Directors & Officers Bootcamp Basics of Duties & Liabilities

1. January 26, 2007 Directors & Officers BootcampBasics of Duties & Liabilities Rian Jorgensen Adrian Atilano Senior Vice President Vice President FINPRO FINPRO San Francisco, CA San Diego, CA

2. Risk & Insurance Services Investment Management Consulting Services • Risk Management Consulting • Risk Management Due Diligence • Innovative Deal Solutions • Deal Referral/Networking • Portfolio Insurance Programs • Post-Acquisition Services • Organizational Architecture • Change Management • Employee Benefits • Retirement Benefit Programs • Health/Group Benefits Programs • Compensation Evaluation • Management Evaluation and Structure • High Yield Debt Participation • 401K Management • Money Management Services • Reinsurance Solutions • Specialty Practices • Modeling & Actuarial Services • Merger Bid Evaluations • D&O Mass Tort Litigation Estimates • Strategic Idea Generation • Deal Sourcing • Strategic Due Diligence • Value Enhancement MMC ALTERNATIVE RISK SOLUTIONS • Financial Risk Identification • Insurance Capital Solutions • Image Analysis • Identity Planning • Financial Services Strategy • Risk Management Consulting • Corporate Advisory • Background Screening • Corporate Restructuring • Forensic Accounting Introduction to Marsh and MMC

3. 1995 PSLRA: Be Careful What You Wish For • Rise of the institutional investors (who were not as benign as the law’s drafters had hoped) • Number and severity of suits continued unabated

4. Enron, WorldCom and Tyco • Massive frauds • Personal liability (triggered much concern, for the most part, overblown, particularly for outside directors)

5. 2002 SOX • Expanded statute of limitations (from 1/3 to 2/5) • Increased criminal penalties and enforcement • Boost in the SEC’s enforcement division’s funding

6. NERA and Cornerstone Results • Why the drop in number of suits? • Steady bull market of last few years • Turmoil among the plaintiffs attorneys • Less fraud due to fear of criminal prosecution • Not all good news – Many new routes to courthouse besides class actions (Opt-outs, serious derivative litigation, SEC/DOJ) • Stock option backdating cases – directors investigating (and spending the company’s money on legal fees) at the drop of a hat

7. What Does The Future Hold? • More invasive personal underwriting for D&O coverage • More uninsured legal costs for investigations (challenge for the insurance industry to address) • Movement afoot to “loosen up” SOX • Conflicts between interests of companies and their D’s and O’s to become more pronounced (broad indemnification, A-side to the extreme…)

8. D&O Indemnification Trends and Implications

9. Indemnification Insurance B O T H How are Personal Assets of Directors and Officers Protected?

10. Indemnification Indemnification Authorization (DE & CA) • Corporate Charter • Corporate Bylaws • Indemnification Contract

11. Failure to Indemnify • Common Situations Where Unable or Unwilling to Indemnify: • Conduct Not in “Good Faith” or “Reasonable Belief” • Bankruptcy or Near Bankruptcy • Hostile Board • Hostile Regulatory or Prosecutorial Environment • Public Policy: • Violation of Federal Securities Laws or Statutory Prohibition • Derivative Suit Judgments/Settlements (Delaware)

12. D&O Insurance Trends & Implications

13. Covered Claim Against Directors & Officers Covered Sec. Claim Against Corporate Entity INDEMNIFICATION? No Yes Insured - Corporate Entity as a Defendant in Sec. Claims only Insureds - Directors & Officers Insured - Corporate Balance Sheet Personal Assets Corporate Assets Corporate Assets D&O Insurance Insuring Agreement A: Personal Liability D&O Insurance Insuring Agreement B: Corporate Reimbursement D&O Insurance Insuring Agreement C: Corporate Entity Coverage for SEC Claims “PERSONAL ASSETS PROTECTION” “CORPORATE RISK TRANSFER” “SIGNIFICANT DEFENDANT ALLOCATION COVERAGE” Directors’ & Officers’ Liability Insurance Side B Side A Side C

14. Side A-only* Excess Program Structure w/Side A DIC A,B,C coverage w/ excess side A Coverage A Personal Asset Protection For Non-Indemnifiable Claims Coverage B Corporate Asset Protection For Indemnifiable Claims Coverage C Corporate Asset Protection For Corporate Liability Claims (Securities Claims only) Single Aggregate Limit Difference in Conditions No Retention Retention TBD Retention TBD Public D&O forms cover the entity for securities claims only

15. ABC Corp. Public D&O Program w/Side ADIC $90M AIG $10,000,000 Side A DIC $80M ACE $10,000,000 Arch $10,000,000 $70M HCC $10,000,000 $60M Darwin $10,000,000 $50M DIC Navigators $10,000,000 $40M Axis $10,000,000 $30M Chubb $10,000,000 $20M Hartford $10,000,000 $10M SIR $0 / $500,000 / $1,000,000 Retention

16. Who Sues Private Companies? Major Types of Allegations 50% Employees 8% Customers / Clients • Denial of civil rights • Wrongful termination • Breach of contract • Price fixing • Breach of duty • Conflict of interest • Anti-trust • Mismanagement • Self dealing • Failure to disclose material facts • Misconduct 10% Competitors / Suppliers 31% Shareholders / Investors 3% Other Third Party Source: 2005 Directors & Officers Liability Survey the Tillinghast Towers Perrin

17. Preparing to go public – Form Changes • Private to Public Form Changes • Add SEC coverage for individuals and Entity (securities only ) • Understand severability provisions and fraud exclusions • Continuity with side A and side B insuring clauses • Address Employment Practices Liability exposures (separate policy) • Securities Act of 1933 coverage • section 11 (material misrepresentation) • section 12 (misrepresentation in prospectus or oral communication) • Securities Act of 1934 coverage

18. FAQs • Do I have to pay a retention/deductible if I am sued? • What happens if I am accused of fraudulent conduct? • Will I be covered by the D&O Insurance if someone else commits fraud? • Will I be covered by the insurance contract if someone else makes misrepresentations in the application to the D&O Insurers or if the company has to restate its financials? • Will the D&O Insurance protect me if the SEC pursues a formal investigation against me? • If the company is sued as well as directors and officers, how does the policy respond? • If the company declares bankruptcy, will the D&O policy cover me? • May I have choice of counsel?

19. Shopping For D&O Coverage • Choosing a broker: • Expertise and Service • Proactive solutions • Relationships with markets and leveraging power • Claims advocacy and Governance consulting • Global presence • Choosing a underwriter/carrier • Policy language, Pricing, Deductibles • Financial Strength/Surplus • Global presence • Internal and Experienced Claims Adjusters • Consistency • Coverage • Policy language • Who’s the buyer? Board? Officers? • Limits Benchmarking – Peers or Market Cap

20. QUESTIONS???