Business Insurance magazine recently carried a Reuters report in which PricewaterhouseCoopers' Chief Executive Samuel DiPiazza called for a cap on the liability exposure of directors. He discussed the ease with which D&O suits can be instigated and the difficulties in recruiting directors that corporations are beginning to face as a result.

I think that Mr. DiPiazza has a point, at least for outside directors. Executives who spent their careers managing other companies can provide a wealth of knowledge, experience, and insight on a board of directors. Why, however, would a successful businessperson want to risk his/her entire life savings to serve on a corporate board? The compensation would rarely be adequate to cover the risk. As an example, one of my best friends was CEO for a billion dollar service business until he retired. While he could contribute greatly to any corporate board, he is unwilling to take the risk.

On the other hand, our legal liability system does provide needed checks and balances that motivate people to perform their duties responsibly. The pendulum swings back and forth, as we saw with WorldCom and Enron, but our system depends on the liability risk to "keep people honest."

Regardless, I think some type of cap on the liability of outside directors makes sense. Since D&O insurance is available, it could be a high number, perhaps $1 million or more. It might also have an exception or two, such as instances where illegal acts or financial self-dealing are proven against the director. It also might not apply to corporate officers and inside directors. A system such as this should make it much easier to recruit high quality people to corporate boards. The only question is whether removing the threat will also significantly reduce the diligence of their oversight. I don't think it would.

What do you think? Have you seen situations where the current liability situation has made it difficult to recruit quality board members? Would it make sense to cap director liability? If so, should it apply only to outside directors? [See reader responses.]

We've recently updated our popular Glossary of Insurance and Risk Management Terms. The tenth edition interprets more than 2,800 terms and nearly 900 abbreviations for risk professionals and their assistants. To learn more or purchase copies for your clients or staff visit this site.

Thank you for subscribing to IRMI Update and for recommending it to your friends and colleagues.

Have a great day.

Jack

Jack P. Gibson, CPCU, CRIS, ARM
President
IRMI

Risk Tip

Don't Let Environmental Liability Claims Become Bottomless Money Pits—Pay-for-performance contracting for environmentally impacted properties is an ideal way to minimize spending; to cap the total claim payout; and to assure cleanup cost controls are built into your contracts. If you answer "no" to four or more of the questions below, you should consider pay-for-performance contracting:

Is there a firm commitment by the cleanup contractor to reach liability closure by a specific date?
Is there a firm commitment by the cleanup contractor to reach liability closure within an established maximum budget?
Will your cleanup contractor or consultant "put their money on the table" by tying your claim closure to them receiving full payment?
Will your consultant or contractor agree to a "not to stop" approach to cleanup by committing resources and effort until regulatory closure is achieved?
Can your consultant or contractor provide examples and references for specific projects that have reached regulatory closure?
Does your services contract align your goals and the goals of the contractors and consultants ("pay-for-performance"), or do contractors get paid more the longer it takes to complete your project ("time and materials")?
Is the extent of the environmental liability fully defined?
Have the regulatory cleanup goals been identified?
Have you hired consultants to perform more than one "site investigation"?
Are the prices you are quoted an "all-inclusive" price, or are some necessary tasks excluded, only to be added on later (cost-modification)?
Has your consultant or contractor considered financing and accounting options that match your annual claims paid or cash flow goals?
Will you realize a return on investment (ROI) or are you overspending on noncleanup tasks and costs?

By: Ron Adams, P.E., Sr. VP Client Services
Environmental Remediation and Financial Services, LLC
Sea Girt, NJ

www.erfs.com

Suggest a Risk Tip. Send us a practical tip (less than 300 words) for identifying and managing risks, buying insurance, managing claims, or filling gaps in insurance coverages. Submit your tips. We'll acknowledge your contribution as we did for Ron.

What's New in Your IRMI Library

We have recently updated a number of the reference manuals in the IRMI library and published new issues of The Risk Report and Captive Insurance Company Reports. To make sure you don't miss any of this new information take 30 seconds to scan the "What's New" summary page.

For IRMI Online and Print Subscribers.

For SilverPlume Sage subscribers.

New Expert Commentaryy

There are now 781 risk management and insurance articles on IRMI.com. Below you'll find summaries of some recent additions with links to the articles.

Business Interruption Claims and September 11—Kevin Merriman discusses two recent cases dealing with airlines' claims for business interruption losses.
Key Personnel Protection (KPP) at the Enterprise Level—David Nicastro provides a proactive approach to protecting an organization's key personnel.
Wrap-Ups: Back to Basics—Rich Resnick explains what a wrap-up is, the benefits of forming one, and the size requirements.
New ISO ACV Definition and California Statute—ISO responds to claims handling difficulties caused by recent California statutory changes. Barry Zalma explains.
Marketing Health Insurance through "Trusteed Groups"—Tim Ryles explains advises consumers to avoid the purchase of such products.
Deming's Point #9 as Applied to the Insurance Industry—John Pryor discusses Dr. W. Edwards Deming's ninth principle: "Break down barriers between staff areas."
Stuck in the Middle—The Reinsurance Intermediary—Working with the right intermediary is key to a profitable reinsurance arrangement. Larry Schiffer explains.

Updated Tenth Edition of the IRMI Glossary Now Available

IRMI's best-selling Glossary of Insurance and Risk Management Terms will give you quick answers to questions involving unfamiliar terminology used in insurance specifications, proposals and risk management reports. This updated tenth edition defines more than 2,800 terms, plus 860 frequently used abbreviations and acronyms. You'll also find cross-references to specific sections in your IRMI manuals. Support personnel will find the IRMI Glossary useful as both a practical manual and training guide. Call Client Services at (800) 827-4242 and ask about quantity discounts, or order online.

Expert Commentator Hits the 25-Article Mark

Larry Schiffer writes the Reinsurance Law column for IRMI.com and has contributed 25 articles since March 2000. He is a partner with LeBoeuf, Lamb, Greene & MacRae, L.L.P., in New York City and practices in the areas of commercial, insurance, and reinsurance litigation, arbitration, mediation, and regulation. He also serves as a mediator for the mandatory commercial mediation program of the U.S. District Court for the Southern District of NY and for the NY Supreme Court Commercial Division, Alternative Dispute Resolution Program. He is a popular speaker and author on reinsurance litigation and other insurance topics. See a list of his IRMI.com articles, including his most recent March 2006 commentary.

To learn more about Mr. Schiffer and his practice, see his full biography.

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IRMI Update—Issue #134

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