A Chubb Special Report: Outside Position Liability Loss Prevention
By: Dan A. Bailey, Esq.
Many companies frequently request their directors, officers, and employees to serve other organizations in various capacities (an “Outside Position”). These requests by a company can arise in numerous situations, including the following:
- The company wishes to support a charitable organization by placing a representative on the charity’s board of trustees;
- The company has a significant investment in another company and wishes to actively oversee the affairs of that portfolio company by having a representative serve on the portfolio company’s board of directors;
- The company is a member of a trade association and wishes to be proactively involved in the association’s activities by placing a representative on the association’s working committees;
- A parent company wishes to actively manage or oversee a subsidiary company by designating a representative to serve as either a director or officer of the subsidiary;
- In order to encourage good stewardship and develop leadership skills, the company encourages its employees to be active volunteers and leaders in community organizations.
Although requesting its directors, officers, and employees to serve in these types of Outside Positions can be beneficial to both the company and the individual, this practice can create potentially significant liability exposures for both the individuals serving in the Outside Position and the company that requests the individual’s service in the Outside Position. These exposures are some of the most commonly overlooked personal and entity exposures within a company.
Service in an Outside Position is troublesome not only because of the numerous liability exposures faced by any director or officer, but also because of several liability theories uniquely applicable to Outside Position claims. In addition, with increasing frequency, plaintiffs are realizing that persons who serve in Outside Positions can be lucrative litigation targets since they may have access to indemnification from the company that requested them to serve in the Outside Position in addition to indemnification from the outside organization. Plus, in some situations a direct claim may be asserted against the requesting company based on its ability to influence the person serving in the Outside Position. As a result, plaintiffs often now investigate whether a defendant director or officer is serving in that position at the request of another company and, if so, pursue the additional legal claims and deep pockets that are implicated by that individual’s service in the Outside Position.
Difficult and surprising indemnification issues arise with respect to financially protecting persons who serve in Outside Positions. These issues should be identified and addressed when the outside service commences, not when allegations of wrongdoing are made, since it may be too late then to provide the maximum protection. When evaluating and planning for Outside Position indemnification, the indemnification rights and obligations of both the outside entity and the requesting company must be considered.
When designing an appropriate Outside Position indemnification provision, a company must balance the legitimate interests of the company to avoid unintended indemnification liabilities in light of the broad Outside Position indemnification statute, on the one hand, and the legitimate desire of the person serving in the Outside Position to obtain maximum financial protection for that outside service, on the other hand. Ultimately, that balance may be best achieved by implementing a formalized Outside Position Program, and linking the corporation’s Outside Position indemnification obligations in its internal indemnification documents to that formal Outside Position Program.
Before accepting an Outside Position, a copy of the outside entity’s D&O liability insurance policies should be requested and the assistance of a knowledgeable advisor should be utilized to evaluate the quality of the coverage and the adequacy of the limits of liability afforded by that insurance program. Equally important is the D&O liability insurance coverage afforded by the requesting company. Absent special provisions in the requesting company’s D&O policies, claims against directors and officers for wrongful acts while serving in an Outside Position are not typically covered under the requesting company’s policy since service in the Outside Position would be in an uninsured capacity. However, many, but not all, D&O policies include special provisions that extend coverage for insured persons who serve in certain types of Outside Positions under certain circumstances. The scope of coverage afforded by those provisions can vary greatly among policies.
Companies should be mindful to manage the risks associated with their directors, officers, and employees serving at the company’s request in an Outside Position with another entity. That service can create unique and acute liability exposures for the persons serving in the Outside Position as well as for the requesting company. However, those exposures can be managed if prudent procedures are implemented and if appropriate indemnification and insurance protections are maintained. Please contact your Seitlin insurance consultant for assistance in assuring that you have the correct provisions in place for directors, officers, and employees serving in “Outside Positions”.
For more information, contact:
Eric Donahoe
COO & Chief Marketing Officer
Tel: 305.513.5958
Email: edonahoe@seitlin.com
