McClendon's death creates complex financial picture

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When an individual is the face of a business, any harm or trouble that befalls that person can have an outsized effect on the company.

For that reason, businesses may take out "key man" insurance that protects companies against financial losses from the death of a crucial employee, as well as what's called directors and officers liability insurance (D&O). The latter typically covers settlements or defense costs from legal actions brought against current and former C-suite executives. If the case involves an executive's suicide the situation can be even more complex.

Police have yet to determine the cause of the Wednesday car crash that killed former Chesapeake Energy CEO Aubrey McClendon. His death came a day after a federal indictment was issued alleging McClendon engaged in illegal bid-rigging while at the multibillion-dollar company he co-founded.

It's also unclear whether McClendon, 56, even had life insurance, either for the benefit of his family or his newer start-up, closely held energy firm American Energy Partners LP.

McClendon's story doesn't conform to any usual script. The Justice Department has moved to dismiss its case because of his death, and there's no evidence that American Energy Partners had taken out key man insurance on McClendon. Calls to the company on Thursday and Friday were not returned.

Not all companies regard key man insurance as equally necessary.

"The idea is that this is a person who brings something very special to the company, who is critical to the organization," said Joan Schmit, a professor of risk and insurance at the University of Wisconsin-Madison's business school.

Besides providing cash to help replace top talent, key man insurance can sometimes be used to ensure that a company will be able to buy back from beneficiaries large stock holdings owned by a deceased employee, said Peter Daly, senior vice president and founding principal of ABD Insurance and Financial Services.

But it's not always obvious which companies take out such policies. The New York Times Co., for example, has taken out insurance on some key employees, while in past securities filings, companies like Google have explicitly warned they do not maintain key person policies for top executives such as co-founder Larry Page.

On the other hand, D&O insurance is all but mandatory for big public companies, said Brian Wanat, chief executive officer of Aon's financial services group in New York City.

"D&O helps a company attract a great board of directors, since it protects the individuals personally as well as the corporate balance sheet," he said.

Most companies take out policies covering up to about 10 percent of their market capitalization, Wanat said, and the insurance can sometimes even protect employees' spouses.

Though D&O insurance can be used to offset different types of legal costs, settlements are most common.

"Very few of these cases ever get tried," said Peter Kochenburger, an insurance law professor at the University of Connecticut.

While it's no longer an issue in McClendon's case, D&O insurance typically comes with a "criminal acts" exclusion. Though D&O usually covers claims resulting from a wrongful act, like a mistake in a SEC filing, allegations of willful illegal acts are generally covered only up to the point of adjudication, said Jeff Kingsley, a partner at the New York law firm Goldberg Segalla.

There is also the unanswered question of what happens to McClendon's family, particularly depending on whether a cause of death is ultimately determined.

Life insurance policies generally have "suicide clauses" stipulating that insurers won't pay benefits in such cases. But those restrictions expire after two years, and sometimes just one, depending on which state laws apply, said Burke Christensen, an insurance lawyer and accounting professor at Eastern Kentucky University.

"If Mr. McClendon had, hypothetically, taken out a policy three years ago, the insurer would have to pay, even if his death were ruled a suicide," Christensen said.

Oklahoma police have said it could take weeks to determine what caused the single-car crash.