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the component that deals with representa-tion [a pledge of truthfulness] is going tobecome one of the most important parts of

determining if a carrier is going to rescindthe insurance at the time of loss.

NJBIZ: How are D&O policies changing?

Sobel: In the past, there was severabilitythe individual who signed the application

for the coverage could be treated separate-ly from the board of directors. So, if a CEOor president signed an application to get

the insurance but [knew about activities]of a criminal or fraudulent nature, the in-

surer would exclude that person from thecoverage but continue to defend the board

of directors. But one of the new policyforms that insurance companies are writ-ing now has a provision that says if the

CEO or president of the company has in-

Reprinted from May 26, 2003

NJBIZ: Todays corporate landscape in-

cludes terrorism, SARS, bankruptcies andshareholder lawsuits. Is the fear factorplaying a part in commercial premium

pricing?

Sobel: It depends on the line of insurance

and the sector of the economy. But, gener-ally, insurance pricing is beginning to sta-

bilize. In some lines, particularly in

workers compensation and select profes-sional liability policies, pricing will contin-

ue to rise at a profound rate.

NJBIZ: Two weeks ago, scandal-rackedTyco International paid Chubb $92 million

to keep its D&O coverage. Could such pay-ments become an industry trend?

Sobel: Its very unclear whats going on

there. What I can tell you is this: in publicand private D&O insurance placements,

Interview | Robert Sobel

Executives with

superior experience

are not prepared to put

their personal wealth

on the line.

Robert Sobel,46,managing director of Cook,Hall & Hyde in Fair-

lawn, serves as an insurance and risk adviser to wealthy individ-

uals and mid-sized technology companies. A string of widely

publicized corporate scandals has focused attention on the

once-obscure segment of the market known as directors and of-

ficers liability insurance (D&O). The cost of this coverage has

been soaring. Sobel talked with Associate Editor Marshall McK-

night about insuring an ever-growing range of corporate risks.

formation about a fraud, the entire board

of directors can be excluded from the cov-erage at the time of a claim.

NJBIZ: Are companies having a difficult

time finding directors these days?

Sobel: Because of the amount of scandalsfinancial restatements and bankruptcies

Fear and Loathing in the Boardroom

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directors and officers are more exposed

now than theyve ever been in the past.There is an intolerance on the part of

stockholders of a public company becauseof the amount of money theyve lost over

the last four years. Therefore, executiveswith superior experience are not preparedto put their personal wealth on the line for

those boards that have not received theproper guidance and training on how to

properly fulfill their roles.

NJBIZ: How has the insurance market re-

sponded to the increased exposure to high-level fraud?

Sobel:Certain insurers have come up witha personal D&O policy to insure a board

member for directors liability for each

board that the person sits onwhether itspublic, private or nonprofit. This product

has come into vogue. The cost is approxi-mately $3,000 to $5,000 per $1 million

worth of coverage. This is in excess of allavailable insurance that a company has in

force and will [apply] whether or not theinsurance for the underlying coverage isrescinded or the company goes bankrupt.

NJBIZ: Do officers and directors really un-

derstand their D&O coverage?

Sobel: I think that if you ask a corporate

board member to say what is truly coveredby their insurer, they would not be in a po-sition to properly respond to the extent of

coverage in force. That has led a number oflawyers, accountants and investment

bankers to start consulting services to

boards. On a retainer basis, these consul-

tants assist board members prior to boardmeetings by advising them on the nature

of the meeting and specific key points thatneed to be raised at the meeting. [They

also] review with them at the conclusion ofthe meeting what had transpired during it.

NJBIZ: Will such consultants become thenorm?

Sobel:Things have become so complex andaccountability so high. Its a very, very toughtask thats given rise to this business service.

Board members will go to a meeting and geta stack of papers. How can they properly

discuss the contents of reams of papers in-side of a week and approve them without

assistance and someone to guide them?

NJBIZ: What changes should companies

look for in their D&O policies?

Sobel: There are basically four things that

the buyer of public and private D&O cov-erage should [be aware of]. They are the fi-

nancial stability of the carrier, a reductionin [coverage] limits, an increase in cost ofthe layers of insurance and a reduction in

the capacity of the primary insurer.

NJBIZ: How can one determine the finan-cial stability of an insurance carrier?

Sobel: In the last four to six years, a num-ber of insurers writing D&O have left theindustry. The remaining companies, pri-

marily Chubb and AIG, continue to havean A.M. Best rating of A++. There are oth-

er rating agencies such as Standard &

Poors and Moodys. When considering the

purchase of insurance, stability is the firstthing to consider before price and before

terms and conditions, because you wantthe insurer to be there to be able to defend

and pay a claim.

NJBIZ: What is capacity?

Sobel: The availability of an insurer toprovide the limits of insurance in a policy

Historically, an excess carrier of D&O in-surance would not be touched becausemost of the claims would hit in the prima-

ry layer, or the burn layer, of coverageBut due to the volatility of the market-

place, the [size of claims] has becomemuch greater and therefore writing an ex-

cess layer is as much a challenge as writing

the primary insurance coverage.

NJBIZ: What is the difference between theD&O risk facing a public company com-

pared with a private one?

Sobel: The key difference is that a public

company faces the securities exposure re-garding the violation of securities laws thatwould not affect a private company.

NJBIZ: In general, what has changed in the

boardroom post-Enron?

Sobel:The demands on the board of direc-

tors have increased exponentially and at thesame time the D&O coverage they need hasbecome significantly more expensive

There is an increase in pricing and a reduc-tion of coverage at a time when its needed

most. Thats the definition of a crisis. s