Retired but Not Forgotten

How much D&O coverage do former officers and directors need?

Frank Borelli is concerned about his directors’ and officers’ liability coverage — and that’s saying something, since Borelli is a former CFO of insurance broker Marsh & McLennan Cos. Why the worry? “I’m on three boards now, and if I left one of them today and a claim is made four and a half years from now, I have no assurance that the D&O policy existing at that time will cover me fully,” he explains. “There’s a risk it could be a lesser policy than the one in effect today.”

Unlike other liability insurance policies, D&O insurance is underwritten on a claims-made basis. That means the insurance policy that absorbs liability is the one in effect the year in which a claim is filed — not the year in which the alleged wrongdoing occurred. Naturally, an executive who leaves a company or a director who resigns from a board has no say over the terms and limits of the insurance policy that covers his or her future liability.

Thanks to the Sarbanes-Oxley Act, the statute of limitations on a securities claim against a director or officer has been extended to five years following the alleged wrongdoing (formerly it was three years). The e personal liability for former directors and officers can be high. The former outside directors of Enron, for example, had to hand over $13 million in personal cash in addition to the company’s D&O coverage. Former directors and officers of WorldCom, in settling class-action claims against them, paid a total of $18 million. In April 2007, five former directors of shoe retailer Just for Feet coughed up $41.5 million of their own money to settle litigation.

To address such potential exposure, Ace Westchester, an Atlanta-based insurer, has introduced a new retired director and officer liability policy. The policy is the only one of its kind in the United States, though similar policies are sold in the United Kingdom and Australia. The insurance is sold to individual directors and officers (paid for out of their own wallets), although a company may buy it to cover its current directors and officers for their post-retirement liabilities.

The insurance is noncancelable, nonrescindable, and buyer-specific — the coverage belongs entirely to the director or officer and cannot be diluted by other people or entities. It provides full coverage for up to six years after the insured resigns, retires, or is fired. The financial limits can be as high as $10 million, though since the insurance responds only after underlying D&O policy limits have been exhausted, not many people would likely need that much coverage. “We haven’t had any requests for the full limits,” says Steve Wilson, president of Dallas-based Retired Directors Assurance Underwriting Services, the agency licensed by Ace to sell the insurance in the United States. The cost of the one-time premium is roughly $3,000 to $8,000 for $1 million in insurance for the full six years.

A Single-Digit Probability

But do directors and officers really need additional D&O insurance as they move on with their lives? Opinion is mixed. While the postemployment liability of directors and officers is not in doubt, the actual risk of traditional D&O policies not absorbing this liability is considered small for a simple reason: D&O claims are typically filed almost immediately after the incident that brought rise to the claim. “D&O claims rarely are filed years after an event,” says Lou Ann Layton, a managing director at Marsh & McLennan.

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