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Retired Directors Liability Policies

Retired Directors Liability Policies

Definition

Insurance policies designed to cover individuals who at one time served yet are now no longer serving on a corporate board of directors. Directors are exposed to claims long after their tenure on a board has ended. In fact, the statute of limitations for such claims under the Sarbanes-Oxley Act (SOx) of 2002 is 5 years. Standard directors and officers (D&O) liability policy forms affirmatively cover retired directors, and for this reason, retired directors policies always apply as excess over the organization's policy. However, retired directors policies may still be needed because at the time a claim is made, (1) the parent company may not have a policy in force; (2) even if a policy is in force, the policy's coverage limits may be exhausted or inadequate; or (3) the current policy may exclude a claim for which coverage is not excluded under the retired directors policy. Another advantage of retired directors policies is that the retired director is the sole insured under such policies. As a result, (1) the insurer will focus its efforts on defending the insured's interests, which sometimes conflict with those of existing board members; and (2) the insured does not share policy limits with other persons. For example, directors who sat on the boards at Enron and WorldCom were required to use their personal assets to settle lawsuits filed against them because the corporations they served were financially unable to provide indemnification due to the companies' insolvencies and the exhaustion of their policy limits. More recently, five former directors of Just for Feet paid a total of $41.5 million in conjunction with their service at the company, an amount that exceeded the combined Enron and WorldCom director-funded settlements. In these situations, retired directors liability policies would likely have eliminated, or at least vastly reduced, the amounts of personal director contributions that were required.

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