NEW PRODUCT ANNOUNCEMENT
On September 18, 1992, A.C.E. Insurance Company (Bermuda) Ltd., announced the introduction of its Executive Compensation Insurance program to protect executives against the loss of their unfunded benefits. This insurance program is intended to respond to the needs of executives who are foregoing current cash compensation and accepting an array of benefits payable in the future. The insurance will provide first dollar coverage for a multitude of plans ranging from deferred compensation and pension benefits to complex long-term incentive compensation and equity plans.
A.C.E. is pleased to bring its standards of an excellent claims paying record and a strong and unassailable balance sheet to the Executive Compensation Insurance program. This should permit A.C.E. to expand its long-term close relationship with current policy-holders and to develop new client relationships.
EXECUTIVE COMPENSATION INSURANCE
Features:
- Insures against a failure to receive benefit on the scheduled payment date
- Long-term non-cancelable policies of 10 years
- Policies owned by the executives
- Payments are made beyond the policy term if the loss occurs during the policy term
- No need for the executive to sue the employer before payment by A.C.E.
- Insurance is not voided by misrepresentations or actions of other executives or of the employer
- Available to executives of companies from giant multinationals to young rapidly growing concerns
- Program capacity of no less than $150,000,000 nominal values
The insurance is an efficient - and cost effective - way to assure a company's executives that their retirement or incentive plans will be honored by their employer. The policies accomplish this objective without the need for the advance funding of the benefits to the detriment of the corporation and its shareholders. The Martin E. Segal Company has called the policies, "the most cost efficient way for companies to secure senior executives nonqualified benefits," and has estimated that the policies can be 34% more cost efficient than providing benefits through a rabbi trust and 42% more cost effective than other alternatives. The policies are not life insurance or annuity products.
The insurance provides executives and directors with protection against the failure to receive specified executive compensation benefits on the scheduled payment date. The concept of the insurance is straightforward. If the company fails to pay the promised benefit, in certain circumstances A.C.E. steps into the shoes of the company and makes payments. Of course, if an insured executive's benefits are forfeitable under the plan, no claims could be made under the insurance if such forfeiture provision becomes operative. This is set forth in an understandable policy form.
A.C.E. will offer claims-made policies with terms up to ten (10) years. Once a loss has occurred during the policy term, benefits are paid by A.C.E. whenever they are due under the plan - even if the due date is after the expiration of the policy. Rolling one-year extensions, and increases in coverage for new benefits and new insureds, would be made on the policy anniversary date.
An overall limit of liability is specified in each policy. The available program capacity per company is no less than US$150,000,000 of insured benefits (in nominal dollars). A policy generally provides a specific dollar amount of insurance for each individual's accrued benefit under a plan as of a given year. This amount is chosen by the company or the insureds and, typically, is stated in nominal dollars.
ELIGIBLE COMPANIES
A.C.E. will offer this coverage to executives of a broad range of "investment grade" and comparable companies in the U.S. as well as multinational corporations in the Fortune 1000 Industrial and Service ranking. A.C.E. is also prepared to consider submissions with respect to plans of major "not-for-profit" organizations.
INSURABLE PLANS
The types of compensation arrangements which may be insured can e extremely varied. Some of the more common types of plans are:
- Excess 415 Pension Plan. This type of plan provides and additional pension benefit in respect of salary above the indexed statutory maximum of $112,200.
- SERP. A SERP, or "Supplemental Executive Retirement Plan," provides executives with a retirement benefit in respect of non-salary compensation, i.e., bonuses, deferred compensation, salary above the Section 416 $200,000 maximum, etc., which also cannot be taken into account for qualified pension plan purposes.
Deferred Compensation. A deferred compensation plan offers executives the opportunity to defer the receipt of, and the payment of income taxes on, current cash compensation, bonuses, directors' fees, etc. Generally, interest - at above market rates - is credited to the deferred amounts. The deferral and interest are then payable at retirement or a predetermined future date.
Equity Plans. Equity and equity-like instruments are frequently used as a substitute for cash compensation. This may be in the form of actual shares of restricted stock, phantom shares, stock options or stock appreciation rights. These offer a non-cash means to compensate executives and directors while matching the increase in an executive's wealth with that of corporate shareholders.
Other Benefits. Other insurable benefits include Mezzanine Pension Benefits, Supplemental Life Insurance Plans, Executive or Retiree Medical Plans, Vacation Plans and other non-ERISA perquisite plans.
PROPOSED D&O TORT REFORM
Criticism of the proliferation of perceived meritless litigation against directors and officers frequently echoes throughout the board rooms and executive offices of corporate America. However, those complaints are infrequently transformed into constructive proposals for reform. A rare opportunity now exists to support proposed legislation which, if enacted, would substantially reduce securities strike suits against U.S. directors and officers.
On August 11 and 12, 1992, H.R. 5828 and S. 3181 were introduced in the U.S. House of Representatives and Senate, respectively. The two bills, which are substantially but not entirely similar, represent a bipartisan effort to curb frivolous, meritless securities fraud lawsuits. The proposed findings of Congress set forth in the legislation include the starling conclusion that in the past three years, issuers of one out of every twelve stocks traded on the New York Stock Exchange have been sued for securities fraud. One of the stated purposes of the legislation is to ensure that fewer frivolous securities fraud suits are filed for the primary purpose of coercing nuisance settlements from innocent defendants.
The following summarizes some of the more important provisions of S. 3181, which would adopt the Securities Private Enforcement Act of 1992 ("Act"):
A. Statute of Limitations
The Act would create a new, longer statute of limitations applicable to all private rights of action under the Securities Exchange Act of 1934 ("1934 Act"). As a result of a recent Supreme Court case, such suits must be brought within three years after the date on which the violation occurred or one year after the date on which the violation was discovered or should have been discovered through the exercise of reasonable diligence. The proposed Act would change the result of the Supreme Court case and lengthen those periods to five years and two years, respectively.
B. Shifting of Attorney Fees and Expenses
The proposed Act would require the losing party in any private right of action under the 1934 Act, to pay the reasonable attorney fees and expenses of the prevailing party unless the court determines that the position of the losing party was substantially justified. This award of fees and expenses could occur by virtue of the court granting a motion to dismiss, a motion for summary judgment or following a trial on the merits. In the court's discretion, the award may be against either the losing party or the losing party's attorney.
C. Proportionate Liability
Currently, Section 10(b) and most other provisions of the 1934 Act create joint and several liability and therefore any one director, officer or other violator can be held liable for all of the damages incurred by the claimant even though other parties are equally or more culpable. The proposed Act would eliminate this joint and several liability in any implied private action under the 1934 Act unless the defendant is found to have engaged in knowing, not just reckless, securities fraud. In those cases where joint and several liability is eliminated, the trier of fact must allocate liability among the plaintiff, each defendant and each other person alleged to have caused or contributed to the harm alleged by the plaintiff. Each defendant would be liable only for that portion of the total damages allocated to that defendant. No indemnification or contribution between defendants would be allowed unless permitted by a contractual relationship.
D. Elimination of Abusive Practices Under the 1934 Act
The proposed Act would:
- Prohibit a class representative who prosecutes a class action from receiving any premium or extra recovery in a settlement or judgment other than reasonable compensation attendant to serving in the representative role.
- Permit a court to disqualify counsel in a class action suit under the 1934 Act if the counsel owns or has a beneficial interest in securities that are the subject of the litigation.
- Prohibit brokers and dealers from accepting remuneration for assisting an attorney in obtaining the representation of any member of the class period.
- Prohibit funds disgorged as a result of a SEC action, for example under Section 16 of the 1934 Act, to be paid for attorney fees and expenses incurred by private parties seeking a share of the disgorged funds, unless ordered by the court.
These Bills have been referred to the Senate Committee on Banking, Housing and Urban Affairs and the House Committee on Energy and Commerce. It appears unlikely that the legislation would be enacted in this election year and it may be shaped in part by the changes in Congressional delegations as well as any changes in the Administration. However, the pendency and debate of the Bills provide a unique forum for corporate America to express its dissatisfaction with the current securities fraud litigation climate. Although broad-based and vocal support of this legislation will not necessarily result in the enactment of any reform, failure by U.S. corporations to participate in this debate will almost certainly doom any reform efforts both today and for the foreseeable future.
BANK OF THE WEST: UNANSWERED QUESTIONS
In recent years, corporations and their D&Os have sought with increasing frequency coverage under the "advertising injury" section of their CGL policy when sued for securities fraud and similar wrongdoing. The insureds argue that such claims allege "unfair competition", which is included within the definition of "advertising injury" in the standard ISO policy forms pre-dating 1986. Many of those and similar policy forms are still in use today.
In a long awaited and much anticipated recent opinion, the California Supreme Court had the opportunity but largely failed to give D&Os and their CGL insurers guidance as to the existence of advertising injury coverage in, for example, garden variety securities claims. In Bank of the West v. Superior Court, 2 Cal 4th 1254 (July 30, 1992), the court ruled that claims under the California Unfair Business Practices Act were not claims for "unfair competition" and therefore not insured under the Banks' CGL advertising injury coverage.
However, contrary to everyone's expectations, the opinion did not answer the question - what is unfair competition for purposes of the advertising injury coverage. The court discussed but did not adopt either one of two alternative interpretations (i.e. unfair competition constitutes only "palming off" one's goods as those of a competition, or it includes almost any unfair, deceptive, unreasonable or illegal business practice perpetrated on the public). Instead, the court ruled that the California Unfair Business Practices Act does not authorize an award of "damages" and thus such a claim does not trigger the CGL's insuring clause, which requires the insurer to pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of advertising injury.
If the claim for which CGL coverage is sought is premised on alleged violations of the federal securities laws or other statutes which authorize an award of damages, the court's basis for finding no claim for unfair competition and thus coverage appears inapplicable.
The court cited as an alternative basis for no coverage the lack of causation between the defendants' alleged unfair competition and plaintiffs' advertising injury. This basis for denial also appears inapplicable, for example, in a D&O securities claim where the purported "advertising" is directed to the plaintiff investors.
Because of the questionable applicability of the Bank of the West case in may types of D&O cases, heightened interest is now being given to a related case pending before the Ninth Circuit Federal Court of Appeals. In Keating v. National Union Fire Insurance Co., 754 F. Supp. 1431 (C.D. Cal. 1990), the question being considered in whether bondholders' securities law claims against D&Os are insured by the CGL advertising liability coverage. That case may provide to D&Os and CGL insurers the guidance that the Bank of the West case was expected, but failed to afford.