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Directors and officers: only qualified need apply.

"'Why Sane People Shouldn't Serve on Public Boards,"' read Daniel Bailey from the title of a recent Harvard Business Review article. The partner with the law firm Arter & Hadden in Columbus, OH, began the seminar, "Directors' & Officers' Liability-Loss Prevention and Financing With a New Twist," by holding the article in midair to demonstrate the high cost of D&O insurance.

To reduce their exposures, he said, companies should start by selecting directors based on their character, mature judgment, vision, resourcefulness in dealing with unusual situations and cooperative attitude. Too frequently, directors are selected based on their personal relationships, he said, adding that Revlon's recent selection of Nancy Reagan to its board is a prime example of how not to choose a board member.

According to Mr. Bailey, recent surveys indicate that the average board of a publicly held corporation consists of 12 to 15 members. It is questionable whether such a large board is effective and efficient, he said. "Most people in this size group tend not to talk or challenge anything. ... Their attitude is Nothing will get done if we all challenge this."'

The board's performance should be evaluated periodically by members of the board, management and, if possible, outside consultants, he said. "Everyone from the janitor to the CEO must go through an evaluation process," said Mr. Bailey. "Why not directors?"

In addition, a corporation should educate directors and officers about itself, its marketplace and the regulatory and legal environments in which it conducts business, he said. Finally, he said, probably the most important action a corporation can take is to sensitize all directors and officers to their exposures, because they are liable for everything they do.

Derivative Suits on the Rise

Calling the 1986-amended False Claims Act the "new RICO," or Racketeer Influenced and Corrupt Organizations Act of 1970, Mr. Bailey predicted that more and more companies will be hit with Qui Tam lawsuits in the 90s. "Like RICO, the False Claims Act allows for triple damages," he said.

Qui Tam lawsuits are derivative suits brought by U.S. citizens on behalf of the federal government against parties who have allegedly defrauded the government. According to Mr. Bailey, if the Justice Department chooses to participate in the suit, the citizen is guaranteed at least 15 percent of the recovery; if the department does not participate, the citizen gets 25 percent to 30 percent of any recovery.

Any private party who contracts with the federal government is liable, he said. Areas where these suits are likely to stem from include defense contracts and Medicaid. Pollution and environmental suits are also on the rise, he said, and, like Qui Tam suits, these can be filed by citizens or regulators.

Take-Charge Programs

"It's easy to follow the crowd regarding traditional D&O policies," said Joseph Morahan, president of the professional liability division of Frank B. Hall & Co. in Denver. "It's difficult to do something different."

That's why risk managers need to take charge of their D&O programs, he said, adding that the first step involves developing a long-term plan. "As crazy as it sounds, most brokers don't have one for the long term."

Then, he said, risk managers must nurture long-term relationships with their brokers. "Relations will not always be smooth along the way, but over time they will." And when dealing with underwriters, he added, remember to explain more to them than you think is necessary. "Underwriters are usually young and not well-rounded and are a little nervous about the outcomes of their decisions."

When it comes to D&O risk financing, Mr. Morahan believes that most companies take deductibles that are too low. "There is too much reliance on insurance," he added.

It is necessary, he said, for a company to take a "bigger position" regarding risk financing because it is impossible to predict costs, or, as Mr. Morahan aptly put it, "You can't measure a snake til it's dead."M.M.
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Title Annotation:Risk and Insurance Management Society Conference; liability insurance
Author:McCabe, Monica
Publication:Risk Management
Date:Nov 1, 1990
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