With liability risks to executives on the rise, companies are reviewing their internal policies and their insurance policies. “From an insurance standpoint, litigation trends and coverage trends tend to move in correlation,” says Barney & Barney’s John Niedernhofer.

For example, “Both the WorldCom and Enron cases involved independent directors as opposed to founders, majority owners, and other insiders,” Niedernhofer says. “Historically, independent directors had not been liable. The independent directors of WorldCom and Enron settled for a very large amount of their personal net worth. This is a change, because previously I’m not aware of any example where independent directors had paid their own money unless they collaborated in the fraud. These (independent directors) just didn’t catch it.”

Generally speaking, directors and officers liability insurance (referred to as D&O) insures against allegation of fraud and breaches of duty. “But if something is proven that you’re acting in bad faith or breaching a fiduciary duty, there is no insurance available, nor should there be,” Niedernhofer explains.

What Niedernhofer calls “an emerging crisis” in D&O involves monies paid out in settlement of claims and whether they are characterized as damages or restitution.

“There is a difference in the eyes of about a third of insurance companies that damages are insurable, but restitution is not,” he says. “It’s an evolving area of insurance coverage litigation and has caused a rift in the insurance industry with dramatic consequences because multi-million-dollar settlements can be had. The difference between restitution and damages is about motive. Is it something arising out of negligence or is it something arising out of fraud? That’s the distinction that some insurers are trying to characterize and the other two-thirds of the industry feels they are misusing some recent precedents.”

Niedernhofer says the dispute is troubling to D&O insurance brokers.

“It’s our job to structure language that dictates outcomes, and if we can’t predict the outcome based on the same language, our ability to predict is threatened, so this is a very troubling issue,” he says.

— Rich Acello