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By DOUGLAS MCLEOD, who has covered commercial insurance for more than 20 years.

For-profit college companies should have little or no trouble renewing directors' and officers' (D&O) liability programs despite lawsuits and government scrutiny over student recruiting and financial aid practices, brokers and insurers said.

Several of the schools are also being investigated by state attorneys general and sued by students who allege that the colleges misled them about costs and future employment prospects.

Despite this, premium increases may be the only hurdle facing the companies in directors' and officers' renewals.

Pricing may remain flat or rise by 30 percent or more for some companies, with capacity a concern only in the programs' primary layers, said John Ergastolo, an executive vice president with Arthur J. Gallagher & Co. in Itasca, Ill.

Fewer insurers may be willing to write primary D&O for for-profits, and rates will likely be moderately higher, agreed Simon Beynon, president of national accounts, executive liability, for Chartis Inc. in New York.

Completing programs won't be a problem, sources said.

Marketwide, as many as 60 D&O insurers are competing over a dwindling number of public companies, said an insurance executive familiar with the for-profit college sector. "There are so many struggling underwriters out there, they'll write anything that limps in the door," he said.

For-profit colleges range from small, privately held institutions to large publicly traded companies that operate from dozens of locations, offering degrees in business, health care services, psychology, culinary arts, cosmetology, information technology and other fields.

The schools have grown explosively, with enrollments rising 46 percent to 3 million students--12 percent of all U.S. college students--between 2004 and 2009, according to the Washington-based Association of Private Sector Colleges and Universities. The biggest for-profit institutions, some with more than 100,000 students, have become familiar names in many U.S. cities, including Apollo Group Inc.'s University of Phoenix, DeVry Inc.'s namesake colleges, and Education Management Corp.'s Argosy University and Art Institute brands.

The primary source of revenue for most of the schools is financial aid programs created by Title IV of the Higher Education Act of 1965. More than a quarter of for-profit schools get at least 80 percent of their revenue from federal student aid, according to the U.S. Department of Education.

Of the University of Phoenix's $4.5 billion in 2010 net revenues, for example, about 88 percent came from Title IV student aid, very near the 90-percent limit the government imposes for continued participation in the programs, according to Apollo's financial filings.

The push to boost enrollment and gain access to Title IV funds has long created legal and regulatory trouble for for-profit colleges, much of it involving allegedly improper incentive compensation of recruiters.

In a series of 2004 class actions, shareholders alleged that Apollo Group and several of its executives failed to disclose an education department finding that the company had violated Title IV's ban on incentive compensation. The plaintiffs won a judgment that could total $228 million, and the U.S. Supreme Court earlier this year refused to hear Apollo's appeal. The company has taken charges of $177 million to cover the liabilities, saying that it doesn't expect significant insurance recoveries and that insurers may seek reimbursement of $25 million in defense costs.

The issue blew up again in August 2010 after the U.S. Government Accountability Office released a report finding widespread misconduct by for-profit college personnel. GAO employees posing as prospective students visited 15 for-profit schools and found that recruiters at all 15 made misleading statements about the colleges' accreditation and graduation rates and students' post-graduation job and salary prospects. Representatives at four of the schools advised GAO investigators to lie on their federal aid applications to qualify for loans.

For-profit education stocks dropped after the report and a barrage of shareholder class-action and derivative suits followed against several of the largest companies, including Apollo, Education Management, DeVry, Corinthian Colleges Inc., ITT Educational Services Inc. and Lincoln Educational Services Corp., according to Securities and Exchange Commission filings.

The lawsuits generally claim that company executives failed to disclose fraudulent recruiting practices, resulting in the stock losses. The companies have denied the allegations and said they will defend the suits.

The shareholder litigation echoes allegations in another set of lawsuits afflicting some colleges: qui tam, or whistleblower suits, brought by employees. These suits generally accuse companies of defrauding the government by violating federal rules to obtain Title IV funds.

Along with the litigation, the for-profit industry is facing state investigations of recruiting and financial aid practices. Half a dozen companies, including Apollo, Education Management and Corinthian, have received subpoenas or investigative demands from attorneys general or other regulators in California, Delaware, Florida, Georgia, Iowa, Kentucky, Massachusetts and New York, SEC filings show.

The U.S. Senate's Committee on Health, Education, Labor and Pensions is also keeping an eye on the industry, holding hearings on recruitment--it was the HELP committee that ordered last year's GAO report--and students' high debt levels and default rates.

For-profit college students represent 26 percent of student loans and 46 percent of loan dollars in default, according to the education department. The department in June unveiled new loan repayment standards--known as "gainful employment" rules--that a college's students must meet for the school to remain eligible for Title IV funds. APSCU, the industry trade group, is suing to vacate the rules.

None of this makes for-profit colleges an easy sell to D&O underwriters.

"The sector has become highly politicized, and that's not the kind of spot the industry wants to be in," Gallagher's Ergastolo said.

"Whenever you've got a sector with a lot of bad press, you're going to have underwriters who are not going to write it," said John C. Schneiter, senior vice president with HUB International in Norwell, Mass., and co-chairman of its academic practice.

The largest publicly owned companies have D&O programs with $75 million to $100 million in limits over deductibles of $1 million to $5 million, Chartis' Beynon said. This would include layers of "ABC" coverage insuring company officials and the corporate entity, along with a separate tower of Side A coverage for the directors and officers only.

Even if some insurers shy away from writing primary layers, the market is competitive enough for even large for-profit colleges to renew their programs, possibly at higher prices, sources say.

"I would characterize it as definitely more difficult, tightening," said Bruce Bernstein, senior vice president and Western Zone Education Leader with Marsh Inc. in Newport Beach, Calif. "But the market has capacity. People are not walking away from this business."

Pricing may be the only sticking point in these renewals: Market sources say they've seen no pressure from underwriters to add restrictions or limitations on coverage.

The turmoil and scrutiny of recent months may actually lead some insurers to conclude that all the bad news in the for-profit college sector is out in the open, and that the risk going forward may lessen, said Kevin LaCroix, executive vice president with Oakbridge Insurance Services in Beachwood, Ohio.

NEW SOURCE OF PLAINTIFFS: STUDENTS

As they grapple with shareholder litigation, for-profit colleges are facing another growing source of lawsuits: their own students. Student lawsuits, often filed as class actions, typically allege that colleges misrepresented their accreditations and transferability of course credits as well as student job and salary prospects. Most suits allege violations of state deceptive trade practices laws, fraud and breach of contract, and many end up in arbitration, where arbitrators often--but not always--decline to handle plaintiffs as a class.

During the first half of this year, for example, Corinthian Colleges was hit with seven student class-action suits, an "unprecedented" increase that it blamed on bad publicity and "aggressive lawyer recruitment" of student plaintiffs.

Student suits may fall under colleges' educators legal liability policies, which cover a range of risks including "failure to educate" claims, sources say.

Cobbs, Allen & Hall, a retail and wholesale broker in Birmingham, Ala., put together a broad APSCU-endorsed program in 2007 that is written by RSUI Group Inc. in Atlanta and covers educators' legal liability and D&O.

Cobbs, Allen has placed the coverage for 20 privately held for-profit colleges with enrollments ranging from 350 to 30,000 students, said Bruce Denson, a Cobbs, Allen executive vice president.

Even these privately held schools have had a poor loss record, Denson said. Rates in the program increased 15 percent to 20 percent last year and are likely to increase again this year as schools continue to face student suits.

Denson and others point out, though, that some for-profit colleges are making efforts to address their problems.

Apollo Group reported that it has stopped using enrollments as a performance measure for admissions personnel and has eliminated 700 mostly admissions jobs. In addition, Apollo now requires new students to attend a three-week orientation program that describes academic expectations.

In July, 20 regional for-profits in the Northeast signed an accord pledging to provide clear information about the colleges' costs, graduation rates, academic requirements, employment data and student debt.

Companies "that make the changes will have better success" with insurance markets, Marsh's Bernstein predicted.

September 15, 2011

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