Corporate Governance

Stockman and the Limits of D&O Insurance

By J. Robert Brown

We note that Kevin LaCroix at the D&O Diary, a one stop shop for all things about D&O insurance, has commented on the post on this Blog that discussed the burn rate of the D&O policy used to pay legal expenses in the current litigation against officers and other personnel from the bankrupt Collins & Aikman.  His comments are worth repeating:

• The first and most basic point is the importance of defense expense in the limits adequacy analysis. The potential for defense expense to exhaust or substantially deplete the available limits is most obvious in a catastrophic claim like the one involving Collins & Aikman, but even in less catastrophic circumstances, accumulating defense expense can substantially reduce the indemnity protection available even in a large insurance program. And the insurance is supposed to able to respond adequately in all circumstances, even the unlikely event of a catastrophic claim. In considering the requirements that a catastrophic claim can present, it is important to note that the aggregate defense expense related to the Collins & Aikman claim consumed $15 million in just nine months.
• The second point is that one of the problems in the Collins & Aikman claim is that so many different people are accessing the policy, for a wide variety of different matters. The potential for the policy limits to drain away through so many different access points is perhaps inherent in the current standard D&O policy structure, in which so many different people are included as ?insured persons? and so many different kinds of matters fall within the definition of a covered ?claim.?
• While this breadth of coverage is generally viewed as a positive thing from the policyholder?s perspective, it has the inherent potential (a potential that is being dramatically realized in the Collins & Aikman claim) for accelerated policy erosion and even depletion. The erosion potential inherent in the breadth of available policy coverage is a consideration that is too infrequently considered in connection with the question of limits adequacy.
• Third, the problem Barnaba faces is not just his alone ? all of the other ?insured persons? are also facing imminent insurance program depletion. Once the available insurance is used up, these individuals will face continued complex litigation without further insurance available to defend or indemnify themselves. Among other things, it could prove difficult and painful for the defendants in the civil lawsuits to extricate themselves without insurance available.

In short, for a multi-billion dollar company like Collins & Aikman, $50 million in insurance limits may not be enough.

Full post as published by The Race to the Bottom on June 03, 2008 (boomark / email).