Reprinted from May 26, 2003

Interview | Robert Sobel

Fear and Loathing in the Boardroom

Robert Sobel, 46, managing director of Cook, Hall & Hyde in Fair-
lawn, serves as an insurance and risk adviser to wealthy individ-
uals and mid-sized technology companies. A string of widely
publicized corporate scandals has focused attention on the
once-obscure segment of the market known as directors and of-
ficers liability insurance (D&O). The cost of this coverage has
been soaring. Sobel talked with Associate Editor Marshall McK-
night about insuring an ever-growing range of corporate risks.

NJBIZ: Today’s corporate landscape in-
cludes terrorism, SARS, bankruptcies and
shareholder lawsuits. Is the fear factor
playing a part in commercial premium
pricing?
Sobel: It depends on the line of insurance
and the sector of the economy. But, gener-
ally, insurance pricing is beginning to sta-
bilize. In some lines, particularly in
workers’ compensation and select profes-
sional liability policies, pricing will contin-
ue to rise at a profound rate.
NJBIZ: Two weeks ago, scandal-racked
Tyco International paid Chubb $92 million
to keep its D&O coverage. Could such pay-
ments become an industry trend?
Sobel: It’s very unclear what’s going on
there. What I can tell you is this: in public
and private D&O insurance placements,
“Executives with
the component that deals with representa-
tion [a pledge of truthfulness] is going to
become one of the most important parts of superior experience
determining if a carrier is going to rescind
the insurance at the time of loss.
are not prepared to put
NJBIZ: How are D&O policies changing?
Sobel: In the past, there was severability—
the individual who signed the application
their personal wealth
for the coverage could be treated separate-
ly from the board of directors. So, if a CEO on the line.”
or president signed an application to get
the insurance but [knew about activities] formation about a fraud, the entire board
of a criminal or fraudulent nature, the in- of directors can be excluded from the cov-
surer would exclude that person from the erage at the time of a claim.
coverage but continue to defend the board
of directors. But one of the new policy NJBIZ: Are companies having a difficult
forms that insurance companies are writ- time finding directors these days?
ing now has a provision that says if the Sobel: Because of the amount of scandals,
CEO or president of the company has in- financial restatements and bankruptcies,
directors and officers are more exposed
now than they’ve ever been in the past.
There is an intolerance on the part of
stockholders of a public company because
of the amount of money they’ve lost over
the last four years. Therefore, executives
with superior experience are not prepared
to put their personal wealth on the line for
those boards that have not received the
proper guidance and training on how to
properly fulfill their roles.
NJBIZ: How has the insurance market re-
sponded to the increased exposure to high-
level fraud?
Sobel: Certain insurers have come up with
a personal D&O policy to insure a board
member for director’s liability for each
board that the person sits on—whether it’s
public, private or nonprofit. This product
has come into vogue. The cost is approxi-
mately $3,000 to $5,000 per $1 million
worth of coverage. This is in excess of all
available insurance that a company has in
force and will [apply] whether or not the
insurance for the underlying coverage is
rescinded or the company goes bankrupt.
NJBIZ: Do officers and directors really un-
derstand their D&O coverage?
Sobel: I think that if you ask a corporate
board member to say what is truly covered
by their insurer, they would not be in a po-
sition to properly respond to the extent of
coverage in force. That has led a number of
lawyers, accountants and investment
bankers to start consulting services to
boards. On a retainer basis, these consul-
tants assist board members prior to board
meetings by advising them on the nature
of the meeting and specific key points that
need to be raised at the meeting. [They
also] review with them at the conclusion of
the meeting what had transpired during it.
NJBIZ: Will such consultants become the
norm?
Sobel: Things have become so complex and
accountability so high. It’s a very, very tough
task that’s given rise to this business service.
Board members will go to a meeting and get
a stack of papers. How can they properly
discuss the contents of reams of papers in-
side of a week and approve them without
assistance and someone to guide them?
NJBIZ: What changes should companies
look for in their D&O policies?
Sobel: There are basically four things that
the buyer of public and private D&O cov-
erage should [be aware of]. They are the fi-
nancial stability of the carrier, a reduction
in [coverage] limits, an increase in cost of
the layers of insurance and a reduction in
the capacity of the primary insurer.
NJBIZ: How can one determine the finan-
cial stability of an insurance carrier?
Sobel: In the last four to six years, a num-
ber of insurers writing D&O have left the
industry. The remaining companies, pri-
marily Chubb and AIG, continue to have
an A.M. Best rating of A++. There are oth-
er rating agencies such as Standard &
Poor’s and Moody’s. When considering the
purchase of insurance, stability is the first
thing to consider before price and before
terms and conditions, because you want
the insurer to be there to be able to defend
and pay a claim.
NJBIZ: What is capacity?
Sobel: The availability of an insurer to
provide the limits of insurance in a policy.
Historically, an excess carrier of D&O in-
surance would not be touched because
most of the claims would hit in the prima-
ry layer, or the “burn” layer, of coverage.
But due to the volatility of the market-
place, the [size of claims] has become
much greater and therefore writing an ex-
cess layer is as much a challenge as writing
the primary insurance coverage.
NJBIZ: What is the difference between the
D&O risk facing a public company com-
pared with a private one?
Sobel: The key difference is that a public
company faces the securities exposure re-
garding the violation of securities laws that
would not affect a private company.
NJBIZ: In general, what has changed in the
boardroom post-Enron?
Sobel: The demands on the board of direc-
tors have increased exponentially and at the
same time the D&O coverage they need has
become significantly more expensive.
There is an increase in pricing and a reduc-
tion of coverage at a time when it’s needed
most. That’s the definition of a crisis. ■