“Who do we represent? The question has come to the forefront,” he said.

“The obvious answer is the directors and officers. But what about the company” buying the insurance? he asked, noting that the interests of directors and officers may not be aligned with the corporate entity. “Are the interests ofinsiders and outsiders aligned?” he asked, highlighting another potential conflict.

Mr. Cavallaro went on to describe two situations he faced personally within the past year that illustrate these conflicts. The first situation pitted the chief executive of a bank against an outside director over the question of what limit of coverage to buy. The second involved the internal conflict facing the general counsel of a Fortune 1000 company whose interest was in protecting the company with entity coveragea coverage which, if triggered, could dilute the coverage available to directors and officers. Entity coverage also increases the likelihood that policy proceeds will be frozen in a bankruptcy situation.

Describing the first situation, Mr. Cavallaro said that during a bank board meeting, the CEO advocated maintaining the same limit of coverage. But the outside director said he viewed his service on the board as “some sort of civic duty.” As such, he told Mr. Cavallaro, he was not going to expose his personal assets, advocating increased limits for his protection.

“The conversation became a little heated and they turned to me for my recommendation. Before I could speak, the CEO tried to lead me to recommend the status quo,” Mr. Cavallaro reported.

“The obvious conflict [was between] insiders who wanted to keep a lid on the costs and the outsiders [who were] more concerned about the level of protection. The other conflict was a little more subtle–with the CEO telling me you represent me, not necessarily everybody else.”

Turning to the case of the Fortune 1000 company, Mr. Cavallaro reported that the general counsel, conflicted by his knowledge that entity coverage was in the best interests of the company but not in the best interests of the directors, said he wanted to recuse himself from the insurance purchase process.

In any of these cases, Mr. Cavallaro said, “My solution is to ask my insureds, Why do you buy this coverage? Is it just to protect the directors and officers? Or is it also to afford some corporate balance sheet protection?”

Mr. Cavallaro and other brokers said that in spite of the emotionally charged atmosphere, new coverage solutions are creating opportunities for brokers to respond to these conflicts.

A popular solution leaves entity coverage in the D&O program, but adds a separate tower of nonrescindable side-A coverage with a DIC (difference-in-conditions) feature, brokers reported during the conference.

Under traditional D&O policies, side-A coverage pays judgments and settlements on behalf of directors and officers in situations where the corporation does not indemnify them, either because it is financially unable or prohibited by law to do so. (Side B reimburses the corporation for judgments and settlements for which the corporation has indemnified the directors and officers.)

Newer side-A-only policies provide additional limits of side-A coverage. DIC features allow the newer policies to drop down and pay primary limits when an underlying policy is rescinded or frozen in bankruptcy.

“These products present a phenomenal opportunity for us as an industry to expand the pie [and] bolster the revenue stream for the [D&O] industry,” said Todd Jones, executive vice president for the Executive Risk Practice of Willis of Pennsylvania in Radnor, Pa. “We are in an environment where there is intense focus on what we do. And people [buyers] are spending a lot of time making sure thattheyre doing the right thing for their particular companies,” he said, explaining that such conditions create opportunities for brokers and underwriters to sell the new products.

But brokers also said that underwriter growth targets are adding to the uncertainty of an already cloudy D&O market pricing picture, increasing the challenges inherent in one of the brokers key rolesmanaging client expectations.

“I dont think theres anything that would indicate that weve got a really good handle on what this [marketplace] is going to look like in 12 or 24 months,” Mr. Jones said.

Paul Kim, managing director for Aon Financial Services in New York, said that based on his conversations with underwriters, most D&O insurers are looking to increase revenues 15 or 20 percent. “The only way to pick up that business is either to write new business that comes to the marketplace or to take it from the competition,” he said, suggesting that growth goals could fuel price competition.

Lou Ann Layton, managing director and D&O practice leader for Marsh in New York, noted that another market change shes observed has some carriers that limited the capacity they were willing to put out on primary layers in recent years now being more aggressive.

While she views this as a helpful change in the market, Darren Sonderman, a broker for McGriff, Seibels & Williams in Atlanta, Ga., said the change creates additional challenges for brokers. “As brokers, I think we have an obligation to support” markets that havent wavered or shifted their appetites, he said.

The brokers agreed that they have a clear role to play in educating clients about D&O insurance and some role to play in moderating pricing swings.

Mr. Jones pointed out that the brokers role in educating clients has become more critical in the last two years. “We live in a world [of] sound bites” where risk managers and outside directors are getting “snippets of information” from CFO magazine, Corporate Board Member or the Wall Street Journal, he said. “And theyre only getting part of the story,” he added, noting that brokers need to deal with the perceptions shaped by these sources.

Mr. Sonderman said, “There is clearly an ability to put logical and rational thinking into the process” by engaging clients in “difficult discussions” and imparting wisdom that “they dont want to hear.” For example, he said, pricing is leveling off sooner than the last cycle, and pricing reductions, “in all likelihood, can be attained,” But “that might not be the best thing for the client or for this industry, in general.”

While underwriters have the final say about where prices fall, “were all responsible in some way, shape or form” for the “irrational and at times stupid behavior” still evident in the marketplace,” he said.

Aons Mr. Kim, however, drew an analogy between insurance underwriters and baseball club owners when it comes to the marketplace. “They grouse all the time about the salaries they have to pay. Yet they are the ones paying them,” he said of the baseball owners. And underwriters exert some of the same control over their marketplace, he said.

“It is incumbent on you to recognize that you are the ones who, to a certain degree, can dictate the pricing on these programs. Hopefully you will maintain some pricing discipline over the next few years.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, February 27, 2004. Copyright 2004 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.

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