7. Executive Risk

Question 1

Types of Law

Answer 1

• Common Law - refers to precedents and/or prior rulings by judges and juries
• Civil Law - while the interests of society are protected by criminal law, the interests of individuals are protected by civil law
• Regulatory Liability - Mandatory compliance & Voluntary Regulations
• Private Law - Organizational charters and bylaws

Question 2

Types of Law - Civil Law includes the following

Answer 2

1. Torts – a tort is a private or civil wrong,
2. Contracts – the law of contracts governs the performance of a promise between parties
3. Statutes – enactments of legislative and administrative bodies (state and federal)

Question 3

Civil Law - Torts

Answer 3

1. Unintentional – an unintended accident that leads to injury, property damage or financial loss. The person who caused the accident is considered negligent.
2. Intentional – when an individual commits an act with the intention of causing injury, damages or a violation of another person’s rights
3. Strict Liability

Question 4

Unintentional Tort - Describe Negligence

Answer 4

Negligence is the failure to exercise that degree of care which a reasonably prudent person would exercise under the same circumstances.

The elements of negligence are:

1. A duty owed (by the defendant to the plaintiff)
2. A breach of that duty
3. Causation – the breach of duty must be the proximate cause of the injury, in an unbroken chain of events
4. Damages resulting from the injury

Question 5

Intentional Acts - Examples

Answer 5

Examples of intentional acts:

• Libel/slander
• Assault/battery
• Wrongful detention/false imprisonment
• Discrimination

Question 6

Strict Liability

Answer 6

• Keeping wild animals–
• Selling alcohol to minors
• Ultra‐hazardous/inherently dangerous activities

Question 7

Remedies for Tort Actions awarded by court

Answer 7

Financial Damages - Compensatory, Punitive, Fines

Injunction

Question 8

4 Requirements for an enforceable contract

Answer 8

1. Competent parties
2. Agreement or assent
3. Legal consideration (exchange of values)
4. Legal purpose

Question 9

Remedies for a breach of contract

Answer 9

Damages – compensatory, punitive or liquidated

Reformation –change the contract to better reflect the intentions of the parties

Injunction – a requirement to refrain from doing an act, an enforcement of performance or an obligation stated in contract

Performance – enforced compliance with contractual promises

Question 10

Civil Law - What are Statutes

Answer 10

legislative and administrative bodies(state and federal) impose responsibility actions or omissions

Question 11

Examples of statutes relevant to directors and officers

Answer 11

• Infringement of patent, copyright and trademark
• Tax withholding
• Business incorporation acts
• Mirroring laws, e.g., COBRA

Question 12

Types of Law - Regulatory Liability Exposures

Answer 12

1. Mandatory compliance – examples

• Licensing
• OSHA
• EPA

1. Voluntary regulations – rules created by professional, trade and other organizations to internally govern their members
   
   1. Codes of conduct
   2. Professional standards

Question 13

Types of Law - Private Law

Answer 13

Organizational charters and bylaws – corporate rules that define what the executives can and cannot do and that carry the force of law. Violations of these laws are ultra vires acts, or “acts beyondthe powers of the organization.“

Financial Liability is determined by the following:

1. Circumstances of the event
2. Nature and severity of the damage or injury
3. Degree of fault by one or more parties
4. Applicable law
5. Judge’s or jury decision

Question 14

Common Law Duties of Directors and Officers

Answer 14

Obedience - actions conform to legal standards and requirements

Loyalty - undivided and unselfish loyalty with no conflict between organizational duty and self‐interest

Duty of Care - competent oversight of the organization in a deliberate and knowledgeable manner using the standard of care of a reasonably prudent person in a similar position in similar circumstances

Disclosure - disclosure of any interest in any transaction where the director or officer could be a beneficiary

Question 15

Managing D&O Exposures Control Methods

Answer 15

• Board Composition
• Management of conflicts of interest
• Risk Financing

Question 16

Managing D& O Exposures Control Methods - Board Composition

Answer 16

1. Who is appointed?
2. Should independent members?
3. size of a board?
4. term limits?

Question 17

Managing D&O Exposures - Procedural Actions Meetings

Answer 17

1. Preparing for the meeting
   
   1. Scheduling
   2. Notification
   3. Duration of meeting–
   4. Board books
2. During the meeting
   
   1. Formality – Robert’s Rules of Order or a derivation of those rules
   2. Presentation of information
   3. Conduct
   4. Guest attendance – key management, outside advisors, employees, shareholders, etc.
3. Documentation
   
   1. Accurate and complete minutes – precisely record matters considered, discussed and voted upon
   2. Identification of documents incorporated by reference or attached to minutes
   3. Precise record of results of any vote taken including identification of dissenting and abstaining directors
   4. Avoid imprecise wording, inflammatory comments or ambiguous language
   5. Pre‐finalization review of minutes by directors and legal counsel or by risk manager
4. Opportunity for absent directors to review meeting actions taken and to record their support or dissent

Question 18

Management of conflicts of interest

Answer 18

1. Avoiding conflicts of interest is central to the common law duty of loyalty
2. Conflicts of interest
3. Conflicts of interest should be avoided as much as possible, but whenever they cannot be avoided, they must be managed
   
   1. Unavoidable conflicts can be managed by:
      
      1. Disclosure to directors
      2. Abstention from discussion
      3. Abstention from voting
4. Recusal (abstention) is used when a board member has a disqualifying conflict

Question 19

Business Judgement Rule - Single most powerful defense - All or Nothing Rule

Answer 19

• Business Decision
• Disinterestedness
• Due Care
• Good Faith

Question 20

Fiduciary Liability - Duties and responsibilities

Answer 20

1. Prudence – like D&Os, fiduciaries must act as reasonably prudent persons in similar circumstances using the same level of care, skill and diligence
2. Loyalty –Actions on behalf of the plan must be solely for the benefit of the plan participants
3. Adherence – must adhere to ERISA standards and the plan documents
4. Diversification – plan investments must be sufficiently diversified to minimize risk

Question 21

Methods to Managing Fiduciary Exposures

Answer 21

• Board Composition
• Procedural Actions
• Delegation
• Management of conflicts of interest
• Risk Financing