Bank directors frequently settle lawsuits out of court - even when they haven't done anything wrong.
The reason: Insurance doesn't ordinarily cover suits brought by regulators, shareholders, and people alleging sexual harassment or racial discrimination, about 85% of all actions against directors.
When directors can get coverage, they have to pay through the nose - about $20,000 annually per director at small banks for a $1 million policy and $260,000 for directors at big banks.
Avoiding the Courtroom
Faced with these high costs, the directors figure it's cheaper to take a dive than go nine rounds in court.
Enter a small insurance company that says it's found a way to give directors the muscle to climb into the legal ring.
Art Seifert, president of a small Washington insurance underwriter called Eagle Co.. is devising a new type of insurance that covers just the legal costs of board members in such actions. He hopes to have it on the market in 1993.
Roberta Waper, director of the Resource Group, a bank consulting firm in Washington, said the insurance will make it possible for bank directors to "do the right thing" and defend themselves. She and partner Bruce Bugsby helped develop the concept and will receive a royalty from every policy that is sold.
"We haven't decided yet, but we're thinking [about charging] $2,000 to $3,000 per director per year" for $250,000 in coverage for each board member, said Mr. Seifert.
Mr. Seifert, a triathlete as well as a high-school basketball coach, said he can price his legal-fee insurance so low because costs run about the same in most cases, and are thus predictable.
Response Termed |Eager'
Mr. Seifert, 35, describes the response from the banking community as "eager." "If this is available by the first of the year, we could write 3,000 policies," he predicted.
Mr. Seifert started Eagle Co. three years ago after spending a number of years at a large insurance company, specializing in customers with large premiums.
He said he founded Eagle because "I'm a person who gets a lot done in a day. The only way for me to get paid what I'm worth is to work on my own."
Mr. Bounds reports for the Medill News Service.