Chapter 7 - Executive Risk

Question 1

Common Law

Answer 1

How the law has been applied in the past. Refers to prior precedents and/or rulings by judges and juries.

Question 2

Civil Law and the kinds

Answer 2

Protecting the interests of society are protected by criminal law, the interests of individuals are protected by civil law. 1. Torts Unintentional & Intentional; Strict Liability 2. Contracts 3. Statutes

Question 3

Torts

Answer 3

Private or civil wrong, other than a breach of contract, for which the courts will an action (lawsuit for damages).
1. Unintentional Torts - an unintended accident that leads to an injury, property damage or financial loss. The person who caused the accident is considered negligent.

Question 4

Elements of negligence

Answer 4

The failure to exercise a degree of care which a reasonably prudent person (bystander) would exercise under the same circumstances:
- A duty owed (by defendant to plaintiff)
- A breach of that duty
- Causation (the breach of duty must be aproximate cause of injury in an unbroken chain of events)
- Damages resulting from the injury
All 4 elements must be proven establish negiligence.

Question 5

Intentional Torts

Answer 5

When an individual commits an act with the intention of causing injury, damages or a violation of another person’s rights
Examples of intentional acts:
- Libel/slander
-Assault/battery
-Wrongful detention
-Discrimination

Question 6

Strict Liability

Answer 6

LIability directed by law (statute or common law) without regard to the intentiona; of the offender’s actions. Strict liability shitfts the burden of proof; it creates a rebuttable presumption that the defendant must overcome: Selling alcohol to minors.

Question 7

Damages (remedy for tort actions awarded by the court)

Answer 7

Compensatory - to make plaintiff whole
Punitive
Fines/penalties

Question 8

Injunction (remedy for tort actions awarded by the court)

Answer 8

A requirement to refrain from doing an act, an inforcement of performance, or an obligation stated in a contract:
- Temporary restraining order
- Peace bond
- Cease and desist order

Question 9

Contracts and 4 requirements

Answer 9

The law of contracts governs the performance of a promise between parties:
Requirements
- Competant parties
- Agreement or assent
- Legal consideration (exchange of values)
- Legal purpose

Question 10

Remedies for a breach of contract or failure to performances

Answer 10

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 contracts
Performance - enforced compliance with contractual promises

Question 11

Statutes

Answer 11

Enactments of legislative and administrative bodies (state and federal) that impose responsibility for certain actions or omissions
Examples of statutes relevant to directors and officers:
-patent infringement, copyright and trademark
- False Claims Act: Fraud in government contracts
- Tax withholding
- Business incorporation acts
- State business judgment rules
- Mirroring laws

Question 12

Examples of Statute exposures

Answer 12

Fines, Penalties & Injunction

Question 13

Regulatory liability exposures

Answer 13

1. Mandatory compliance examples: Licensing, Osha, EPA
2. Voluntary regulations - rules created by professional, trade and other organizations to internally govern their members: codes of conduct & Professional Standards

Question 14

Private Law

Answer 14

Organizational charters and bylaws - corporate rules that define what the executives can and cannotdo and that carry the forcce of law. Violations of these laws are ultra vires acts, or acts beyond powers of the organization: Amount of the loss: circumstances of the event, nature and severity of the damage, degree of fault by one or more parties, applicable law, judge’s or jury’s decision.

Question 15

Common Law Duties of Directors & Officers

Answer 15

Obedience, Loyalty, duty of care, disclosure

Question 16

Obedience

Answer 16

Actions conform to legal standards and requirements.

Question 17

Loyalty

Answer 17

Undivided and unselfish loyalty with no conflict between organizational duty and self-interest.

Question 18

Duty of Care

Answer 18

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

Question 19

Disclosure

Answer 19

Disclosure of any interest in any transaction where the director could be a beneficiary

Question 20

Control Methods to Manage D&O Exposures

Answer 20

Board Composition
1. Who is on the board
2. Should independent members be appointed?
3. What is the size of the board?
4. Who evaluates board members?
5. Do members have term limits?
6. What education is provided for board members?
Meeting Procedural Actions
Preparing - scheduling, notifications, length of the meetings, board books
2. During - formality, presentations, conduct, attendance
3. Documentation - complete minutes, include reference documents, review of the minutes by legal or RM, record of voting, clear language
4. Review actions with absent directors.
Delegation and Reliance Defense
1. When to delegate?
2. Types of delegation - management or committee?
3. Defense of reliance on professional advice.
Management of Conflicts of Interest
1. Avoid them
2. Even the appearance of a conflict of interest is bad
3. When you can’t avoid them, manage them
4. Use recusal when necessary
Risk Financing
1. The organization is bound to have claims
2. Purchase an insurance policy
3. set aside assets for funding.

Question 21

Business Judgment Rule

Answer 21

Importance
Single most powerful defense available to a director or officer that insulates them from liability and recognizes that not all diecisions will benefit the organization or its stakeholders or may even be unintentionally detrimental to the organization.
Key Elements
An all or nothing rule- each of the following 5 elements must be satisfied. Failure of even one of these key elements will result in the defense not being available to the directors and officers:
1. Business decision, not personal decisions
2. Disinterestedness
3. Due care - Following a defensible procedure
4. Good Faith - honesty and best efforts when dealing with others.
5. No abuse of discretion - a failure to take into proper analytical consideration the facts and law to a particular matter.

Question 22

Duties and responsibilities of fiduciaries

Answer 22

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 the ERISA standards and the plan documents.
4. Diversification - plan investments must be sufficiently diversified to minimize risk.

Question 23

Risk Control methods specific to fiduciary exposures

Answer 23

Same 5 elements of the business judgment rule that apply to directors and officers also apply to fiduciaries. There are additional control mechanisms that are specific to the fiduciary exposure.

Question 24

Fiduciary/Trustee Board Composition

Answer 24

Fiduciaries can’t have been convicted of certain criminal offenses. Under a Taft-Hartley Union plan, there must be an equal number of management and employee representative trustees.
1. Evaluation of fiduciaries more specifically includes:
a. Performance assessments of co-fiduciaries and outside consultants
b. system for identifying and investigating complaints
c. Administrative time and cost efficiencies
d. Investment performance

Question 25

Procedural actions for fiduciaries

Answer 25

There are sponsor oversight responsibilities to establish:
1. Operating procedures
2. Procedures for evaluation of reports, compensation records, outside benefit records, participant entry and exit
3. Procedures for secure data transmission and storage (under HIPAA and other statutes)

Question 26

Delegation for fiduciaries

Answer 26

1. Delegation of defense not available unless the plan documents specifically authorize delegation
2. Delegate must meet ERISA requirements and be adequately capable of fulfilling delegated duties
3. Delegation must be to a registered investment advisor, bank or qualified insurance company with acknowledgement of fiduciary status; delegation transfers fiduciary liability, but fiduciaries are still responsible for negligent selection and supervision
4. Fiduciaries must be willing to revoke the delegation of responsiblity.

Question 27

Management of conflicts of interest for fiduciaries

Answer 27

1. Fiduciary employed by plan sponsor:
   a. inherent conflicts of interest include conflicting duty of loyalty to employer, fiduciary duty to plan and self-interest in plan benefits
   b. requires exercise of extraordinary care in making decisions that are fair to participants and the plan
   c. Requires documentation of provable fairness
   d. Special problem areas
   1) Sponsor fails to contribute to plan
   2) Stripping of assets or termination of an overfunded plan

Question 28

Risk Financing for fiduciaries

Answer 28

Administrative or clerical actions can be insured with an employee benefit errors and omissions endorsement, but managerial actions can only be insured on a fiduciary liability policy. Endorsement also exists for fines and penalties imposed by ERISA.