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Executives now come under fire.

Changes in the tax codes, retirement acts and federal legislation are leaving executives increasingly vulnerable to lawsuits.

IN TODAY'S LITIGIOUS era, directors and officers have become a tempting target for disgruntled outside parties. The result has been an enormous increase in the number and size of suits being filed against directors and officers over the last several years. According to a recent survey by The Wyatt Co., 24 percent of the 1,501 responding companies reported having had at least one or more claims brought against their companies' directors or officers over the past nine years. Although the survey found that the number of claims leveled off in 1991, their dollar amounts increased significantly.

To make matters worse, changes in the tax codes, retirement acts and federal legislation, such as the Civil Rights Act of 1991 and the Americans with Disabilities Act, are leaving corporate executives increasingly vulnerable to lawsuits, says Corbette Doyle, senior vice president of Willis Corroon in Nashville, Tennessee. "The new legislation is making it much easier for executives to get sued," she says. The Wyatt survey, for instance, shows that wrongful termination was the biggest cause of directors' and officers' (D&O) liability claims last year.

The Civil Rights Act of 1991, for example, opens the door for employees or potential employees with grievances to sue their employers for discrimination, wrongful discharge and sexual harassment. The 1991 act marked the first time that employees could sue their companies for both compensatory (e.g., pain and suffering) and punitive damages. Equally important, the 1991 act gave workers seeking these damages the right to a jury trial. Since juries may be sensitive to workers who bring discrimination claims--especially if attorneys can succeed in portraying defendant executives as wealthy and greedy -- many employers can expect to face large and costly penalties.

The Americans with Disabilities Act (ADA), which goes into effect on July 26 of this year for private employers with more than 25 employees, also opens directors and officers up to the prospect of litigation. Private employers with between 15 and 25 employees must comply in 1994. The act requires employers to accommodate employees or potential employees who are disabled. Because there is the possibility that the act will require companies to sink large sums of money into equipment and procedures, some critics argue that the act's requirements will make it harder for smaller firms to comply. Additionally, "the ADA categories are broad, especially in regard to mental health, which encompasses substance abuse and mental illnesses such as neurosis," explains Ms. Doyle. She also points out that although the law is not yet in effect, it is certain to engender a great deal of litigation. In any event, the requirements of these new laws are stringent, and employers who do not meet them -- even if unwittingly -- expose themselves to risk.

Financial problems, such as corporate bankruptcies and other types of repudiation, are another cause of D&O liability. Bankruptcies can even place the unqualified portion of a senior executives' retirement benefits in jeopardy, reports the National Union Fire Insurance Co. in Pittsburgh. Additionally, companies involved in mergers, acquisitions or divestitures were more than three times as likely to have claims filed against their officers and directors as other companies. Directors and officers also face an increase in suits from issues relating to their companies' financial condition and inadequate corporate disclosure; the Wyatt survey showed that in these cases shareholders were the most likely to sue, accounting for 47 percent of the claims.

Serving on outside boards can June of last year, a U.S. Supreme Court ruling involving Virginia Bankshares, a company sued by its stock was significantly undervalued in a majority buyout, held that corporate board members should have realized that their valuation of the shares had been too low; the court held them savings and loan debacle has resulted in a large number of suits filed against directors and officers for causes such as misrepresentation and breach of duty.

Building a Defense

A PRIMARY DEFENSE against these types of risk is, of course, insurance. Traditionally, D&O liability insurance has been regarded as a singular entity. However, David Lapin, vice president at The Aetna Casualty and Surety Co., points out that "All traditional D&O policies fall into two categories: the D&O liability type and the company reimbursement type." Most corporations protect their officers with a company reimbursement policy. There are cases, however, when companies cannot indemnify their officers, such as when a company becomes insolvent. In such situations, a D&O liability policy is needed.

According to Carolyn Rosenberg, a D&O expert and attorney at Sachnoff & Weaver Ltd. in Chicago, risk managers must ensure that they purchase insurance that will afford their companies, directors and officers the most protection. "Risk managers must also make sure the company is aware of the provisions of the policy. And it's equally important to attempt to make the policies cover any new legislation that could expose directors and officers to risk." This latter step may entail working with a firm's legal department to ensure that the coverage is up-to-date and takes into account any new judicial decisions.

Phil Norton, author of Wyatt's Directors and Officers Liability Survey, points out that risk managers must be aware that the number of coverage exclusions in D&O policies has increased. Risk managers, then, must work with their companies in deciding which coverage exclusions to accept or reject among insurance proposals; this may require thinking about how much money may be at stake for directors and officers should an excluded claim materialize. Ultimately, "you want to match the level of coverage with your particular needs," he says.

In response to the increase in exposures now burdening executives, several insurance companies have created products that provide a greater degree of coverage for top executives. Consider Aetna's Broad Form Directors and Officers Liability Insurance policy. According to Mr. Lapin, this "offers the broadest coverage of any policy on the streets. Think of it as an umbrella; it's designed to fill in the gaps of traditional D&O policies."

The American International Group's Boston-based Lexington Insurance Co. offers a policy called Employment Practices Liability Insurance, which provides increased protection for directors and officers hit by discrimination, sexual harassment and wrongful discharge claims filed by current or former employees. Chubb & Son Inc.'s Employment Practices Liability Insurance is aimed at protecting the company itself from suits based on similar claims.

Although providing directors and officers with adequate insurance is a key component in protecting them from exposures, risk managers should take other steps to ward off the specter of litigation as well. One way is to ensure that the company is complying with new legislation such as the Civil Rights Act, the Americans with Disabilities Act and the Clean Air Act.

By striving to create a work environment free from discrimination, harassment and unfair (as defined by law) employment practices, risk managers can reduce the likelihood that these types of suits would be filed in the first place. In order to accomplish this, risk managers should familiarize themselves with this new legislation and work with the company's top management and legal department to create firm company policies that address the issues raised by these laws. "Companies need a good management philosophy to deal with these issues," says Ms. Doyle. By working to prevent situations that can lead to litigation, risk managers will stop problems before they even start.
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No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:directors and executive officers of companies are, increasingly, target of litigation
Author:Christine, Brian
Publication:Risk Management
Date:Jun 1, 1992
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