Litigation, Investigation Fears Driving Up D&O Insurance Limits

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:

“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.”