Directors and officers operate in an extremely difficult environment. The fundamental principles governing their conduct have come under increasing judicial and regulatory scrutiny due, in large part, to the visibility of corporate scandals. In 2002, we witnessed the passage of the Sarbanes Oxley Act as well as proposed new regulations from the major stock exchanges intended to improve financial reporting and eliminate abuses in executive behavior. The legal and regulatory changes are expected to improve corporate governance over time but also increase litigation risk for companies that are not in compliance.

Shareholder groups have fomented additional unrest by pressuring corporate management to make swifter changes and improvements to remain economically competitive in the complex world markets. Although there is no single solution for protecting directors and officers from liability, directors and officers (D&O) Liability insurance can be an effective tool in mitigating a firm's overall exposure. Marsh's FINPRO Practice can provide D&O insurance designed to protect a director or officer of a firm for liability due to breaches of duty resulting from negligence, error, or omission.

Directors and officers coverage is typically underwritten on a one-year basis for a single aggregate limit of liability. Many corporations purchase some form of entity coverage or predetermined allocation for securities law claims as a means of avoiding much of the traditional allocation of loss that normally occurred under previous D&O policies. Allocation often resulted in disputes between D&O underwriters and policyholders as to how certain elements of a loss, such as uncovered policies or wrongful acts, should affect the ultimate amount of insurance recovery.

There is little directors and officers can do to diminish the complexity of the business, legal and regulatory environment in which they operate. However, a great deal can be done to protect the personal assets of directors and officers through a combination of strong corporate governance, broad corporate indemnification, and a risk transfer program that includes a high quality D&O liability insurance program.