One More Thing to Keep Directors and Officers Awake at Night: Dodd-Frank’s Impact on D&O Insurance

Alan Parry and Eric Barber   By K. Alan Parry and Eric G. Barber

The November/December 2011 issue of Coverage features an article, "One More Thing to Keep Directors and Officers Awake at Night: Dodd-Frank's Impact on D&O Insurance," by K. Alan Parry of Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P. and Eric G. Barber of Perkins Coie LLP. The article warns that policyholders and insurers can anticipate increased directors' and officers' (D&O) coverage litigation in the wake of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The article analyzes pertinent provisions of the Dodd-Frank Act, notably the whistleblower and compensation claw-back provisions.  The protection for corporate whistleblowers who provide original information to the SEC leading to successful judicial or administrative action resulting in certain monetary sanctions is extended beyond that provided by the Sarbanes-Oxley Act in that there is a significant "bounty" payment to a successful whistleblower. This and other provisions of Dodd-Frank are expected to incentivize increased whistleblower complaints against directors and officers. The article also explains how Dodd-Frank contains an executive compensation "claw-back" provision that greatly expands the circumstances in which a company must seek to recoup incentive-based compensation paid to directors and officers prior to an accounting restatement. The article predicts, "There is little doubt that the Dodd-Frank claw-back provision will lead to increased SEC enforcement, as well as shareholder derivative actions seeking the recoupment of incentive-based compensation."

The article notes that, given the uncertainty regarding the extent of coverage under existing D&O policies in the context of the Dodd-Frank provisions, increased litigation over the policy terms' meaning and application can be anticipated. The article focuses on analyzing four pertinent and key provisions in D&O policies: (1) coverage for government agency investigative costs; (2) the definition of "Loss"; (3) the Personal Profit Exclusion; and (4) the Insured versus Insured Exclusion. The analyses include recommendations to policyholders as to examining what coverage they now have with regard to issues that the implementation of Dodd-Frank may generate and what additional protections they should seek to obtain. The article includes a cautionary note that with the Dodd-Frank rulemaking process still ongoing , insurers may be hesitant to permit changes during the renewal process that may increase their risk. It predicts that "potential gaps in D&O insurance coverage ... are sure to be highlighted, litigated, and ultimately addressed through modifications to policy language." Given the potential impact of Dodd-Frank, all involved are recommended to consult with their advisors as to how best to manage their risk.

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