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Directors' and officers' liability.

Over the past decade, directors and officers have increasingly become the target of lawsuits brought by disgruntled shareholders, employees and even competitors. In hundreds of recent cases, the settlements have resulted in verdicts in excess of $10 million each. With this in mind, it is more important than ever for risk managers to take an active role in protecting the company's officers. According to Dan Bailey, a partner with Arter & Hadden in Cleveland, a risk manager has essentially three roles to play in the context of D & O: "Understand the exposures; provide adequate financial protection for the company's officers (including indemnification or corporate protection); and explore and implement less control concepts."

The number one exposure at the current time for publicly held companies revolves around the federal securities laws, said Mr. Bailey. An example of this type o exposure might involve a situation where a company announces some surprising news to the market such as a reduction of earnings forecast or an increase in loan loss reserves and the market reacts by dropping dramatically. What usually results is a lawsuit against the company and the directors brought by one of several professional plaintiff law firms that actively monitor the Dow Jones and will file a lawsuit against both company and directors within hours -- with the allegation beign that those defendants mislead the market by not announcing information earlier as it became known.

According to Mr. Bailey, another major exposure is third-party exposures, which include the danger of suits from employees, customers, creditors and competitors. Additionally, those companies approaching insolvency or actually filing for bankruptcy should likewise be on the lookout for a suit from disgruntled employees or creditors. Pollution is also a major area of exposure for directors and officers, noted Mr. Bailey. In some states, statutes go so far as to say that if a particularly senior officer could have prevented the pollution -- even if the officer knew nothing about if -- that officer is personally liable.

Closely held companies are just as much a cause for worry as those that are publicly held because often the boards of directors are controlled by one dominant member or by members of the same family, leading to emotionally charged situations. Furthermore, because closely sheld companies have fewer resources, there are often smaller margins of error and what would in a larger company be a small mistake is "a big blip and is much more visible to shareholders and potential plaintiffs," said Mr. Bailey.

The main thing a risk manager should do to protect his or her directors and officers is to take a close look at the indemnification issues when structuring a risk management program for them, according to Mr. Bailey. Risk managers need to be sure their companies' policies are up-to-date with recent statutory amendments. When reviewing the policies, be sure they include provisions that provide for indemnification "to the fullest extent permitted by law," and carefully consider exactly which employees to cover, said Mr. Bailey. In addition, Brian Foy, vice president of Berwanger Overmyer Associates in Columbus, echoed that the importance of analyzing the actual D & O policy word for word cannot be overstated. "You need to be understanding of what the D & O policy does and does not do, and you need to look to outside counsel for help with indemnification review."

Another weight being added to an already weighty schedule for risk managers is employment law, according to John Lewis, a partner with Arter & Hadden. And risk managers are becoming involved with employment law at an especially challenging time. What should they do to protect their companies? According to Mr. Lewis, risk managers should put flexible policies in place that deal with cases ranging from $5,000 to $50,000, identify the person responsible for handling employment law, explore what insurance is available and have a disclaimer on employment applications that says employees are employed at will. Additionally, risk managers should document all employee behavior so that the firing of an employee can be justified, and make sure that performance evaluations are objective and goal-oriented, he noted. Also, take care to avoid firing emplpoyees on day calculated to make them seek retribution, such as birthdays and holidays. And be sure frontline managers are not given the authority to fire anyone on the spot. As a final note, Mr. Lewis advised getting a release from any diffcult employee who has been fired.
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Title Annotation:Risk and Insurance Management Society North Central Regional Conference
Author:Kehl, Joyce L.
Publication:Risk Management
Date:Nov 1, 1993
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