D&O Costs More
from July/August 2002
Just when companies need it most, directors’ and officers’ liability insurance is getting a lot more expensive.“The typical good risk, the company that has little to no claims activity, is financially healthy, and is in a stable or relatively growing industry, is receiving a premium rate increase anywhere from 25% to 50% this year,” says Fred Podolsky, executive vice president and national practice leader for global financial and executive risks at Willis Group Holdings, one of the nation’s largest insurance brokers. “Obviously there are some exceptions—some have received rate increases somewhat less than that—but they are few and far between.”
For companies that are financially challenged or operate in “difficult” industries such as telecommunications, high tech, or biotechnology, Podolsky says, rate increases are on the order of 50% to 100% at minimum. “If you look at a financially challenged company that also has claims activity, we are seeing multiples of that 100%,” he says. “That’s also true for companies that are coming off multi-year insurance programs, who might be seeing rate increases in the 200% to 400% range.”
At the same time, most companies are being hit with deductibles 50% to 100% higher than in the past. In some cases, according to Podolsky, deductibles are trebling.
The D&O market began hardening early last summer, a process that accelerated after the September 11 terrorist attacks. Podolsky attributes the escalating prices to insurer losses in those disasters, the growing number of securities lawsuits, and the burgeoning size of the settlements in these suits, which in 2000 totaled $4.4 billion. “It was like nothing I’ve ever seen in my 20 years in this industry,” he says of the market’s abrupt price spiral.
There’s no relief in sight. “Last year there were almost 500 shareholder securities actions against directors and officers, up from the prior year and a substantial increase from the approximately
200 cases we had in 1995, when the Private Securities Litigation Reform Act was passed,” Podolsky notes. “There are still more than 1,000 of these cases winding their way through the courts, many of which will require D&O insurers to fork out many hundreds of millions of dollars.”
Despite the rising prices of D&O policies, Podolsky sees no evidence that companies are cutting back on their coverage. That’s hardly surprising, with securities litigation and the size of settlements both climbing.
Podolsky advises companies to begin planning their policy renewals as much as six months before their current policies expire. “Companies need that time to sit down with their broker and come up with a plan as to how the company will be presented to the underwriters, much like the time and attention that goes into presenting the company to the investment community,” he says. “That means keeping in more regular contact with the company’s insurance broker and underwriters, seeing those underwriters more than once a year, and coming up with a plan as to what the company wants the policy to look like.”
Directors, meanwhile, should pay particular attention when their company is entering into a D&O policy with a new insurer, rather than simply renewing an existing policy. When a public company fills out an insurer’s application for the first time, it must answer questions about whether the applicant has any knowledge of errors, acts, or omissions that could give rise to a claim. If the policy has a feature known as warranty severability, it means that the only person liable for the statements made in the application would be the signer. If the policy does not have warranty severability, however, all of the covered officers and directors would be liable for those statements, and a board member might find himself sued for something he didn’t say. A director covered by such a policy, Podolsky says, would want to be highly confident about the accuracy of the application.
