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Insured parties, especially boards of directors who usually go without direct compensation, have even had to look at overseas markets to find the proper insurance.

"There are a lot of new hoops to jump through, but the type of claim and the source of claim remain the same," says Steve Shappell, director of the legal and claims practice in the financial services group at Aon. "As a result of Sarbanes, the Securities Exchange Commission is far more proactive. They got a huge budget out of this, and they're using it. SOX also makes it critical that you have a policy in place because the severity of a claim may be greater."

"A lot of independent directors are saying, 'Let me look at the policy. Do you have enough limits? How are you protecting me separate and distinct from the inside directors and officers?' How do you protect an independent director from a CFO who's cooking the books?" Shappell says.

As a result, some board members are getting choosy about their insurance, says Shappell. "If the board has a lot of wealthy, prominent people on it, they're going to insist on a higher level of protection," he says.

The requirements imposed by SOX coupled with the difficult insurance market have been problematic for some risk managers.

"During the hard market, there had been the sense that coverage could be more expensive, and some markets were not as willing to offer certain limits," says Carolyn Rosenberg, partner and head of the Insurance Coverage Group at the law firm of Sachnoff & Weaver Ltd., which represents policyholders. "There's some sense now that the market is softening."

Part of the problem with D&O had been the traditional difficulties with uninsured interests. Because most insurance policies exclude coverage for fraud or punitive damages, or for misrepresentations to the insurance carrier, some found D&O coverage not broad enough.

"However, some domestic insurers will cover punitive damages as well. They may include that those damages will be covered if there is a law that permits their insurability, and you may have the opportunity to use the most favorable jurisdiction to determine if punitive damages are insurable," says Rosenberg.

While domestic carriers may not have designed D&O policies tailored specifically to SOX, some carriers have managed to get by.

The issue is important, says Carol Zacharias, counsel and senior vice president at ACE USA, because legal settlements continue to rise. The average settlement value in 2003 for securities class actions, for example, was $23.3 million, Zacharias says.

ACE's solutions include providing for severability and nonrescindable Side A coverage. "Historically, a misrepresentation by anyone filling out an application binds anyone else on the policy. But under severability, knowledge of one insured cannot be imputed to any other insured for purpose of coverage," says Zacharias. "However, some carriers are now limiting severability or pulling it back. That's another phenomenon of the hard market and fraud litigation in the marketplace.

"Some insurers say, 'We will increase the limits on your policy to deal with Sarbanes-Oxley liability.' Others turn overseas to jurisdictions like Bermuda or England where punitive damages are considered insurable," she says. "But you can address that concern just by not having enterprise coverage on the same policy, or you can address it by having severability."

April 15, 2005

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