How's the market for directors and officers (D&O) insurance? It all depends on whom you're talking to–and who your customer is. Increased litigation from the subprime meltdown has helped to create a bifurcated market, divided into financial institutions and everyone else. Insureds without subprime exposures are still enjoying a D&O buyers' market, with low premiums and broad coverage; financial services firms face higher premiums, less capacity and tougher scrutiny of everything from potential losses to investment portfolios.

But the threat of litigation isn't limited to financial institutions or large publicly held companies. Combine a slumping economy with a glut of plaintiff's attorneys, and you have an environment where businesses of all sizes and types are potential defendants–with the personal assets of their directors and officers on the line.
This presents agents and brokers with both a challenge and an opportunity: While they must navigate the market vagaries and find the best carriers and coverage for their customers' unique needs, it's also a good time to educate and sell their small to midsized customers on the importance of buying this essential protection.
Carriers have a big appetite for D&O
For the past several years, public, private and nonprofit D&O buyers with little or no financial risk have enjoyed broad coverage, generous terms and competitive premiums, with insurers like Zurich, ACE, Lloyd's, XL, Chubb and AIG targeting the business segment.
“D&O liability insurance is a long-standing product, so insurers have a very good idea of the key underwriting areas, as well as the risks and rewards of insuring customers with this coverage,” said James Proferes, vice president, deputy underwriting manager of D&O liability for Chubb Specialty Insurance, Warren, N.J. “And the universe of privately held customers is a vibrant, growing customer base that presents sales opportunities to agents, brokers and insurers alike.”
To tap that market, insurers are increasingly designing D&O coverage for small to midsized buyers. This is a market they can easily service through technology and the Web. For example, CNA's Epack EZ umbrella policy is designed specifically for businesses with less than 50 employees and less than $10 million in assets. The coverage allows buyers to bundle or unbundle employment practices liability, D&O and fiduciary coverage, and features online applications, risk management pointers and 24-hour quote turnaround time.
Similarly, Chubb's ForeFront Portfolio coverage for private businesses includes optional coverage selections like D&O, EPLI, fiduciary liability, crime insurance, workplace violence expense insurance, Internet liability insurance, and kidnap/ransom and extortion coverage.
It's a buyer's market–for some
Hot competition means buyers are seeing low rates and broad coverage. In its most recent survey on D&O insurance purchasing and claims trends (based on 2006 statistics), Towers Perrin reported an 18 percent drop in average premiums, coupled with a 31 percent increase in coverage enhancements to D&O policies, with typical limits ranging from $500,000 to $490 million.
For fourth-quarter 2007, D&O pricing overall was down on average by 18.9 percent, reflecting the ongoing trend of the past 17 quarters. This period is characterized by low rates, high capacity and broader coverage, said Michael Rice, chief executive officer for Aon Financial Services Group in Chicago.
This trend holds true even for complex business. “It all boils down to financial institutions and everyone else, and in the 'everyone else' category, it depends on whether you've had a loss or not,” said Megan Colwell, senior vice president, D&O at Woodruff-Sawyer & Co., San Francisco. “For public or private buyers with no claims and no subprime exposure, the D&O rate decreases are terrific. If the risk is more complex, we're seeing flat to more modest premium decreases–but we're still seeing decreases.”
The news is even better for nonprofits, where intensive carrier competition has resulted in premiums that are 10 to 15 percent lower than last year, said Joseph Schneider, branch manager for wholesaler Jimcor Agencies, Plymouth Meeting, Pa., which writes approximately $7 million in D&O premium.
Nonprofit insureds with clean claims histories can expect D&O premiums that are decreasing or staying flat. “We didn't see the 30 to 50 percent increases for nonprofits during the hard market, so although prices are softening, it's not as dramatic,” said Patti Loftis, assistant director at Armfield, Harrison & Thomas Inc., a Leesburg, Va.-based agency specializing in nonprofits.
A fiasco for financial institutions
However, it's a completely different market for the subset of businesses with direct exposure to the subprime crisis, including hedge funds, banks and broker dealers. These businesses saw D&O rate increases of 18.6 percent in fourth-quarter 2007–a trend that's driven in part by increased litigation, said Michael Rice of Aon. “Rates for D&O are driven by public company claims,” he said. “About 100 security class-action claims were filed in the last six months of 2005, 2006 and 2007, half of the 10-year historical average, which explains why rates were down. In the last six months, however, the annualized number of claims has risen from 220 to 240, more significantly by as many as 40 claims a year.”
Financial institution claims activity is up an estimated 500 percent year over year, with the number of class-action claims filed against financial institutions in first-quarter 2008 more than five times those filed in first-quarter 2007, said Greg Flood, president of IronPro, the professional liability facility of Bermuda insurer Ironshore Insurance. This trend is reflected in the higher D&O premiums financial institutions have been seeing over the past five or six quarters–increases of 30 percent in fourth-quarter 2007, with premiums doubling in first-quarter 2008, according to Flood.
“As there is no standard D&O insurance form, policy language varies significantly. Consequently, it is not surprising that it's one of the most litigated contracts in the history of insurance,” said J. Glenn Dockery, executive vice president, Hilb Rogal & Hobbs, Glen Allen, Va. D&O claims are complex, typically taking between three to five years to settle, he said. Underwriters are also demanding more information from financial institutions. “When the subprime market began falling apart last summer, we started seeing underwriters asking questions about mortgage-backed securities in portfolios, but once Bear Sterns fell, this spread to all asset-backed securities,” said Colwell of Woodruff-Sawyer. “Now we're seeing increased scrutiny on all sorts of things underwriters didn't look at before January, including questions about investment portfolios.”
Capacity is shrinking for these buyers, too. “We're seeing significant contraction in financial institutions and related industry classes,” said Dockery of HRH. As manager of the southeast and central regions, Dockery is seeing insurers reducing D&O capacity from $25 million on a single account to a $10 or $15 million range.
Evolving trends in litigation
D&O specialists are also concerned that fallout from the credit fiasco–in the form of increased litigation across all businesses–could taint the rest of the market. Commenting on a recent class-action suit against student loan operator First Marblehead Corp., D&O blogger Kevin LaCroix (www.dandodiary.com), an attorney and partner at wholesaler OakBridge Insurance Services of Beachwood, Ohio, believes the case reflects the “secondary and tertiary consequences” of the subprime meltdown: “The spread of litigation to other types of credit and other kinds of companies underscores the dark possibilities for a crisis that began in the residential real estate lending sector to spread across the entire economy and activate a much broader array of litigation.”
The increased threat of lawsuits could also generate new trends in the D&O field. Observers are closely watching a class-action lawsuit against Citigroup and others filed by San Francisco attorneys Girard Gibbs LLP. The complaint alleges the plaintiffs deceived investors about the investment characteristics of auction rate securities, which are either municipal or corporate debt securities or preferred stocks that pay interest at periodic auctions.
Traditional D&O claims of the '80s and '90s often involved “disappointed expectations,” in which shareholders sued corporate directors and officers if projected earnings missed the mark, said Ann M. Longmore, executive vice president, D&O, fiduciary and EPLI product leader for Willis Executive Risk Practices, New York. These cases can be expensive and take several years to fight in court. While the Private Securities Litigation Reform Act of 1995 eliminated the most egregious of these lawsuits–and the Enron scandal shifted the focus of litigation to outright fraud–a weak economy could help disappointed expectations lawsuits make a comeback.
“Any public company with earnings expectations could see a return to the traditional 'disappointed expectation' claims,” Longmore said. “In the last year, we've seen an uptick in these cases–nothing major yet, but the anticipation is that in a slow economy, there will be a natural progression to these kinds of cases. Both investors and companies like certainty, and we don't have certainty in this economy. If you put out a number, you're open to criticism.”
While the metaphorical jury is still out on whether this trend will grow, some observers are gearing up for a deluge–and predicting the end of the soft market. “When you look at the staggering amount of money insurers will have to pay to clear up all this litigation, it's inevitable that financial institution rates will have to go up, otherwise that market will shrivel up,” said Flood of IronPro.
“We need another quarter to really see how those subprime losses are affecting the insurance companies and what that does to their rate and underwriting initiatives,” said Colwell of Woodruff-Sawyer.
Negotiating the labyrinth
An agent or broker's ability to track such trends, advise clients on the state of the market, and help them select the appropriate carrier and coverage is what sets successful producers apart from the pack. For J. Glenn Dockery of HRH, who was once responsible for risk management and insurance for bank holding companies, this process involves much more than simply finding the carrier offering the lowest premium. “Having once been a client, I see too much focus on price at the expense of maintaining meaningful relationships over time,” he said. “Brokers also need to address service and quality of coverage issues. As a buyer, I would first and foremost want contract certainty.”
An in-depth understanding of the contract is especially important in D&O because coverages can vary widely. “You either know the coverages or you don't–it's not something you can dabble in,” said Michael Rice of Aon. “You must specialize in it and follow changes in case law, the types of litigation being filed, as well as the arguments by carriers regarding what they can cover.”
The next step is to educate your clients on the need for coverage–and some businesses may need more education than others. “Many nonprofits don't have large budgets to work with, and because insurance can eat up a huge chunk of that budget, they're reluctant to purchase it,” said Patti Loftis of AH&T. “For a long time, nonprofit companies thought they didn't need D&O coverage because as volunteer organizations they are protected by some state laws. But this protection is very limited–it doesn't provide defense costs or coverage, and it doesn't include employment practices protection, which makes up most of the litigation for nonprofits. Part of our job is to educate them on the need for this coverage.”
The best way to convince a buyer that they need D&O coverage is to provide them with real-life examples of how a D&O claim could affect their type of business. “Fortune 500 clients understand risk management and the transfer of risk; a privately owned company with $50 million in revenue may not,” said James Proferes of Chubb. “Presenting a client with examples of D&O claims is a great sales opportunity for an agent.”
The ability to provide risk management advice also comes into play. “In helping agents and brokers sell the coverage to their customers, we stress the importance of recommending to their clients that they put policies and procedures in place and train their managers to avoid risk,” said Joe Schneider of wholesaler Jimcor.
If you can't provide this expertise yourself, deferring to the experts is a big part of how agents and brokers can make a success of marketing D&O coverage. “Part of our job is to try and steer clients toward carriers that offer free hotlines for access to practical advice on how to manage risk,” Schneider added.
“Insurance policies are contracts and every word has meaning,” said Ann Longmore of Willis. “Executive risk is very specialized. Leave it to the experts who have their own attorneys. You need to partner with people who do this for a living.”
The best insurers have a history of specializing in D&O risk and are committed to the market for the long haul. “The D&O policy is claims made, so it doesn't present the same issues as a workers' comp coverage regarding the solvency of the carrier,” said Colwell of Woodruff-Sawyer. “But if you're a large market cap company faced with litigation that can take 10 years to reach fruition, you want to make sure your insurance company will be there for you.” Sidebar D&O exposures: A growing risk for private companies
o Over the past five years, one in four (26 percent) private companies experienced a D&O lawsuit
o One in three companies with 50+ employees has experienced a D&O lawsuit
o 43 percent of D&O lawsuits are brought by customers; 29 percent by government/regulatory agencies; 17 percent by vendors; and 11 percent by partners/shareholders
o The average loss cost of a D&O suit, including settlement, judgment and legal costs: $308,475
o 75 percent of smaller private companies (less than 50 employees) do not own D&O insurance
Source: 2005 Chubb Private Company Risk Survey
Laura Toops is editor of American Agent & Broker.