Making matters worse is that about one-third of all D&O suits stem from merger and acquisition activity, which is now ripe in the health care sector. "It is tough. Everything has cycles and the loss experience on health care--mostly because of mergers and new legislation--makes it difficult," he said.

Mr. Taffae cited in particular the 1996 U.S. Health Insurance Patient Portability Act, which he said led to billing fraud allegations.

The NERA report published in April of this year backs this up, asserting that settlements in the health care sector are typically one-third higher than settlements involving other industries (controlling for case characteristics).

The NERA report said that the higher settlements' average could be the result of concurrent billing fraud allegations against health services companies brought under the federal False Claims Act.

Nick Bozzo, head of specialty lines at Beazley USA in Farmington, Conn., said that those life sciences companies that "live and die" by one product have a greater potential to face shareholder ire than more diversified companies.

"It doesn't necessarily have to be fraud, but more like 'you should have told us about this sooner than you did,' such as in the case of clinical trial results or government approvals," he explained.

D&O carriers also face tangential product liability or employment practices liability insurance risk since lawyers can figure out how to turn the suit against management for either their failure to provide enough insurance coverage or the underlying misdeed, Mr. Bozzo said.

The Enron and WorldCom settlements are unusual in one respect in that outside co-defendants financed nearly the entire sum.

Jim Nestheide, vice president for St. Paul Travelers, said what reinsurers would term "contagion" now presents new challenges to D&O underwriters. "One particular act in, say, the Enron situation, has brought into it the investment banks, the law firms, accounting firms," he said. "So, it is not just contained to that one organization."

Steve Shappell, Denver-based managing director of the legal and claims practice for Aon's financial services group, categorizes the entire Fortune 100 as difficult to class due to the size and frequency of settlements. "It is such that it has scared some [insurance company] markets from that line of business," he said. "Either they publicly won't do it, or they just price them out of the business."

Not only do hard-to-place risks get higher premiums, they require "a lot more work in going to the marketplace--and more finesse," he noted. "But we are still able to place most of this insurance, so there is really no capacity issue, and for the most part clients are paying less than they did last year."

John Rafferty, national D&O manager for The Hartford, said the specifics of what issue or industry "of the moment" becomes challenging for insurers "evolve from year to year," noting that energy and utility risks were difficult several years ago, while last year it was auto parts manufacturers. "The challenge is to not only react to unfolding events, but to try to look around the corner to prepare for the next event or sector in the news," he said.

After the sharp hikes post-9/11, Enron and WorldCom, prices dropped fairly sharply in 2004 and are now creeping back up, according to Mr. Nestheide. The MarketScout Barometer survey of agents and brokers reported an average 3 percent decline in May for D&O coverage.

That's "close but no cigar" in terms of the pricing matching the risk, according to Mr. Nestheide. "If you look at the first quarter of 2005, I think you could see that the price decreases were double digits, but it improved every quarter as it went along," he said. "Now in 2006, I am hearing more [talk] of [changes in the] -5 to 0 percent [range]."

With new risks stemming from things such as options back-dating (see related story, page 14) and larger investor losses, Mr. Nestheide believes further price increases are justified.

In the end, the good clients will still get the favorable conditions and rates, "but if it is a difficult risk, I think it needs to be priced accordingly, and I am not sure the market is there yet," he added.

As for terms and conditions, Mr. Rafferty said they seem to have found equilibrium. "Pressure is building to limit the rescindibility [or] voidability protections afforded insurers who feel they were clearly misled in the underwriting process," he said.

Brokers are also looking for all the excess insurance layers in a D&O program to conform to the provisions of the underlying insurance layer to avoid coverage gaps, he said--referring to this as "another pressure point from brokers."

Mr. Rafferty said insurers are addressing this in various ways. Hartford has responded with a Universal Excess form that makes it easy for brokers to add the insurer to a program, he noted, adding that most insurers attempt to match the specific requirements of the insurance tower by amending older forms when requested by their agent/broker.

Insureds, Mr. Rafferty said, are looking beyond price, although that is a concern. However, for D&O insurance, there are several "customers"--ranging from the risk manager (who is interested in carrier security, as well as scope of coverage and appropriate limits) to outside directors (who are concerned about their personal assets should they face a situation where the company on whose board they serve cannot or will not indemnify them).

So, just how effective is directors and officers coverage in the crunch?

Rick Betterley, publisher of the Betterley Report, said directors and officers have grown increasingly concerned about just how good their coverage is. "With uncollectible coverage claims reported in the press, board members are asking whether or not their protection is as reliable as they thought," he wrote in a report late last year.

To meet these concerns, carriers developed so-called Side-A coverage, which is usually purchased in parallel with the organization's regular D&O policy, so it only covers directors and officers when the original policy does not pay for any number of reasons. (See NU, Oct. 14, 2004 and Oct. 24, 2005 for more on different types of Side-A coverage.)

"Although this type of coverage is relatively new, we understand from the carriers that large, publicly-traded companies are buying a substantial number of policies," according to Mr. Betterley.

He estimates that the premium for Side-A coverage is in the $300-to-$500 million range for businesses in the United States, which he termed sizable for a new product.

While not all carriers are writing it, the industry leaders are, he said--noting that growth rates in 2005 for the handful of carriers that responded to his survey were in the range of 40-to-75 percent. Such growth is "not unusual for a new product, and likely not sustainable, but it represents a significant premium increase for the D&O line of business, which could certainly use it," Mr. Betterley said in his report.

New D&O coverage issues can arise even from laws passed more than three decades ago, such as the Foreign Corrupt Practices Act, noted insurance broker Kevin LaCroix of Oakbridge Insurance in Beachwood, Ohio.

A combination of the lure of doing business in China, where bribery is a more accepted business practice, plus Sarbanes-Oxley disclosure requirements regarding internal controls can add up to shareholder action, he noted.

"Shareholders of companies facing FCPA difficulties may allege that prior internal control assessments or certifications were deceptive or misleading due to failure to disclose internal control or other weaknesses that failed to prevent or detect improper payments," said Mr. LaCroix.

New risks make carefully managing a D&O portfolio more challenging and critical than ever, according to participants at a panel discussion at the D&O Issues Symposium of the Minneapolis-based Professional Liability Underwriters Society earlier this year.

But Mr. Rafferty, who spoke at the session in New York, noted that D&O underwriters have better management tools. Technology now makes understanding portfolio risks to the slightest detail ever more feasible, he said.

"We have no excuse now not to know about our portfolios," he added, noting that carriers can pinpoint how many Fortune 500 companies, for example, reside in a portfolio. "It takes discipline, and I think the jury is still out on whether or not we are going to use that technology effectively."

Another speaker at the PLUS session--Timothy O'Donnell, an executive vice president for ACE USA in New York--said that "we still have to make judgments every single day. As we move into soft markets, are [insurance] companies going to have discipline and are people going to be willing to walk away from certain business? If we use the information we have, we shouldn't lose as much as we have in the past."

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