Officers to face backdating directors insurers claims

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The “first line of defense” when corporate officials do face liability is indemnification.Indemnification is “broader than insurance in some respects, so it can provide protection in situations where insurance coverage may be more limited” – for example, in the early stages of an investigation, when the costs typically would not be insured because no claim has yet been made.

(For a more detailed discuss of the problems associated with D&O insurance layering, refer here.) Another increasingly common feature of many D&O insurance programs is Excess Side A insurance, which provide an added layer of protection when the company is unable to indemnify whether due to insolvency or legal prohibition, Many of these Excess Side A policies include so-called “Difference in Condition” (DIC) protection as well, by which the policy will be triggered – and will fill the gap – for example if an underlying insurer is insolvent or wrongfully refuses to pay.

In what may be a watershed event for the directors and officers (D&O) insurance industry, the parties to the consolidated federal options backdating-related shareholders’ derivative lawsuit involving Broadcom Corp.

have agreed to settle the case for 8 million, to be funded by the firm’s D&O insurance.

The agreements can include presumptions in favor of indemnification and provide for “fees on fees” (that is, indemnification of fees incurred to enforce indemnification rights).

An indemnification agreement can also provide an added layer of protection against unilateral amendment or rescission of indemnification rights.

The memo notes that “many boards of directors seek comprehensive analyses of their companies’ D&O insurance programs, undertaken with the assistance of experts, at the time of the initial purchase or renewal of D&O insurance coverage.” My recent discussion of advancement and indemnification issues can be found here.

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