Page 269 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 6. Employee Benefits and Perquisites 255

may be short or open-ended. The matters affected may be narrowly defined or broadly
stated. Since the power of attorney permits someone to act on one’s behalf, it is important
the matter be carefully thought through.
Nonetheless, the typical company does not have a qualified legal services plan for its
employees, and even if such a plan existed, it would be short of the services executives might
wish. While it is not uncommon for executives to draw upon inside counsel for routine matters
(e.g., drafting a will or giving an opinion on a personal transaction or possible liability), more
and more companies are moving away from providing comprehensive legal services, especially
in the case of defense against a nonbusiness civil lawsuit or defending against criminal prose-
cution. Thus, company involvement ranges from providing a list of attorneys in outside firms
(with the executive being billed directly) to covering a specified dollar amount and/or list of
scheduled services selected by either the company or the executive. While the company may
take a business tax deduction, the executive will have an imputed income for tax purposes
similar to financial planning. This can be a high-importance service for executives.
Liability Insurance. Today we live in a rather litigious society. Suing for damages is a fact
of life. The executive assumes both business and personal risk. Thus, business liability insur-
ance is commonplace for corporate officers and members of the board of directors called
director and officer (D&O) coverage. The coverage exclusions of any D&O policy must be
carefully examined. Typical examples which are not covered are: fraud; personal profit by the
insured; violation of security laws; suits between two or more insured; change of control
actions; and prior or pending litigation. For valid claims the insurer must be provided
adequate notification during the coverage period, even though the claim may take plaxce at
a later date; however, an extended discovery provision may be purchased to cover losses dis-
covered after policy expiration. Individuals will want to be certain that the claims of directors
and officers have first priority on insurance proceeds, not the company, and that any misrep-
resentation made by the company is not attributed to the directors. Some D&O underwriters
offer an extra-protection policy, typically referred to as side A coverage. This policy supple-
ments but does not replace the basic policy. The supplemental policy might include non-
rescindable coverage even if information provided to obtain coverage misleading or even
false, financial statements have to be restated, or the wrongful act was intentional. Coverage
may also apply if the underwriter for the basic policy is financially unable to make payments.
In addition, those who have fiduciary responsibility, as defined by ERISA, are often covered
for their business actions. Whether or not such protection can be purchased by the compa-
ny is often a function of the state in which the company is incorporated. Where possible, it
is common for the company to purchase protection, and since it is a business expense, the
company takes a business deduction without creating an income liability for the executive.
Should the executive be on the board of directors of own or another company, he or she
should be sure that the company-provided (D&O) liability insurance is adequate in both
amount and coverage and that such protection is in effect even after the company files for
bankruptcy. For example, legal fees should be reimbursed. Many executives will seek an
indemnification agreement whereby the company agrees to reimburse the executive or director
for any legal actions not covered by the director and officer liability insurance. These
policies should be carefully reviewed by specialists in such coverage. D&O insurance is also
covered in Chapter 10.
Because of the earnings level of the executive, many find that the liability maximums on
auto and homeowners’ policies are inadequate to cover bodily injury or property damage.