“Insurance companies are trying to incorporate coinsurance into the policies, which requires the corporate entity to participate in the claim,” he added.

According to Michael Cavallaro, director with ARC Excess and Surplus in Garden City, N.Y., premiums increases vary. “Ive had some good accounts in public companies that have gotten a 35-40 percent increase, and Ive had some public companies that had pricing go up three to four times, depending on the circumstances,” he said.

“The accounts that have been affected the most are obviously the big market capitalization companies, the Fortune 500s,” he said. But “it doesnt have to be a Fortune 500. It could be a company thats trading at a very high multiple, where the stock market values it at a high figure.”

Underwriters in the directors and officers liability business increasingly want to get back to D&O basics and are pushing to provide coverage for the personal liability of the directors and officers, which they say was the markets original intent. Nevertheless, there is still a demand for entities coverage, which underwriters are still providing, but following strict underwriting criteria.

Paul Brodeur, directors and officers liability product manager for Travelers Bond in Hartford, Conn., said there is still a lot of capacity out there thats willing to provide securities entity coverage. “Weve seen some withdrawal but not to the point where Ive seen people having problems putting together the program they wanted,” he said.

However, on an isolated basis, individual companies may be having trouble getting securities entity coverage in the amounts they would like, especially if they have had problems or are in tougher industries that have been sued, such as software companies, Mr. Brodeur said.

He said that a lot of the newer D&O products are going back to the traditional “A-Side” coverage that responds only to the directors and officers for derivative claims and claims that arise out of an insolvency. The Side A coverage is pure Side A. So theres no coverage for the entity securities claims or for the indemnified claims for the directors and officers (otherwise known as side B coverage).

“The decision to purchase entity coverage does, without question, come at the expense to some extent of the board,” said Tony Galban, vice president, D&O underwriting manager for Chubb Insurance in Warren, N.J.

After a bankruptcy, the entity coverage creates an argument as to whether the policy belongs to the company or the board, he said, explaining that the courts have held in some cases that the coverage may very well belong to the company. “That has put boards in precarious situations.”

Bill Cotter, chief underwriting officer for National Union, the New York City-based subsidiary of American International Group, said the fundamental intent of a D&O policy is to buy coverage to protect the personal assets of individuals.

“If a risk manager wants to go beyond that, to provide coverage for the balance sheet, thats why we continue to provide protection for the indemnification responsibility of the organization on behalf of individuals. Were not taking that away,” he said, referring to what is traditionally known as Side B coverage. “If the risk manager wants to provide further balance sheet protection for the liabilities of the corporation itself, that product null may also be available, but there will be a coinsurance provision added.”

The real answer for a board of directors is that the policy should not have entity coverage. It should be devoted strictly to the board members as individuals or to the companys obligation on their behalf, Mr. Galban stated.

“I love all this debate about entity coverage. The simple answer is take it out. Take out the entity and the board can breathe a sigh of relief. It has never served the individual board members purpose. It has always served the company,” he said.

Nevertheless, Chubb still provides entity coverage but separately charges for it, he said. “We build it into the policy and then offer programs that have it with or without it,” he said. “Its not a separate policy. I want to be clear about that. Its still in the basic policy.”

Mr. Brodeur thought that entity coverage would still be offered, but insurance carriers would be more careful about the companies theyre willing to offer it to. “It will become more limited and the price will continue to go up,” he added.

“Weve always taken the approach that well provide full securities entity coverage to accounts that meet our strict underwriting guidelines,” he said.

“We dont provide it to a broad range of companies. We looked at the larger companies and we feel we cannot provide their balance sheet protection for a securities lawsuit,” he said. “We cant underwrite which ones will have a claim and which ones wont. Its gotten that bad. So we just dont provide it in some cases.”

For other companies, Travelers will offer “A Side” coverage in its broad form policy, which only provides coverage for non-indemnifiable claims to the directors and officers. “Theres no entity coverage whatsoever, securities entity or directors and officers coverage for the indemnified claims,” he said.

The industry as a whole has tried to mitigate losses through the use of larger retentions and coinsurance, but that doesnt seem to be helping, he said.

“Basically its gotten to the point where, when you have a securities loss, pretty much the whole tower of insurance is going toward the settlement value, and no matter where you are on that program, if youre providing securities entity coverage, youre going to be paying,” he emphasized.

Over the last 20 years, the value of individual directors and officers policies have been eroded to the point where more coverage is being provided for the company than to the directors and officers, Mr. Brodeur said.

“If you pay out for the company, then the directors and officers dont have the coverage,” he said.

When a claim comes in, if the corporation is sued and the directors and officers are sued, if youre only providing A-side D&O coverage, then you run into the issue of allocation, which entails trying to parcel out how much of that claim against the directors and officers would be covered by the insurance policy, he noted.

“There would no coverage for claims against the corporation and no coverage for claims against the directors and officers where the corporation is permitted to indemnify them,” he said. “So the only coverage that would be provided is for claims where the corporate is either not permitted to indemnify or is unable to by reason of insolvency.”

Describing Travelers Broad Form PLUS+ policy, Mr. Brodeur explained that its for directors and officers who wish to make sure that no matter what happens, they have a policy out there thats going to respond to their situation and not provide any coverage for the corporation, he said.

(The Broad Form PLUS+ policy is a stand-alone policy that is in excess of any other directors and officers policy.)

“The expectations that have been placed on their roles as directors and officers were always serious, but obviously its been brought to the forefront now,” he said. “Their individual liability has been brought to their attention because of whats happened” with the various corporate scandals.

He noted that in Travelers standard D&O policy, securities entity coverage is still being provided in some cases. “In other cases, were only providing A-Side,” he said.

Mr. Galban at Chubb noted there are products surfacing for the benefit of individual directors.

“Weve just released one ourselves called a personal directors liability policy, which is built for individuals, for that outside director to buy themselves, to cover the situation where they may find themselves hung out to dry because theyre in the midst of a scandal of which they were unaware,” he said.

“They want to buy an individual protection that would cover them for their individual liability in that circumstance,” he said, noting that this policy is getting a lot of interest” because its very hard as an outside director to get to know the other directors and officers well.

Certainly the bar has been raised with the new audit committee rules and the Sarbanes-Oxley requirements, but if somebody wants to commit fraud internally, its often hard for an outside director to see it, he said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, May 26, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.