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Membership on a company’s board of directors used to seem like a real plum — little work, lavish pay, hobnobbing with the chief executive, flying around to fancy golf clubs in the corporate jet. But yesterday’s plum has become today’s hot potato. Potential candidates are begging off in unprecedented numbers, spooked by the threat of lawsuits that could dip into their personal fortunes. Their fears are not that far-fetched. Although companies routinely buy directors’ and officers’ (D&O) insurance to protect board members against liability for corporate misdeeds, directors are now seeing that such insurance is hardly bulletproof. “It used to be that the insurers would simply cut a big check,” said Kirk Pasich, a partner at the Los Angeles office of Howrey Simon Arnold & White. “That’s all changed.” The scope of coverage has narrowed, premiums have increased and for some sectors like telecommunications and technology, D&O insurance may not be available, he said. Even more alarming, directors who think they have coverage may find they do not. If an executive, director or the company itself is held to be criminally liable, the insurer will often refuse to cover anyone’s defense costs. The same holds true if the company is found to have lied about its business. The companies that insured Enron Corp.’s directors and executives against shareholder lawsuits, for instance, are trying to rescind $350 million in coverage on the grounds that Enron misled them as to its financial health, thus voiding the policies. “For the first time, we’re seeing that the very thing giving rise to liability is no longer covered,” Pasich said. If the company goes bankrupt, directors and officers may find themselves vying for insurance dollars with company creditors or even the bankruptcy trustee. Enron’s creditors tried — albeit unsuccessfully — to keep company executives from accessing their D&O insurance, arguing that the money should go to them instead. The court rejected the creditors’ bid, ruling that the executives had the right to use the money to defend themselves against fraud allegations. Pasich said Enron is just the tip of the iceberg. Insurers for a whole host of other scandal-ridden companies, such as WorldCom Inc., Adelphia Communications and Tyco International, are all likely to balk when it comes to covering the legal costs of the firms or their officers and directors, he said. He said that the way things are right now, he would “categorically” refuse to serve as an outside director of a publicly held company. “What you’re telling these people is that they can be personally at risk for everything they own,” he said. Even before the recent wave of multibillion-dollar accounting scandals, insurers were hiking up the price of D&O policies. Fierce competition among underwriters had kept rates underpriced for much of the last decade, but premiums began to soar after last year’s spike in shareholder lawsuits in the wake of the stock market’s collapse. D&O coverage is issued largely to protect against such suits. Last year’s 485 securities fraud class action suits were more than double the number filed in any previous year, according to the Stanford Law School Securities Class Action Clearinghouse. “For every Enron where the people who ran the ship were doing something wrong, there are seven or eight companies being sued simply because their stock price dropped,” said Robert Bregman, senior research analyst at International Risk Management, a Dallas publisher that puts out a reference manual on D&O insurance. PREMIUMS SKYROCKET Almost all class actions are settled. The average amount of these settlements has risen from $7 million in 1996 to more than $17 million last year, according to a PricewaterhouseCoopers study. Settlements of lawsuits alleging accounting fraud are even higher, averaging around $23 million. As a result, “premiums are going through the roof,” Bregman said. Especially hard hit are industries such as telecommunications, technology and even investment banking. Xerox Corp., for example, will shell out about 10 times as much for D&O insurance this year — nearly $5 million — compared with prior years. “No one wants to underwrite these companies because they are just getting sued right and left,” Bregman said. In addition to skyrocketing premiums, deductibles have increased anywhere between 100 percent and 300 percent, he said. And in an effort to push companies to contest shareholder suits more vigorously, insurers are also requiring companies to kick in up to 30 percent of the settlement costs. Some insurers, hit hard by Sept. 11-related losses as well as big D&O claims, have pulled out of the D&O market entirely. The decreased competition has allowed the remaining carriers — American International Group dominates the market, well ahead of second-place Lloyd’s of London and third-place Chubb — to harden their position. “If they can’t get their price, they walk away,” Bregman said. STEPS FIRMS CAN TAKE Although the situation seems grim, lawyers said there are steps companies and their directors and officers can take to protect their interests. First, because they are typically issued for three-year terms, many D&O policies still carry favorable terms and higher limits, explained Howrey Simon’s Pasich. Moreover, before recent events, insurers did not demand nearly as much financial information from its insureds, he added. If a company still has an old D&O policy in place, it can send its carrier a notice letter that states simply that it is a publicly traded company and believes its financials to be accurate, but given the number of shareholder suits being brought, may itself get targeted in the future, Pasich said. Should the company get sued, the notice letter will help secure coverage under the existing policy, he said. Joseph M. McLaughlin, a partner at Simpson Thacher & Bartlett, said directors and officers could also benefit from a closer look at their D&O policies. For one, they should make sure it includes a severability clause protecting them, as innocent parties, from a denial of coverage claim on the basis of a company’s misleading financial statements. If the policy also covers the company, it should also provide that its directors’ and officers’ insurance receives priority over any property interest the company may have, he added. Finally, should everything else fail, executives can take measures to protect their assets by, for example, moving their money offshore or into their spouse’s name, said Jonathan M. Forster, a partner at the Tysons Corner, Va., office of Greenberg Traurig. Experts said caution was called for given the continued uncertainty of the D&O landscape. “Everything that could have gone wrong has gone wrong,” Bregman, the research analyst, said. “Now the underwriters are having to play catch up.”

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