A. Corporate Accounting Scandals

Enron … WorldCom … Tyco … Merck … Once venerable corporate names now send shudders up the spines of investors, corporate officers, and insurers. Accounting practices that helped drive success after success for these companies and others are now coming under close scrutiny and criticism. Practices that range from routine to aggressive to outright fraudulent are now raising serious implications for corporations and their directors and officers and, consequently, for Directors and Officers (“D&O”) Liability Insurance.

Consider, for example, the following:

1. Enron’s stated earnings as reported to insurance carriers in applications to renew D&O policies were subsequently restated and reduced by $586 million, primarily because of improper accounting for dealings with partnerships run by company officers.(1)
2. Sunbeam Corporation restated its financial results for the last six quarters ending in March 1998, covering the tenure of CEO Albert Dunlap, who was forced to leave amid “massive accounting irregularities.”(2)
3. Merck recorded $12.4 billion in revenue for its Medco unit – nearly 10% of Merck’s overall revenue – based on co-payments collected by pharmacies from patients. The accounting practice conformed to Generally Accepted Accounting Principles, and the SEC did not assert that Merck’s practice was inappropriate. Merck explained that the accounting practice has no effect on net income, because the co-payments are deducted as an expense. Nonetheless, The Wall Street Journal questioned Merck’s accounting practices, and Merck’s stock price dropped to a five-year low as a result. At least four shareholder suits were filed, alleging that Merck falsely inflated its revenue by including the co-payments.(3)
4. WorldCom’s accounting manipulations inflated its assets by $3.8 billion, and WorldCom executives have been criminally charged with securities fraud.(4)

B. Sarbanes–Oxley Corporate Fraud Act of 2002

In July 2002, Congress responded to corporate accounting abuses or perceived abuses by enacting the Sarbanes–Oxley Corporate Fraud Act of 2002. The Act creates increased accountability and increased criminal penalties for corporate fraud. Some of the key provisions of the Act include: (5)

1. Certification by the Chief Executive Officer and Chief Financial Officer – periodic reports containing financial statements must be certified by the company’s CEO and CFO, certifying that the report complies fully with SEC requirements and that the information accurately and fairly depicts the financial condition of the company.
2. Accuracy of financial reports – all reports filed with the SEC containing financial statements must comply with Generally Accepted Accounting Principals and must reflect all material correcting adjustments identified by company auditors.
3. Prohibition on personal loans to directors and executive officers – public companies may not extend or maintain credit in the form of personal loans to directors or executive officers.
4. Trading of company securities during pension fund “blackout periods” – directors and officers are prohibited from buying or selling the company’s securities during pension fund “blackout periods” – the same periods during which the majority of participants in employment retirement funds cannot buy or sell the company’s securities.

C. Impact on D&O Coverage

These corporate accounting scandals, and the Sarbanes-Oxley Act inspired by those scandals, are likely to have far–reaching consequences for corporate governance and accounting practices. For insurance purposes, corporate accounting misconduct and the Sarbanes-Oxley Act raise immediate concerns for D&O policyholders and insurers. A few issues immediately surface:

1. Are individual directors and officers covered in the shareholder lawsuits prompted by the tumbling stock prices resulting from “accounting irregularities?”
2. Do intentionally aggressive yet generally accepted accounting practices trigger exclusions in D&O policies?
3. Are officers and directors covered when they run afoul of new prohibitions against personal gain or profit to officers and directors?
4. Does a restatement of earnings mean that the original statement of earnings was misleading, giving a D&O carrier valid grounds to rescind a company’s D&O coverage?
5. Are “innocent” officers and directors covered, or does misfeasance by one defeat coverage for all?

Before examining these issues, a quick refresher course on basics of D&O coverage may be in order.

D&O Coverage 101

A. General Scope of Coverage
D&O policies are designed to protect directors and officers who are sued when their decisions and conduct in running a corporation result in litigation. Many state statutes give a corporation the power to indemnify officers or directors; other statutes require corporations to provide indemnification for officers and directors under certain circumstances. Corporations, in turn, need insurance policies to reimburse them for money paid to officers and directors for indemnification. Officers and directors themselves need insurance as well, for those situations in which the corporation is not able to indemnify them.

D&O policies traditionally provided two types of coverage. The first coverage reimburses a corporation for losses incurred as a result of indemnifying officers and directors for wrongful acts. The second coverage is paid directly to the individual officers and directors for allegedly committing “Wrongful Acts,” which is a defined policy term. Traditionally, D&O policies did not cover the corporate entity itself. Beginning in the mid 1990s, D&O policies began providing coverage for the corporate entity as well as the individual directors and officers. Current pressures on the D&O market, however, may prompt insurance carriers to cut coverage for the corporate entity.(6)

“Wrongful Act” is typically defined in the policy to mean a breach of duty, neglect, error, omission or other act committed or attempted by an officer or director acting in his capacity as an officer or director of the company. Claims for alleged conduct not plainly within the scope of the officer’s or director’s duties for the corporation will not be covered. Conduct related to another business pursuit or activity in a trade association or charitable organization, for example, would not be covered.

B. Typical Exclusions
Most D&O policies exclude coverage for claims based on the following conduct:

1. Dishonest, fraudulent, or criminal acts. Most D&O insurance policies specifically exclude coverage for claims of dishonest, fraudulent, or criminal conduct. Some of these exclusions are triggered only if there is an adjudication of dishonest, fraudulent, or criminal conduct. Others are triggered by mere allegations of dishonest, fraudulent, or criminal conduct. Even if the policy does not specifically exclude coverage for these claims, most definitions of “Wrongful Act” are limited to negligent conduct, such that dishonest, fraudulent, or criminal conduct would fall outside of the scope of coverage.
2. A director or officer gaining any profit or advantage to which he was not legally entitled. D&O policies typically exclude coverage for claims alleging that directors or officers engaged in conduct detrimental to the corporation for their own personal gain or profit. That kind of conduct is not only peculiarly within the director’s or officer’s control, but the director or officer will have benefited from the alleged wrongful conduct. Insurance coverage protection for those claims is therefore considered inappropriate.
3. For an accounting of profits made from the purchase or sale by a director or officer of securities of the corporation within the meaning of Section 16(b) of Securities Exchange Act of 1934. Section 16(b) makes directors and officers of corporations liable for profits gained through the purchase and sale of the company’s securities within a six month period. This exclusion is a specific example of the general premise that insurance policies do not generally cover deliberate, criminal conduct and is another “twist” on the exclusion for acts that result in illegal profit or gain to the director or officer.
4. Libel and slander. Libel and slander are intentional torts. Insurance generally does not cover intentional conduct.
5. Bodily injury or property damage. Liability policies, not D&O policies, are designed to cover these claims.
6. Pollution. Most D&O policies, as well as most liability policies, now exclude coverage for pollution-related claims.
7. Claims brought by the corporation against one of its own directors or officers. D&O policies typically do not cover claims against an officer or director that are brought by his or her own corporation. Most insurers do not want to underwrite what they see as internal disputes.

C. Grounds for rescission: Misrepresentation on the Application.
Perhaps the biggest pitfall for policyholders, beyond the exclusions in the policy, is any misrepresentation on the application for the policy. D&O insurance policies can be rescinded or
declared void altogether if the insured misrepresents material facts on the application. Notably, an application for a D&O policy includes an extensive history of the corporation and its finances, including the company’s latest annual report, financial statement, 10-K Report, and similar documents.

Another critical question on the application asks if the insured has knowledge of any “act, error, or omission which might give rise to a claim under the policy.” Once a claim is made, insurers will closely examine the extent of the insured’s knowledge at the time of the application. If the insured knew about facts that might give rise to a claim and failed to disclose them, the insurer has grounds to rescind the policy.

Issues Raised By Recent Headlines

Applying some of these basic standards of D&O coverage to corporate activity that has grabbed recent headlines raises some interesting questions.

A. Coverage for Claims Arising from Alleged “Accounting Irregularities”

1. Dishonest, fraudulent, or criminal conduct
Whether directors and officers will be covered for claims arising from alleged “accounting irregularities” will depend on the specific conduct alleged and proven. If the accounting practices were deliberately dishonest, fraudulent, or criminal, then the claims will not be covered. Again, most D&O policies specifically exclude coverage for dishonest, fraudulent, or criminal conduct. As a result of the Sarbanes-Oxley Act, fraudulent conduct by corporate officers and directors may rise to the level of criminal conduct, which would strengthen the insurance carrier’s position of no coverage. As always, the specific language of the policy will govern. Whether this exclusion will apply often turns on a critical distinction in the language of these exclusions. Some exclusions apply only if there is a judgment of dishonest, fraudulent, or criminal conduct. Others apply if there is even an allegation of dishonest, fraudulent, or criminal conduct.

Exactly what happened at Enron, WorldCom, and elsewhere is still being investigated and litigated. Allegations of deliberate fraud, deception, and even criminal conduct have certainly been made, and, in some cases, proven. If so, D&O coverage will likely be excluded, as well it should be. Insurance is not designed to protect people from their own deliberately dishonest, fraudulent, or criminal conduct.

The more intriguing questions are raised by the recent lawsuits against Merck. The shareholder suits allege that Merck “falsely” inflated its revenue by including co-payments. An allegation of “falsely” inflated revenues arguably implicates the exclusion for dishonest or fraudulent conduct. Merck’s practice of including co-payments was certainly deliberate, but it does not appear to have been “dishonest” or “fraudulent.” Merck was following Generally Accepted Accounting Principles, and its practices have not been challenged by the SEC. The co-payments were deducted as an expense, which means there was no effect on the net income reported. Merck’s stock price fell only because the media questioned its practices. Ultimately, coverage for Merck’s claims may turn on the language of its D&O policy and on the allegations made and proved in the lawsuits. Do the lawsuits even allege “dishonest” or “fraudulent” conduct? If so the outcome may depend on whether the policy excludes coverage for allegations of dishonest conduct or an adjudication of dishonest conduct. If there are no allegations or proof of dishonest or fraudulent conduct, the claims against Merck should be covered. Shareholder claims that stock prices fell simply because of errors in business judgment are precisely the type of claim D&O insurance is designed to cover.

2. Profit or gain to which the director or officer was not legally entitled.
Another exclusion that may come into play in connection with claims arising from accounting irregularities is the exclusion for conduct in which the director or officer gained a profit or advantage “to which he was not legally entitled.” Many of the current headline-grabbing scandals involve corporate executives who reaped enormous personal profits from corporate accounting practices while shareholders and company employees lost almost everything. As repugnant as that conduct may be, whether it will impact D&O insurance coverage depends on whether the profit or advantage was one to which the officer or director was not “legally entitled.” That determination will, of course, depend on the specific facts of each claim. The Sarbanes-Oxley Act may come into play here as well. Many of the Act’s provisions are designed to prohibit corporate fraud and wrong doing for personal profit. If the allegations rise to the level of violations of the Act or criminal conduct, coverage under most D&O policies will be excluded.

3. Section 16(b) of the Securities Exchange Act
The exclusion concerning Section 16(b) of the Securities and Exchange Act does not relate specifically to accounting practices, but could potentially bar claims against corporate executives in some of the scenarios that have been making headlines. Again, Section 16(b) of the Securities and Exchange Act makes every director and executive officer of a publicly held corporation liable for any profits obtained by the director or officer through the purchase and sale of the corporation’s securities within a six month period. “Profits” are determined under Section 16(b) by matching any purchase and any sale within a six month period, even though the transaction ultimately may have resulted in a loss to the officer or director. Executives at Enron and other companies are now infamous for dumping company stock before the price plummeted.
If those sales are matched to purchases within a six month period, Section 16(b), and the exclusion based on Section 16(b) could come into play.

B. Potential Rescission for Misrepresentation in the Application.

1. Restatement of earnings
The Wall Street Journal reported in January 2002 that several insurance companies who underwrote liability coverage for Enron’s directors and officers were considering rescinding that coverage on the grounds that Enron misled insurers when it renewed its D&O policies based on earnings that were subsequently restated.(7) Enron is not the first company to have faced this issue. AIG rescinded Sunbeam Corporation’s directors and officers coverage shortly after Sunbeam restated financial results for the six quarters that ended in March 1998. Sunbeam sued AIG in federal district court seeking restoration of the policy. Sunbeam reached a settlement with AIG, but AIG never reinstated the cancelled insurance policy.(8) WorldCom may face the same issue with its D&O carriers. A chief economist for the Insurance Information Institute has speculated that WorldCom’s insurers will argue that they would not have made the same underwriting decisions if they had known what is now known about WorldCom’s financial condition.(9)

Enron, WorldCom, and Sunbeam restated their financial results primarily because of improper or “irregular” accounting practices. Restating earnings is not terribly unusual in the corporate world, and it does not necessarily signal fraud or dishonest conduct. A restatement may be required, for example, because the SEC disagrees with an accounting practice or policy the company had followed. Unfortunately, an “innocent mistake” that leads to a restatement of earnings, which once would have drawn little or no attention, may now draw close scrutiny and perhaps jeopardize the company’s directors and officers insurance.

As discussed briefly above, a misstatement of material fact on an insurance application can give the insurance company grounds to rescind or void the insurance policy. The insurer’s burden of proof on this issue varies from state to state. Under many states’ laws – either common law or statutory -- the insurer must prove that the representation was false, material, and relied on by the insurer in issuing the policy.(10) Notably, under many states’ laws, the misrepresentation need not have been knowing, willful, or made with intent to deceive the insurance company.(11) In Massachusetts, for example, the insurer must prove either that the misrepresentation was material – in that it increased the risk of loss for the insurer – or that the misrepresentation was made “with actual intent to deceive.”(12) Similarly, in North Carolina a misstatement in the application for an insurance policy will not prevent recovery under the policy unless the statement was “material or fraudulent.”(13) North Carolina courts have explained that a “misrepresentation of a material fact, or the suppression thereof, in an application for insurance, will avoid the policy even though the assured be innocent of fraud or an intention to deceive or to wrongfully induce the assurer to act, or whether the statement be made in ignorance or good faith, or unintentionally.”(14)

Whether the representation was “material” depends on whether it reasonably could be considered to affect the insurer’s decision to enter into the risk, its evaluation of the degree or character of the risk, or its calculation of the premium for the policy. If the insurance carrier can establish one of those facts, the representation will be considered “material.”(15) Once materiality is proven, reliance by the insurer is essentially presumed.(16)

In cases concerning restated earnings, the insurance carrier would have to show that the original stated earnings were material to the insurance company’s decision to write the policy or to its evaluation of the risk on the premium. That burden will not likely be difficult to meet. As one court has explained: “The general financial condition of the corporation in the present as well as the past is very important [to an insurance company making the underwriting decision on a D&O policy].”(17) One underwriter testified in an action to rescind a D&O policy:

“As a rule, the veracity and substance of financial information received in connection with an application for D&O coverage are the most critical components of any underwriting decision. The dissemination of a false financial statement exposes a company and its officers to potential liability to investors and stockholders for violations of federal securities laws and the common law. Likewise, the general financial health (or lack of it) of a company is an indicator of the likelihood of litigation potentially giving rise to D&O and other claims against company personnel.”(18)

In one of the leading cases on this issue, Shapiro v. American Home Insurance Company, the insured’s former president submitted a financial statement in applying for the insurance policy that “grossly misstated” the company’s earnings. The court explained, as did the underwriter quoted above, that filing a false financial statement exposes a company and its officers to suits by investors and stockholders, which is the type of risk the company seeks D&O insurance for.(19) The application also misrepresented the company’s knowledge of acts or omissions that could give rise to a claim under the policy, but the court clearly considered the false financial statement to be a “material” misrepresentation in and of itself.

Other courts agree. The United States District Court for the Northern District of California found that “courts and commentators have recognized that the financial health of a company … [is] material to an insurer’s decision to issue a director’s and officer’s liability policy.”(20) Furthermore, financial information “is particularly material when the information has been specifically requested as part of the insurance application.”(21)

Notably, the financial statement at issue in the Shapiro case gave rise to an indictment for securities fraud. Shapiro was convicted for “making a deliberate misstatement of income with an intent to defraud.”(22) The misstatement of income was unquestionably false (and deliberately false). Similarly, the directors and officers who were defendants in the American International Specialty Lines case were prosecuted by the SEC and criminally prosecuted by the government for securities fraud and other criminal violations for false and misleading financial statements.(23) The California case, Jaunich, did not involve such clearly deliberate misrepresentation. The facts in Jaunich were egregious, nonetheless, because the policyholder knew that its financial condition was far worse than it disclosed in the D&O insurance application. For example, the company disclosed to the insurance company that it anticipated losses of $1,021,000 for the fiscal year ending November 27, 1982. At the same time, the company told its board that it anticipated losses of $11,083,000 for the fiscal year ending February 26, 1983. The company also failed to disclose to the insurer that the company’s creditors were willing to trade with it only on a cash basis and that its principal lender refused to extend any additional credit.(24)

The facts in Shapiro, American International Specialty Lines, and Jaunich make a clear case for rescission. In each case, the policyholder knew facts about the company’s financial position that it deliberately misrepresented or deliberately withheld from the insurer. What if the statement of earnings was accurate when made, and was made in good faith with no intent to deceive, but restated later simply because the accounting practices were called into question. Would the original statement of earnings be considered “false” under those circumstances? Insurers could certainly argue that the original statement was a “misrepresentation” of the company’s financial condition because the accounting practices masked or misstated the company’s true financial condition. The “innocence” of the mistake would arguably be irrelevant under those states’ laws that require only that the misrepresentation be false and material. The insurer may have more difficulty proving that the misrepresentation was “ material,” because it may be more difficult to prove that the information was truly misleading or made it more difficult to evaluate the risk. If the company accurately disclosed its financial situation based on accounting practices that were accepted at the time, can the insurer prove that it could not evaluate the risk? What else could the policyholder have done? The insurer would have had precisely the same information the prospective policyholder had. These questions – the “falsity” and “materiality” of financial statements that are accurate when made but restated later – have not yet been answered by the courts.

2. Knowledge of an “act, error, or omission which might give rise to a claim.”
Applications for D&O coverage include critical questions asking the company if it has any knowledge of a pending claim or an “act, error, or omission which might give rise to a claim” After a claim is filed, D&O carriers carefully scrutinize the policyholder’s knowledge at the time the application was submitted. If the application falsely disclaimed knowledge of acts or omissions that could give rise to a claim, the insurer has grounds for rescission.(25) Courts have recognized that the existence of circumstances that can give rise to a claim is material to the insurer’s decision whether to issue a director’s and officer’s liability policy.(26)

In today’s environment, companies applying for D&O coverage must be alert to the possibility of claims by shareholders alleging fraudulent or false statements of earnings based on accounting practices. This creates a dilemma for companies applying for D&O insurance. They certainly do not want to admit or even imply when applying for insurance that their accounting practices are fraudulent or misleading. On the other hand, if they know of potential shareholder claims, those situations must be disclosed to the insurer. Otherwise, the company risks having its D&O coverage rescinded if claims are made and the insurer can prove that the company had knowledge of irregular accounting practices or other conduct that gave rise to the claims.

3. The “innocent” officer or director
Another issue that arises from alleged misrepresentation on the application is whether D&O coverage is void even for those officers and directors who did not participate in preparing the application, had no knowledge of the misrepresentation, or had no knowledge of the undisclosed acts which could give rise to a claim. For example, some officers and directors at Enron probably had no knowledge of the accounting practices and schemes that were distorting the company’s true financial condition. If an “innocent” officer is named in a shareholder lawsuit, is he or she covered under the D&O policy if the application contained material misrepresentations?

A number of courts have concluded that the insurance company is entitled to rescind the policy altogether – wiping out coverage even for “innocent” insureds – if there was a material misrepresentation in the policy.(27) Some courts reason that the knowledge or misrepresentation is imputed to other officers or directors on theories of agency or ratification.(28) Other courts conclude that because the misrepresentation affected the evaluation of the risk of insuring all of the officers and directors, the insurance company can avoid its obligation to all of the officers and directors on the basis of that misrepresentation.(29)

One court has explained that this issue is a difficult one to grapple with. The outcome seems unduly harsh, no matter which conclusion a court reaches. On one hand, rescinding a policy leaves an innocent director or officer, who did not make any misrepresentation, without any insurance coverage. On the other hand, refusing to rescind the coverage for the innocent director or officer requires an insurance company to provide coverage after it was deceived and issued a policy relying on false information that was critical to the underwriting decision.(30) In that case, the court concluded that the appropriate result was to void the insurance coverage for all of the directors and officers in the company, including those who had no knowledge of the misrepresentation.(31)

Some D&O policies have “severability” provisions, which provide specifically that each insured is covered unless that insured participated in a misrepresentation in the application.(32) Some policies state expressly that no knowledge of any one insured is to be imputed to any other insured for purposes of determining coverage.(33) Some policies address this issue by providing that the written application for coverage is to be construed as a separate application by each insured.(34) The American International Specialty Lines court noted, after deciding that the policy should be rescinded for all of the directors and officers, that the innocent officers and directors could have protected themselves by requiring the policy to include a severability clause.(35)

Ultimately, this issue appears to turn on the language of the policy. If the policy has a severability clause, “innocent” officers and directors are probably covered. If not, the policy can likely be rescinded for all of the officers and directors, including the “innocent” ones.

Recommendations

To maximize the chances for D&O coverage, corporations should take the following steps:

1. Comply with the Sarbanes-Oxley Act, Securities laws, and Generally Accepted Accounting Principles – Needless to say, complying with all laws and regulations governing corporate conduct will not only enhance the chances of avoiding any claims or lawsuits against directors and officers, it will enhance the chances for insurance coverage under the D&O Policy.
2. Be fully disclosive and accurate in the application for the D&O Policy – As discussed above, misrepresentations in the application for the policy, including representations of the company’s financial condition, are grounds for rescinding the insurance policy. The application must be completed carefully and accurately. The application must also disclose any claims or potential claims the company is aware of.
3. Ask for a severability clause – As discussed above, many courts will void a D&O policy altogether, even if the individual director or officer seeking coverage was “innocent” with respect to any misrepresentation on the application or any conduct triggering an exclusion to coverage. To protect as many directors and officers as possible, corporations should ask for a Severability Clause when negotiating a D&O policy.
4. Ask for language in the “dishonest conduct” exclusion limiting the exclusion to adjudications of dishonest conduct, as opposed to allegations – The likelihood of an allegation of dishonest, fraudulent, or criminal conduct is always greater than the likelihood of an adjudication of dishonest, fraudulent, or criminal conduct. The potential for these allegations may be greater than ever, given the current environment of public distrust of corporations and corporate officers and directors. To the extent possible, corporations should try to negotiate policy language that limits the “dishonest conduct” exclusion to adjudications of dishonest, fraudulent, or criminal conduct.
5. Consider negotiating a broad definition of a “claim” – Corporations may want a broad definition of a “claim” that will trigger coverage under the policy. Some definitions are broad enough to include administrative proceedings, regulatory proceedings, and investigations. Some policies also define the term “securities claim” broadly enough to cover SEC investigations. Bear in mind, however, that a broad definition of the term “claim” will also create a broad obligation for the corporation to report claims to the insurance carrier.

 Conclusion

Recent high-profile troubles for corporations not only raise these interesting coverage questions under D&O policies, they are raising the stakes for obtaining D&O insurance policies for corporations. Premiums are higher, deductibles are higher, and fewer items are covered under many policies being written today. Some insurance companies are no longer writing directors and officers policies at all. The number of insurance companies offering this coverage has dwindled to a handful.(36) Insurance companies who are still writing D&O coverage are restricting the coverage by removing coverage for the corporate entity itself and forcing many insureds to accept co-insurance clauses. For example, when WorldCom renewed its coverage in December 2001, it accepted a 20% co-insurance clause, which means that for every $8.00 in claims paid by its insurance carrier, WorldCom would pay $2.00.(37) More recently, WorldCom reached a settlement with AIG (and seeks similar terms with other carriers) in which the entity coverage was eliminated, as was coverage for any “culpable” WorldCom official. In return, AIG agreed to continue providing D&O coverage for WorldCom and agreed to cover “nonculpable” officers and directors who were not involved in the overstatement of earnings and other misconduct.(38)

What is the future landscape for D&O insurance coverage? Only time will tell. For the time being, however, any claims concerning questionable accounting practices will receive close scrutiny, and directors and officers may find themselves with no insurance coverage to protect themselves against those claims.

End Notes

(1)Enron’s Board’s Actions Raise Liability Questions, The Wall Street Journal (Jan. 17, 2002).

(2)Enron’s Board’s Actions Raise Liability Questions, The Wall Street Journal (Jan. 17, 2002).

(3)Merck Booked 12.4 Billion It Never Collected, The Wall Street Journal (July 8, 2002).

(4)Ex-WorldCom Officials Are Indicted, The Wall Street Journal (August 2, 2002).
(5)Pub. L. No. 107-209 (2002)

(6)Directors’ Insurance Fees Get Fatter, The Wall Street Journal (July 12, 2002).

(7)Enron Board’s Actions Raise Liability Questions, The Wall Street Journal (January 17, 2002).

(8)Enron Board’s Actions Raise Liability Questions, The Wall Street Journal (January 17, 2002).

(9)Insurers Likely to Balk at WorldCom D&O Coverage, Best’s Insurance News (July 1, 2002).

(10)See, e.g., WedTech Corp. v. Federal Insurance Corp., 74 F. Supp. 214, 218 (S.D. N.Y. 1990).

(11)See, e.g., WedTech Corp. v. Federal Ins. Co., 74 F. Supp. 214, 218 (S.D.N.Y. 1990); Metropolitan Property and Casualty v. Dillard, 126 N.C. App. 795, 487 S.E.2d 157 (1997)(concerning an application for a homeowner’s policy).

(12)Mass. Gen. Laws ch. 175, § 186; Shapiro v. American Home Assurance Co., 584 F. Supp. 1245, 1249 (D. Mass. 1984).

(13)N.C. Gen. Stat. § 58-3-10 (1994); Metropolitan Property and Casualty Ins. Co. v. Dillard, 126 N.C. App. 795, 487 S.E. 2d 157 (1997) (concerning an application for a homeowner’s policy). See also California Ins. Code § 331 (West 1972) (“concealment, whether intentional or unintentional, entitles the injured party to rescind insurance.”)

(14)Tharrington v. Sturdivant Life Ins. Co., 115 N.C. App. 123, 443 S.E.2d 797 (1994).

(15)See, e.g., Shapiro v. American Home Assurance Co., 584 F. Supp. 1245, 1250 (D. Mass. 1984); Bird v. Penn Central, 334 F. Supp 255, 259 (E.D. Pa 1971). See also Metropolitan Property and Casualty Ins. Co. v. Dillard, 126 N.C. App. 795, 799, 487 S.E.2d 157, 160 (1997).

(16)See, e.g., Shapiro v. American Home Assurance Co., 584 F. Supp. 1245, 1250 (D. Mass. 1984); Bouley v. Continental Casualty Co., 454 F.2d 85, 88 (1st Cir. 1972)(applying Connecticut law).

(17)Shapiro v. American Home Assurance Co., 584 F. Supp. 1245, 1249 (D. Mass. 1984).

(18)American International Specialty Lines, Ins. Co. v. Towers Financial Corp, 1997 WestLaw 906427 (S.D.N.Y., Sept. 12, 1997) (quoting the affidavit of a National Union Insurance Company underwriter).

(19)Shapiro v. American Home Assurance Co., 584 F. Supp. 1245, 1249 (D. Mass. 1984).

(20)Jaunich v. >National Union Fire Ins. Co. of Pittsburgh, Pa., 647 F. Supp 209, 211 (N.D. Cal. 1986) (citing Shapiro). See also American International Specialty Lines, Ins. Co. v. Towers Financial Corp., 1997 WestLaw 906427 (S.D.N.Y. 1997).

(21)Jaunich v. National Union Fire Ins. Co. of Pittsburgh, Pa., 647 F. Supp 209, 211 (N.D. Cal. 1986). See also American International Specialty Lines, Ins. Co. v. Towers Financial Corp., 1997 WestLaw 906427 (S.D.N.Y. 1997).

(22)Shapiro v. American Home Assurance Co., 584 F. Supp. 1245, 1249 (D. Mass. 1984).

(23)American International Specialty Lines, Ins. Co. v. Towers Financial Corp., 1997 WestLaw 906427 (S.D.N.Y. 1997).

(24)Jaunich v. National Union Fire Ins. Co. of Pittsburgh, Pa., 647 F. Supp 209, 211 (N.D. Cal. 1986).

(25)See, e.g., Shapiro v. American Home Assurance Co., 584 F. Supp. 1245, 1250 (D. Mass. 1984).

(26)See, e.g., Jaunich v. National Union Fire Ins. Co. of Pittsburgh, Pa., 647 F. Supp. 209, 211 (N.D. Cal. 1986).

(27)See, e.g., Shapiro v. American Home Assurance Co., 584 F. Supp. 1245, 1252 (D. Mass. 1984); Bird v. Penn Central, 334 F. Supp. 255 (E. D. Pa. 1971).

(28)See, e.g., Bird v. Penn Central, 334 F. Supp. 255 (E.D. Pa. 1971).

(29)See, e.g., Shapiro v. American Home Assurance Co., 584 F. Supp. 1245 (D. Mass. 1984).

(30)See also American International Specialty Lines, Ins. Co. v. Towers Financial Corp., 1997 WestLaw 906427 (S.D.N.Y. 1997).

(31)Id.

(32)See, e.g., WedTech Corp. V. Federal Ins. Co., 74 F. Supp. 214, 218-219 (S.D.N.Y. 1990); Atlantic Permanent Federal Savings & Loan Assoc. v. American Casualty Co., 839 F. 2d 212, 215 (4th Cir), cert. denied, 486 U.S. 1056 (1988).

(33)See, e.g., WedTech Corp. v. Federal Ins. Co., 74 F. Supp. 214, 219 (S.D.N.Y. 1990).

(34)See, e.g., WedTech Corp. v. Federal Ins. Co., 74 F. Supp. 214, 219 (S.D.N.Y. 1990). See also F.D.I.C. v. Interdonato, 988 F. Supp. 1, 13 (D. D.C. 1997).

(35)See also American International Specialty Lines, Ins. Co. v. Towers Financial Corp., 1997 WestLaw 906427 (S.D.N.Y. 1997). See also Mazur v. Gaudet 826 F. Supp. 188, 194 (E.D.a 1992) (“the policy will not be rescinded as to all insureds if it contains a severability clause”; National Union v. Sahlen, 807 F. Supp. 743, 746 (S.D.Fla. 1992) (courts upheld that the policy may not be rescinded as to all of the insureds when it contains a severability clause).

(36)Directors’ Insurance Fees Get Fatter, The Wall Street Journal (July 12, 2002). See also Insurers Likely to Balk at Worldcom D&O Coverage, Best’s Insurance News (July 1 2002).

(37)Directors’ Insurance Fees Get Fatter, The Wall Street Journal (July 12, 2002).

(38)WorldCom Deal Alters D&O Cover, Business Insurance (Dec. 2, 2002); See also Insurers Seek to Diminish Exposure on Directors Policies, Wall Street Journal (Jan. 28, 2003).