Side A D&O policy limits, rescissions increase

Plaintiffs’ attempts to impose personal liability on directors is becoming a trend, as are insurers’ attempts to rescind D&O coverage upon learning of fraudulently-reported financial statements, A.M. Best reports.
In some recent U.S. corporate scandals, A.M. Best notes, “plaintiffs’ attorneys have targeted directors and have demanded, and obtained, personal contributions from the directors.”
In January 2005, for example, 18 former directors of Enron reached a US$168-million settlement with shareholders, including an agreement by 10 of the former directors to pay US$13 million from the profits of their sale of Enron stock before the company’s revelation that it had exaggerated its sales and profits.
Also in January 2005, 10 former WorldCom directors agreed to personally pay US$18 million as part of a total US$54-million settlement with lead plaintiff New York State Comptroller Alan Hevesi.
“These settlements have established a precedent and could lead to expectations in future cases that similar contributions will be sought and made,” A.M. Best observes.
Side A D&O policy limits have increased as a result, A.M. Best notes.
Unlike Side B and C policies, which relate to insuring the company as an entire entity, Side A D&O policies protect individual directors and are not considered part of the company’s assets. Side A policies are therefore of particular interest to plaintiffs’ lawyers, because the money they provide is available for recovery by the plaintiffs should a company go bankrupt as a result of financial fraud.
An increase in rescission is another recent outcome of large settlements with company directors.
“Directors and officers have increasingly had to face the risk of rescission of their D&O coverage,” A.M. Best notes. “With the revelation of these massive alleged corporate frauds, insurers are increasingly seeking to obtain rescission of the policies they issued in reliance on financial statements and other representations of management.
“Since many companies have revealed fraudulent accounting practices, for example, insurers have argued that the financial condition of the companies, relied on by the insurers in issuing their policies, was knowingly misstated.
“While in some instances insurers have sought rescission only as to the directors and officers involved in the wrongdoing, others have sought rescission as to all directors and officers.
“Whether such wholesale rescission is warranted is in large part dependent on the language of the policy and the application submitted by the company.”
A.M. Best notes the risk of rescission has led some insurers to begin marketing non-rescindable D&O coverage available to outside, independent directors.