5 THINGS EVERY CFO SHOULD KNOW ABOUT D&O INSURANCE2011 FEI SPRING PROFESSIONAL DEVELOPMENT EVENT

JUNE 16, 2011

5 IMPORTANT ISSUES

1. Indemnification

2. Investigations

3. Excess policies

4. Higher limit warranties

5. Claims notices

TRUE OR FALSE

The indemnification provisions in a corporation’s by-laws provide the first line of protection while I’m a current director or officer. The protection continues to protect me after I’m no longer associated with the Company

MAYBE…

1

INDEMNIFICATION:BETTER THAN INSURANCE• Corporate officials’ front line of liability protection is

indemnification

• Indemnification provisions provide vital protection for directors and officers whether or not the Company purchases D&O insurance

• D&O insurance is subject to a “limit of liability,” whereas indemnification is limited only by the financial strength of the Company

• D&O insurance policies contain numerous exclusions. Indemnification is very broad (“to the maximum extent permitted by law”)

• D&O insurance needs to be renewed every year. Indemnification provisions are changed infrequently

2

INDEMNIFICATION:PAY CLOSE ATTENTION• Concern #1: Retroactively Amending the Indemnification Provision

Schoon v. Troy Corp: Board-approved amendment to the indemnification provisions eliminating advancement to former directors and officers

Subsequent litigation names former director as defendant, Company refuses to advance defense expenses

• SOLUTION: Review your indemnification provision to ensure your rights to advancement and indemnification are not unduly exposed to retroactive amendments. Also, consider the need for each director and officer to have separate indemnification agreements with the Company.

3

INDEMNIFICATION:PAY CLOSE ATTENTION• Concern #2: Presumptive Indemnification

Off the shelf D&O policies include “presumptive indemnification” provisions

If the corporation wrongfully withholds indemnification, the individual’s personal assets are exposed

• SOLUTION: Amend the indemnification provision in your D&O policy to allow individuals to request advancement in the event the corporation refuses to indemnify.

4

TRUE OR FALSE

If the Company is the subject of an SEC investigation, the Company’s D&O program will cover the expenses

FALSE

5

INVESTIGATIONS:SLEEPING GIANT• 2011 - Year of regulatory investigations

Increased anti-corruption/bribery investigations by foreign nations‒ U.K. Bribery Act‒ Nigeria announces investigation of Halliburton and others‒ Malaysia & Honduras launching additional investigations of Alcatel-Lucent SA

Whistleblower proliferation‒ SEC receiving on average one FCPA-related tip a day‒ Impact of Dodd-Frank could be astronomical

Cross-border cooperation‒ Justice Department & SEC actively focused on building relationships with

foreign counterparts‒ U.S. & German authorities conducting joint investigations of Allianz & Hewlett-

Packard

6

INVESTIGATIONS:SLEEPING GIANT• SEC opened 952 new investigations in 2010 (5,400 since 2005)

‒ Contrast: 176 securities class action claims filed in 2010

• Currently 240+ open FCPA related investigations

• Costs associated with internal investigations can be staggering‒ Goldman Sachs: +$700M‒ Avon Products: $22.5M in Q1 2011‒ Office Depot: $23M

• These expenses were uninsurable

7

INVESTIGATIONS:I THOUGHT IT WAS COVERED• Concern: With the average law firm partner billing $635 per hour,

(elite partners are billing $1,000 or more), coupled with an increased regulatory investigation environment, the risk to your balance sheet has never been greater

• SOLUTION: A limited number of carriers are now offering “Corporate Investigations” coverage either with a stand-alone policy or as an endorsement to the D&O policy. Input from the General Counsel and/or outside counsel should help determine if this type of protection is appropriate.

8

TRUE OR FALSE

Once we’ve incurred defense expenses or agreed to a settlement amount that exhausts the limit of the primary policy, the excess policies will respond

MAYBE…

9

EXCESS POLICIES:WILL THEY REALLY WORK?• The excess coverage you bought might not be there when you

need it most

• The overwhelming majority of time is spent negotiating primary policies

Excess policies are often afterthoughts

• Although they do “follow-form,” there are hidden pitfalls Biggest concern - exhaustion of underlying limits Slight variations to primary policy provisions

‒ Specific litigation exclusions ‒ Dispute resolution provisions‒ Discovery periods‒ Cancellation provisions‒ Prior/past act dates

10

EXCESS POLICIES:WILL THEY REALLY WORK?• Concern: Exhaustion of underlying limits

Proposed settlement impacts limits of 3 carriers (primary and 2 excess) Insured agrees to contribute/participate in settlement 1st excess carrier refuses to make limits available because “underlying

insurance was not paid in full by underlying insurer(s).” 2nd excess carrier takes same position $15M in limits just became $5M Bally Total Fitness, Citicorp, Comerica and Qualcomm

• SOLUTION: Amend all excess policies to include language that recognizes exhaustion of underlying limits by any source (underlying insurers, excess Side A DIC insurers and/or Insured)

11

TRUE OR FALSE

Warranty letters are always required when increasing limits of liability. There are no exceptions

FALSE

12

WARRANTY LETTER:NOT JUST A TECHNICALITY• Increasing number of companies are purchasing additional limits

• With additional limits come higher limit warranty statements

• Requirement makes sense – D&O carriers don’t want to insure “burning building”

• Standard language often includes no person for whom this insurance is intended has any knowledge of

information of any act, error, omission, fact or circumstance which may give rise to a claim which may fall within the scope of the insurance

• Warranty usually signed by CEO and/or CFO on behalf of all other Insureds

13

WARRANTY LETTER:NOT JUST A TECHNICALITY• Concern: No coverage for all Insureds as a result of signed

increased limit warranty Company restates earnings and securities class action litigation follows Primary and underlying limits are exhausted New excess carrier asserts that CFO possessed “knowledge” of facts

which may give rise to claim when warranty letter was submitted Carrier denies coverage for CFO and all other Insureds

• SOLUTION: When purchasing higher limits, first determine if carrier will include a prior knowledge exclusion in lieu of a higher limit warranty. If not, make sure the warranty letter includes proper imputation language

14

TRUE OR FALSE

Your first obligation to notice a claim is once you’ve received a lawsuit

FALSE

15

CLAIMS NOTICES:THE CLOCK IS TICKING• The Insureds’ obligation to notice a claim varies by line and by

carrier

• There is no industry standard

• Carriers’ one iron clad defense for denying coverage is late notice

• Prejudice to carriers is immaterial

• The most common claims related issue our clients face is late notice

16

CLAIMS NOTICES:THE CLOCK IS TICKING• Concern:

• Field Manager receives email from disgruntled former employee that includes an unspecified demand but takes no action

• 3 months later Company receives notice from EEOC• By the time the Company provides notification of the claim, the policy in

force when the Manager received the original email had expired. The carrier denies coverage for the claim

• SOLUTION: Numerous recommended changes:• Amend notice provision by limiting knowledge of claim to specific

titles (CFO, GC, RM)• Make sure definition of Claim is drafted appropriately• Explore possibility of biannual bordereaux claims reporting

17

5 THINGS EVERY CFO SHOULD KNOW ABOUT D&O INSURANCE2011 FEI SPRING PROFESSIONAL DEVELOPMENT EVENT

JUNE 16, 2011