Litigation, Investigation Fears Driving Up D&O Insurance Limits

February 22, 2011

Directors and officers (D&O) liability insurance is gaining traction as more companies are increasing their D&O liability limits and a growing number with international operations are also purchasing D&O policies in foreign jurisdictions.

The buyers are being driven by the potential for litigation and regulatory investigations, according to global professional services company Towers Watson’s 2010 D&O liability survey.

The Towers Watson survey reports that 21 percent of respondents increased their D&O limits compared to their prior D&O policy, versus 12 percent in 2008, the last time the survey was conducted. Additionally, while 75 percent said their limits had stayed the same ⎯ versus 86 percent in 2008 ⎯ only 3 percent said they had decreased their limits.

“Clearly, companies are reacting to the fact that D&O liability exposures facing directors and officers are arguably at an all-time high,” said Larry Racioppo of the executive liability group in Towers Watson’s Brokerage business. “Insurance buyers continue to be threatened by an ever-expanding litigation environment and have an increased awareness over regulatory issues they might encounter.”

Racioppo said that the current state of the insurance market with its reduced pricing may have also be contributing to the increases in limits purchased. Towers Watson’s own third quarter 2010 Commercial Lines Insurance Pricing Survey (CLIPS) showed a decline in D&O pricing for the fourth consecutive quarter. “It is also likely that purchasers are reallocating a portion of their savings to buy additional limits,” Racioppo said.

Of those companies surveyed, 53 percent said their companies have international operations. Of this figure, nearly half (47 percent) purchased a local D&O policy in a foreign jurisdiction, a marked increase over 2008, when only 2 percent of respondents with international operations purchased a local policy in a foreign jurisdiction. Additionally, as a general rule, the larger the company, the more likely it is to purchase local D&O coverage. As such, 68 percent of companies with $10 billion or more in assets said they bought local policies, while 23 percent of companies with less than $250 million in assets did so.

“Clearly, multinational organizations have a better understanding that the risk environment has clearly changed, and they are seeing that navigating local laws and regulations are complex, depending on the region,” said Michael F. Turk, a Towers Watson senior consultant. “However, as a result of the time spent becoming more familiar with local issues as they relate to their own distinct situation in a particular country, companies are making more informed decisions as to how to best protect their directors and officers.”

Among other highlights of the D&O survey released by Towers Watson:

  • When asked if they had conducted an independent review of their D&O program within the past two years, 54 percent of respondents said that they had not. Of that 46 percent that did conduct a review, 20 percent said they used an outside broker; 19 percent turned to a law firm for review, and 7 percent said they engaged a consultant. The survey suggests that the competitive insurance market might explain why more companies are not having their D&O program reviewed. Respondents might also have confidence in their current broker’s knowledge and level of service provided.
  • On average, 35 percent of private organizations bought excess Side A coverage. Findings also indicated that the larger the company, the more likely it was to purchase this type of coverage. Eighty percent of private companies with more than $10 billion in assets bought a dedicated excess Side A policy, compared to only 20 percent of private companies with less than $250 million in assets. Additionally, more than 80 percent of public company respondents purchased Side A coverage, which reflects a significant increase over 2008. Clearly, the Side A policy has become an integral component of an organization’s D&O program structure. Side A coverage is the section of coverage affording “direct” coverage of an organization’s directors and officers. It provides direct indemnification to the directors and officers for acts for which the corporate organization is not legally required to indemnify directors and officers.
  • When asked about the main impetus for the purchase of an excess Side A difference in conditions (DIC) policy, the broad range of responses highlights the fact that companies understand the myriad benefits offered by a comprehensive Side A DIC program, including: broader coverage than a traditional A/B/C policy (47 percent), a dedicated limit to the individual that is not depleted by corporate liabilities (46 percent), protection against the lack of availability of corporate indemnity (30 percent) and protection against underlying insurer insolvency (29 percent). Many directors and risk professionals share an underlying sense of concern about their exposure. With premium prices down, it is generally agreed that the purchase of an excess Side A policy is a sound investment.
  • Thirty-five percent of nonprofit and 22 percent of private company respondents said they were not sure how their D&O program was structured. This finding suggests that brokers and other management liability consultants need to spend more time educating their nonprofit and private company clients about their D&O insurance purchase.

“The bottom line is that D&O coverage, and in particular a comprehensive Side A excess policy, at its core, is intended to protect the personal assets of the individual directors and officers,” said Racioppo. “The more educated purchasers are of the nuances of D&O policies, the better prepared they will be in utilizing the program to provide that last line of defense.”

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