Aon Study Reports D&O Liability Expenses Hammering Technology Companies

The chilling effect from last year’s corporate governance scandals has infected the directors’ and officers’ liability insurance market, hitting technology companies especially hard. That is one of the conclusions from a recent study by Chicago-based Aon Risk Services.

The corporate scandals of 2001 and 2002 sent a shockwave through the directors’ and officers’ liability marketplace, hardening the market, reducing capacity and tightening coverage terms. Aon’s benchmarking data suggests that 60 percent of a technology company’s risk transfer cost is now being spent on directors’ and officers’ (D&O) liability. With insurance premiums spiraling upward from 50-1,000 percent, the Aon study found that technology companies simply cannot budget for such increases due to flat or only marginally improving revenues. Consequently, these companies generally purchase less coverage or seek radical alternatives.

“Severely reducing limits or going without D&O is a tightrope walk in every sense,” Michael Rice II, managing principal, commented. “While dramatically reducing or eliminating coverage may make short term economic sense, going without D&O coverage is a dangerous game. Board members are now very sensitized to the manner to which entities procure D&O insurance. It is not unusual for a board member to tender his or her resignation if they feel their company hasn’t taken the necessary steps to provide appropriate liability coverage.”

Rice said technology companies are being hit with an incredibly volatile marketplace. Escalating liability premiums, increasing retentions and other financial conditions (e.g., co-insurance), are exerting extraordinary pressure on the bottom line, but there are few options.

Rice and other Aon thought leaders shared their views on risk in a webcast as part of Aon Tech Week, taking place Jan. 13-17. The event aims to help technology companies prepare for the road ahead by arming organizations with the essential information to deal with a variety of business risks, including the productivity and commitment of their workforce.

Topics Tech Aon