1. 1800 Avenue of the Stars, Suite 900 Los Angeles, CA 90067-4276 Telephone: (310) 277-1010 Facsimile: (310) 203-7199 840 Newport Center Drive, Suite 400 Newport Beach, CA 92660-6324 Telephone: (949) 760-0991 Facsimile: (949) 760-5200 John Hueston, Esq. Post-Enron Considerations for D & O Insurance

2. John Hueston, a trial lawyer and partner with Irell & Manella’s Los Angeles and Newport Beach offices, served as a lead prosecutor for the trial of U.S. v. Kenneth Lay and Jeffrey Skilling. Mr. Hueston’s Enron Task Force experience included assessment of corporate compliance programs and potential prosecutions of corporations, banks, law firms and other entities. During a 12-year tenure with the Los Angeles U.S. Attorney’s Office that included service as a division Chief, Mr. Hueston was presented with four awards by each of the last three U.S. Attorneys General for his trial work. His many commendations for his work include the Department of Army’s Civilian Service Medal for his successful prosecution and trial victory in an international defense contracting fraud case. Mr. Hueston is a magna cum laude graduate of Dartmouth College and a graduate of Yale Law School, where he was a Notes Editor for the Yale Law Journal. Mr. Hueston served as a law clerk for the Honorable Frank M. Johnson, Jr., Eleventh Circuit Court of Appeals, and has been named a California Top 100 Attorney, a Southern California Super Lawyer, a Top 20 Lawyer under 40, and a national Lawdragon Rising Star. Mr. Hueston has never lost a trial.

3. The Application Post-Enron Pro-activity is key. Underwriters should be more diligent and meet with insureds. The application for D&O insurance is likely to be a focal point because carriers will review an application after a Enron-type loss to determine if there were any material misrepresentations. If there are such misrepresentations, then the insurers may consider rescission. What happens to “innocent insureds” is a big issue. Yet, how many D&Os are involved in filling out or reading the application or the coverage before a loss? Some boards do have insurance sub-committees.

4. Post-Enron Considerations Be diligent and have designated responsibility for the preparation of the application. Pay attention to:  What financial information is incorporated into an application.  Accuracy of representations in the application. Severability of the application to protect innocent insureds.  Is there true severability?  What conduct or knowledge is imputed to the Company?  Most policies allow rescission if an insured knew of the incorrectly disclosed facts as opposed to knowing that they were not truthfully disclosed in the application. Does this mean that all D&Os must read the application?  Consider fully non-rescindable coverage (at least for A- side) or separate coverage for independent directors.

5. The Exclusions Post-Enron Consider how conduct exclusions (fraud) may limit coverage for guilty verdict versus admissions versus nolo pleas, as examples. Can the insurer impute conduct to preclude coverage under the exclusions as to innocent insureds? Do public policy exclusions such as California Insurance Code section 533 limit coverage (certain securities claims, punitive damages, criminal fines and penalties)?

6. The Exclusions Post-Enron Considerations To protect innocent insureds “conduct” exclusions should contain a final judgment/adjudication requirement. Some policies offer severability of exclusions as to innocent insureds.

7. Coverage Post-Enron Scope of coverage can be an issue. Is there:  Coverage for formal SEC actions?  Coverage for informal investigations?  Coverage for alleged criminal conduct before indictment?  Coverage for regulatory actions?  Coverage for non-monetary relief?  Coverage for conduct relating to the handling of a pollution issue?  Coverage for shareholder derivative demands?  Coverage for punitive damages

8. Insolvency Issues Post- Enron Issues Raised How does bankruptcy play into all of this? Danger that bankruptcy may prevent D&O’s from collecting under the policy.  Automatic stay  Asset of the Company versus asset of the D&O’s

9. Insolvency Issues Post- Enron Considerations Many boards are now purchasing A-side DIC coverage to protect against BK issues (the coverage drops down if the regular coverage does not respond). Some policies contain insolvency protections -- such as a “priority of payments” provision. Ensure the insured versus insured exclusion contains exceptions for indemnity claims, claims by bankruptcy trustees (or similar appointees) and for claims by former D&Os not a part of the Company for the past 4 years.

10. Summary Post-Enron D&Os should be proactive. Consider a sub-committee on insurance. Review the application carefully. Consider alternative coverage to protect innocent insureds. Try to ensure severability of the application and the exclusions, among other things, to protect innocent insureds. Conduct a policy review by counsel in conjunction with the insurance broker.