Extra Insurance Coverage for Outside Directors in Times of Financial Uncertainty: An Overview of Independent Director Liability Policies

Scott N. Godes is counsel in Dickstein Shapiro’s Insurance Coverage Practice.
In these times of financial uncertainty, outside directors on corporate boards of directors may request that the companies’ boards companies purchase Individual Director Liability (IDL) insurance for them. Generally speaking, IDL insurance is just for outside or independent directors of a company and, depending on the form in which it is written, may offer independent directors additional insurance protection if the corporate policyholder’s insurers were to attempt to deny or rescind coverage under the policyholder’s directors and officers insurance policy. 
In 2004, John Keogh, now the CEO of ACE Overseas General and formerly AIG’s Senior Vice President, Domestic General Insurance and President and CEO of AIG’s insurance subsidiary, National Union, gave a presentation regarding AIG’s IDL coverage at a Practising Law Institute seminar during which he expounded on AIG’s marketing points for its IDL coverage:
National Union recognizes that non-employee directors have unique and distinct needs, especially in the post-SOX environment. They deserve to have the option of a D&O policy that exists exclusively for their benefit. IDL Premier is the insurance product to satisfy this demand.
IDL Premier cannot, under any circumstance, be rescinded. It is structured as an A-side excess policy that will cover non-employee directors in the event that the traditional, underlying D&O program has been exhausted. It also responds during four specific circumstances where the personal assets of directors are put at risk because their traditional D&O policy does not cover them. These circumstances are:
1.         The traditional D&O program has been rescinded;
2.         The claim has been excluded due to a breach of a non-severable warranty in the traditional D&O policy’s application;
3.         The claim has been excluded due to a restatement exclusion; or
4.         Access to the proceeds of the traditional D&O program has been blocked because the D&O program is deemed a part of the bankrupt corporation's estate.
If any of these four events occur, IDL Premier will pay on behalf of non-employee directors immediately for both indemnifiable and non-indemnifiable loss and with no retention. IDL Premier can be amended in three fundamental ways. Although it is defined to insure all non-executive directors, the definition of "insured" can be amended to include only a limited number of individuals (such as the audit committee) or even only one individual (such as the financial expert).
The policy can also be amended to provide cover for only the four triggers – as opposed to also being an A-side excess policy. Because National Union views the likelihood of one of the four events occurring as slim, National Union will be aggressive in pricing this option competitively. The third option will include a Difference in Conditions feature and will be the broadest form of cover available exclusively for non-employee directors.
John Keogh, D&O Insurance in 2003/2004, Briefing Paper, 1449 PLI/Corp 439, 456 (2004).
An article regarding an early Aetna Casualty & Surety IDL policy similarly explained that IDL coverage is designed “to provide supplementary coverage to a company’s basic D&O coverage.” Edward Yodowitz, Protecting Officers And Directors Through Effective Use Of Insurance, Indemnification, And Statutory Limitations On Liability, Securities Litigation 1988: Prosecution and Defense Strategies, 351 PLI/Lit 601, 632 (1988).
There is a dearth of case law on this issue, but commentary on Delaware corporate law, for example, suggests that it would be appropriate for a corporation to buy IDL policies for its outside directors; the intent of the drafters of Section 145(g) of the Delaware Corporation Law appears to recognize that Delaware corporations may purchase insurance for their executives’ benefits, allowing “corporation[s] to do directly what [they] had been doing indirectly for years: reimbursing directors for premiums they paid personally to maintain such insurance.” E. Norman Veasey, Jesse A. Finkelstein & C. Stephen Bigler, Delaware Supports Directors with a Three-Legged Stool of Limited Liability, Indemnification, and Insurance, 42 Bus. Law. 399, 419 (1987). Thus, if a policyholder chose to purchase IDL policies for its independent directors, a policyholder could argue that it was replicating what independent directors could have done previously under Delaware law (i.e., purchase their own individual policies).
A policyholder should consider whether the proposed policy forms, whether individual or group, provide natural person-specific or position-specific coverage. IDL insurance may be flexible on this issue, possibly tailored to the insured’s requests to provide coverage for all independent directors, board committee members, or even individual board members. For example, National Union (an AIG insurance company) stated in a 2004 article that when writing its “IDL Premier” policy, which usually “insure[d] all non-executive directors,” “the definition of ‘insured’ can be amended to include only a limited number of individuals (such as the audit committee) or even only one individual (such as the financial expert).” D&O Insurance in 2003/2004, Briefing Paper, 1449 PLI/Corp 439, 456 (2004).
Even if a policyholder purchases IDL policies for each individual outside director, the directors should be advised that such policies, generally speaking, often are limited to a director’s service for one company’s board. If a director serves on more than one board, that director might need a separate policy for each board.
When considering the purchase of additional insurance coverage for a policyholder’s independent directors, a policyholder should note the variety of policies potentially available and the additional features that they may offer when compared to D&O policies that include Side B or Side C coverages. For example, one notable feature included in certain IDL and similar types of policies is the insurers’ agreement to not rescind the coverage, whereas rescission is an often-raised tactic in D&O insurance coverage litigation. Thus, even if the insurers writing a policyholder’s other D&O policies attempted to rescind a policyholder’s policies that contain entity coverage, the insurers should not be able to attempt to rescind these IDL and similar policies.
In conclusion, IDL policies likely will be of interest to outside directors. In uncertain financial times, insurance policies are more of a valuable asset than ever, and policyholders should take all steps possible to request the best possible forms and coverage terms for the insureds under the policies.