7. Executive Risk Flashcards
Types of Law
- 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
Types of Law - Civil Law includes the following
- Torts – a tort is a private or civil wrong,
- Contracts – the law of contracts governs the performance of a promise between parties
- Statutes – enactments of legislative and administrative bodies (state and federal)
Civil Law - Torts
- Unintentional – an unintended accident that leads to injury, property damage or financial loss. The person who caused the accident is considered negligent.
- Intentional – when an individual commits an act with the intention of causing injury, damages or a violation of another person’s rights
- Strict Liability
Unintentional Tort - Describe Negligence
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:
- A duty owed (by the defendant to the plaintiff)
- A breach of that duty
- Causation – the breach of duty must be the proximate cause of the injury, in an unbroken chain of events
- Damages resulting from the injury
Intentional Acts - Examples
Examples of intentional acts:
- Libel/slander
- Assault/battery
- Wrongful detention/false imprisonment
- Discrimination
Strict Liability
- Keeping wild animals–
- Selling alcohol to minors
- Ultra‐hazardous/inherently dangerous activities
Remedies for Tort Actions awarded by court
Financial Damages - Compensatory, Punitive, Fines
Injunction
4 Requirements for an enforceable contract
- Competent parties
- Agreement or assent
- Legal consideration (exchange of values)
- Legal purpose
Remedies for a breach of contract
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
Civil Law - What are Statutes
legislative and administrative bodies(state and federal) impose responsibility actions or omissions
Examples of statutes relevant to directors and officers
- Infringement of patent, copyright and trademark
- Tax withholding
- Business incorporation acts
- Mirroring laws, e.g., COBRA
Types of Law - Regulatory Liability Exposures
- Mandatory compliance – examples
- Licensing
- OSHA
- EPA
- Voluntary regulations – rules created by professional, trade and other organizations to internally govern their members
- Codes of conduct
- Professional standards
Types of Law - Private Law
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:
- Circumstances of the event
- Nature and severity of the damage or injury
- Degree of fault by one or more parties
- Applicable law
- Judge’s or jury decision
Common Law Duties of Directors and Officers
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
Managing D&O Exposures Control Methods
- Board Composition
- Management of conflicts of interest
- Risk Financing
Managing D& O Exposures Control Methods - Board Composition
- Who is appointed?
- Should independent members?
- size of a board?
- term limits?
Managing D&O Exposures - Procedural Actions Meetings
-
Preparing for the meeting
- Scheduling
- Notification
- Duration of meeting–
- Board books
-
During the meeting
- Formality – Robert’s Rules of Order or a derivation of those rules
- Presentation of information
- Conduct
- Guest attendance – key management, outside advisors, employees, shareholders, etc.
-
Documentation
- Accurate and complete minutes – precisely record matters considered, discussed and voted upon
- Identification of documents incorporated by reference or attached to minutes
- Precise record of results of any vote taken including identification of dissenting and abstaining directors
- Avoid imprecise wording, inflammatory comments or ambiguous language
- Pre‐finalization review of minutes by directors and legal counsel or by risk manager
- Opportunity for absent directors to review meeting actions taken and to record their support or dissent
Management of conflicts of interest
- Avoiding conflicts of interest is central to the common law duty of loyalty
- Conflicts of interest
- Conflicts of interest should be avoided as much as possible, but whenever they cannot be avoided, they must be managed
- Unavoidable conflicts can be managed by:
- Disclosure to directors
- Abstention from discussion
- Abstention from voting
- Unavoidable conflicts can be managed by:
- Recusal (abstention) is used when a board member has a disqualifying conflict
Business Judgement Rule - Single most powerful defense - All or Nothing Rule
- Business Decision
- Disinterestedness
- Due Care
- Good Faith
Fiduciary Liability - Duties and responsibilities
- Prudence – like D&Os, fiduciaries must act as reasonably prudent persons in similar circumstances using the same level of care, skill and diligence
- Loyalty –Actions on behalf of the plan must be solely for the benefit of the plan participants
- Adherence – must adhere to ERISA standards and the plan documents
- Diversification – plan investments must be sufficiently diversified to minimize risk
Methods to Managing Fiduciary Exposures
- Board Composition
- Procedural Actions
- Delegation
- Management of conflicts of interest
- Risk Financing
