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The Exposures
Added to the director’s responsibilities and obligations, is the statistical information:
  • Frequency has more than doubled1
  • A little less than a fifth of all public companies have been sued1
  • Severity has more than tripled over the past 7 years1
  • Risk of restatement has come close to doubling over the past 6 years; a little less than 14.6% of all public companies have restated2
  • Risk of bankruptcy has almost doubled over the past 6 years; and about one tenth of all public companies have declared bankruptcy2
  • Consider the following staggering facts as reported by Securities Class Action Alert, that in 2000 cash settlements more than doubled year over year. The average cash settlement was almost 60% more than the previous year.
Sources:
    AIG, Chubb Insurance, BankruptcyData.com, Huron Consulting Group, National Economic Research Associates; Securities Class Action Alert; relative to the situation in the US, which are the main influence in market terms
  1. Based on statistics for the period 1996 to 2002.
  2. Based on statistics for the period 1997 to 2002.
All of these factors leave no doubt the directors' and officers' face a greater liability exposure than in the past. The effects are also felt by the number of potential board members that turn down a board position because they feel that the risk is now too great. Many of those who do accept a position on a board, state that D&O Insurance is a very important factor in their decision to join a particular board.

How can the directors' be protected?

Some assistance for the directors' and officers' of a company in protecting themselves against personal liability would come from:
  1. The implementation of a risk management program that would identify the corporation’s risks/exposures; assess the cost of such risks and put into place controls and/or loss prevention methods for the Directors, Officers and Corporation.
  2. The transfer of the exposure to an insurance company.