Highest-Ever D&O Liability Shareholder Claim Reported

February 3, 2000

The average size of a shareholder directors & officers (D&O) liability claim award rose to $8.67 million, the highest ever, but overall pricing still declined for D&O liability insurance for the fourth consecutive year, according to the 1999 D&O Liability Survey, an annual study completed by Tillinghast – Towers Perrin.

High-tech and biotech companies with recent initial public offerings (IPOs) ran against the overall downward trend, with some posting substantial premium increases.

“This market remains very competitive, with reinsurance and primary insurance capacity growing and policy language generally less restrictive,” said Mark Larsen, a Tillinghast – Towers Perrin consultant and the survey’s author. “While premiums decreased an average of 7 percent for comparable coverage, shareholder D&O claim costs rose $1.51 million to $8.67 million, with the average indemnity payment for closed shareholder claims — excluding those closed with no payment — up from $7.16 million in last year’s survey.

“If these trends continue, we could soon see adverse loss ratios and shrinking insurer profit margins,” noted Larsen. “Despite the dearth of Y2K claims to date, this type of liability has several more years to its tail and could result in significant losses for D&O insurers. For companies seeking coverage, the financial strength and reputation of D&O insurers will definitely be factors.”

According to U. S. survey respondents, employee claimants most frequently cited discrimination in employment as an issue; such claims accounted for 27 percent of all D&O claims reported. For shareholder claimants, issues related to financial disclosure were most common and accounted for more than 7 percent of all claims.

The survey was endorsed by the Research Committee of the Risk and Insurance Management Society (RIMS) and had over 1,400 responses. Fifty-six percent of the 1,325 U. S. participants were publicly traded companies, and slightly more than half had experienced merger, acquisition or divestiture activity in the last five years.

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