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Article

Outside looking in

Date

December 14, 2005

AUTHOR(s)

Emmanuelle Poupart


In the past year, we heard about rescission of Directors and Officers insurance policy (D&O policy) flowing from misrepresentations about the financial health of companies. In the last edition of our Insurance Newsletter[1], we discussed certain worrisome situations for "outside" directors and the insurance products available on the market in order to maximize the protection that they can benefit from.

Although some products or specific clauses can be of interest, the first rule remains to carefully read the D&O policy under which you are purportedly covered. As an outside director, you are usually covered by the policy of the corporation on whose board you sit. If you are sitting on the board at the request of your own employer, you may also be covered by your own corporation’s D&O policy but only if that policy has an "outside entity endorsement" covering for-profit organizations.

Generally, the "outside entity endorsement" provides that the directors and officers who sit on outside entity boards are covered if they are sued for acts committed as directors and officers of the outside entity. In order for such coverage to be granted, it is generally required that you sit on the board of the outside entity at the request of your company and that your own company’s insurer be advised of your position. Often, the insurer is informed of those employees that sit on boards of outside entities through a list which is sent at the time of subscription or renewal. Typically, the insurer is notified when you resign from the board of the outside entity and that corporation is removed from the policy. If this is not done at the time of your resignation, it will usually be done at the time of the next renewal. Unfortunately, this practice may cause you to lose any potential of insurance coverage for a claim commenced after your resignation for alleged wrongful acts committed while you were a director.

D&O insurance policies are generally "claims- made" policies – the availability of insurance coverage is determined at the time the claim is made. Hence, if you are sued two years after your resignation for alleged wrongful acts committed while you were sitting on the board of an outside entity, you may face a denial of coverage because the outside entity is no longer included on the current policy.

Logically, coverage should be granted if you can establish that the company was listed when the alleged wrongful acts were committed. Unfortunately, some insurers take a different approach. They can adopt such a position because of the absence of clear wording in the outside entity endorsement.

There are two ways of avoiding this problem. First, you can deliberately choose to keep the name of the company on the list of outside entities after your resignation from the outside entity board until the possibility of a recourse against you has lapsed. This is recommended by some brokers but it is far from being optimal. The best way to avoid a denial of coverage in these circumstances is to require that the wording of the endorsement specifically provide that there will be coverage as long as the alleged wrongful acts were committed while the company was identified as an outside entity in the outside entity endorsement. Such endorsements are available on the market and are clearly advantageous.

In times where there are financial scandals and rescission of insurance policies, all of which can be extremely costly for outside directors, it is important that you read the outside entity endorsement and, if necessary, require changes to the wording after having received the appropriate advice.

 

[1] Without a net: /article_detail.aspx?id=1926.

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