge of the post-Enron legislation.

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

WHEN D&O INSURANCE policies come up for renewal, many corporations simply renew them without negotiating any significant improvements. Today, this practice can, under certain circumstances, constitute malpractice on the part of those making or recommending the decision to "renew as expiring." Can you prudently renew as expiring when the liabilities to which directors and officers are exposed increased so dramatically with the signing into law last year of the Sarbanes-Oxley Act (Act)?

No insurer has issued a new D&O policy or omnibus endorsement designed specifically to respond to Sarbanes-Oxley. Accordingly, it is up to you and your advisers to negotiate modifications to your policy that do so. Here are some specific points you may want to negotiate with your insurer.

Criminal Proceedings. Expect more. Sarbanes-Oxley toughened existing criminal penalties and added new crimes to prosecutors' arsenals. For example, Section 807 of the Act created a new felony for securities fraud with a tough 25-year maximum penalty.

With these additional crimes on the books and an increased emphasis on criminal prosecutions of executives, you absolutely need to ensure that your D&O policy covers criminal proceedings so there will be money available to retain defense counsel. Most, but not all, D&O policies today cover criminal proceedings. If you happen to like most of the other terms of a policy that does not cover such proceedings, don't worry: Often you can successfully negotiate a change in the definition of a covered claim to include criminal proceedings without additional premium.

Advancement of Defense Costs. Defense costs in securities fraud and criminal proceedings typically run sky-high. Frequently, these costs are advanced by the defendant's corporation upon receipt of the defendant's agreement to repay them if it is later determined that he or she was not entitled to these advanced funds.

The Act has created uncertainty regarding this practice. Section 402 makes it unlawful for a public company to make a personal loan to any of its directors or executive officers. It is unclear whether advancement of defense costs that may have to be repaid to the corporation constitutes a personal loan under Section 402. What is clear, however, is that advancement by a D&O insurer is legal under Section 402. This underscores the importance of making sure your D&O policy provides that the insurer will advance defense costs as incurred.

Insured Persons...