By STEVE YAHN, who has written for and edited national publications for more than 30 years
In the hard market of 2000 to 2002, a bunch of new directors' and officers' liability (D&O) insurance coverages joined a field historically dominated by Chubb, AIG, the London market and a few other insurers.
"Today, by our account there are somewhere in the neighborhood of 53 to 55 insurers offering D&O coverage policies even though the overall D&O market is soft," said Tripp Sheehan, D&O practice leader within Marsh's FINPRO practice.
Like other D&O market observers, Sheehan sees provisions of the Dodd-Frank Act stirring up the D&O market.
"I would say one thing to look at that's gotten a lot of attention--and I believe the final rules are going to be written by April 17 by the Securities and Exchange Commission--is the whistleblower provision," added Sheehan.
If the provision stands relatively close to the way it's been drafted, Sheehan said, the thinking is that employees will have significant financial incentive to circumvent their in-house compliance procedures. Instead, they'll go directly to the SEC to blow the whistle on perceived wrongdoings at their company.
The incentive? A whistleblower will get between 10 percent to 30 percent of a recovery if it's above $1 million, depending on the quality of information provided.
"That's a pretty hefty percentage for individuals, and something companies are going to have to be on guard about more than ever before," Sheehan said.
Sheehan noted that, when new government regulations are put in place, private plaintiffs are usually right behind. High-quality whistleblower information can feed civil actions against directors and officers at a company.
"So the thinking is that this could lead to an increase in activity, both directly from the SEC and through private litigation," he said.
For D&O underwriters, the whistleblower provision is particularly important because employment practice suits constitute the single largest area of claim activity under D&O policies. More than 50 percent of D&O claims are employment practices related.
Other reasons exist for increased D&O claims activity, namely the economy.
"Companies' financials are at the worst they've ever been in many years, and claims are really starting to come in now for past acts of mismanagement. Everyone is saying this is the time to bring a claim, and people are not taking kindly to mismanagement errors, whereas in the past they might have turned the other way," said Maria Treglia, senior vice president of HUB International brokerage.
Michael D. Price, senior vice president of executive assurance at Arch Insurance Group, cited another regulatory force likely to drive increased claims: the Foreign Corrupt Practices Act.
"This act has been in effect for two or three decades, but we think that it's a Trojan horse that has been underestimated by the market as a whole. The act, originally enacted to police bribery of foreign officials, was very broadly written, however, and now is subject to a wider interpretation," he explained.
HARD MARKET COMING?
According to experts interviewed for this story, coverages have gotten broader to attract new clients in this soft market while margins have gotten smaller.
"Carriers are not walking away from these deals, but you are seeing more pushback than ever," Treglia said. "Something has to give--coverage has to become more restrictive or the prices have to go up--but neither of these things have happened yet."
All of the experts interviewed for this article agreed that for the D&O markets for the most part are amenable to considering reasonable requests on premiums and coverages.
Added Sheehan: "There are some new forms that have come out in some of the markets with the hope that the additional coverage that was being provided would be substantial enough to allow an additional premium, and in some cases they have."
Treglia and other experts interviewed for this article see the D&O market beginning to harden by 2012.
"But nobody's taking that to the bank yet," Treglia said.
Soft market or coming hard market, no matter. Now's the time to expand protections, terms and limits. Now's the time to take advantage of new, improved directors' and officers' insurance policies currently on the market.
"So now is the time to get on the stick," said Carl E. Metzger, a Boston-based partner at the Goodwin Procter law firm.
One of those new D&O policies is the Executive Edge product from Chartis, which Metzger credits with shaking up the D&O market last spring.
Executive Edge introduced many new provisions, but key ones, which many other insurers followed, were: broader coverage for informal SEC investigations and pre-claim defense costs; more protection for "innocent insureds"; tightened-up loopholes regarding international exposure issues; broader coverage for government investigations and more defined coverage for derivative suits; and coverage in the case of one director suing another director.
Metzger pointed in particular to the coverage for informal governmental investigations, which he said is "a hot topic in the D&O world."
"I think that that is an area where we are going to see insurance carriers be more creative about what they will agree to carry," the attorney said.
Another D&O market growth area is emerging in the privately held corporation realm.
"The driving factor is the heightened awareness that the officers and directors of private companies are held to some of the same standards of care and loyalty that their public company counterparts are held to, especially in the areas of bankruptcy, employment practices and raising capital," Price at Arch Insurance said.
Price also said that creating D&O coverages for not-for-profits and individual insureds is another area of growth.
April 1, 2011
Copyright 2011© LRP Publications