While coverage breadth remains the most important decision point in selecting a primary carrier, market security “actually increased twofold,” he said. Specifically, the study found that for 40 percent of Aon's clients, market security was the most important factor in primary carrier selection, compared to 20 percent a year earlier.

“Clearly, with the market dislocations in September and October [last year], we recognized that phenomenon was going to occur,” he said. (Editor's Note: In September, problems at American International Group, the largest U.S. primary D&O carrier at the time, began to surface, with initial news of the near bankruptcy of AIG's parent and a government bailout.)

Susanne Murray, executive vice president of Alliant Insurance Services in New York, said she was not surprised by Mr. Kim's further report, that study results were flipped on an excess basis–with market security emerging as the most important reason cited by clients in how they structure excess D&O program layers.

“You want to make sure that your excess carriers can take the place of your primary,” Ms. Murray said. Clients are looking to excess carriers to provide “a degree of assurance that [they] have insolvency protection,” she said.

Ms. Murray said insureds generally perceive there is value to sticking with incumbent primary carriers, as long as the price and terms of coverage are competitive. But now they're saying, “I need to feel comfortable, no matter what happens, that some of my carriers will continue to exist,” she said, explaining that strong excess carriers can provide such comfort.

Ms. Murray and Jim Blinn, principal of Advisen, a New York-based research firm, both said insureds need to pay special attention to claims-handling methods and the claims-paying experience of excess carriers.

These factors have not “historically been front and center,” because everyone just hoped [claims] would never leave the primary layer,” Ms. Murray said.

Mr. Blinn said his firm recently interviewed attorneys serving as coverage counsel for D&O insurers. He said these lawyers repeatedly reported that claims disputes are arising between primary and excess carriers.

Several factors giving rise to the trend, he said, include the fact that more carriers now make up coverage towers, claims are larger, and policy terms vary for different layers. Where a tower in the past might have consisted of a few companies–with each carrier writing $25 million limits–now there will be many more with primary and first excess layers limited to $10 million apiece, he said.

As claims get bigger, “the primary insurer may say, 'We'll give our $10 million. We've now exhausted our limits for defense and litigation costs,' and [then] walk away.” But excess insurers that wouldn't have been on the hook in the past aren't so willing to contribute their dollars and move on, he said.

“They get into all sorts of legal wranglings as to who will pay and who will not on different issues,” Mr. Blinn said. (For more on specific issues giving rise to excess carrier disputes, see NU July 7/14, 2008, page 21.)

Turning to upfront coverage negotiations, Ms. Murray noted that insureds spend a lot of time pursuing broad primary policy provisions and expect their excess policies to “follow the form of” their primary insurance. In other words, to incorporate all of the primary insurance policy terms and conditions.

The excess policies typically do begin with, “'We follow the form of,' [but] then they add many other pages,” Ms. Murray said. “Clearly, all those other pages have words on them that say something other than 'follow the form.'” She recommended that buyers engage in “real scrutiny” of excess forms.

If the excess is “going to follow the form of the primary, then it should be one page that says, 'Send claims here, this is my limit, this is the primary [carrier] I'm following, and that's it,” she said. “If it's longer, then there's something that's not following form.”

The experts also warned board members to pay attention to nuances of D&O coverage that could come into play if, instead of primary carriers getting into financial trouble, their own organizations face the prospect of bankruptcy filings.

Mr. Kim said that historically, when a company continued to operate as the “debtor-in-possession” under a Chapter 11 bankruptcy process, “the D&O policy would continue [because] typically management [and] the board would continue.” When the company emerged from bankruptcy, that's when the broker would quote a new D&O policy, only covering ongoing acts, he said.

“In this day and age, however, with everything that's happening”–referring to government bailouts and the possibility of “the government coming in and asking companies to change the board's composition”–he said D&O insurance may now be put into runoff, or it may change prior to emergence from bankruptcy.

Ms. Murray's advice to D&O buyers is to consider modifying their policies to add the “debtor-in-possession” as a named insured. She added that attempts should be made to add language expressly stating there is coverage for claims brought by a creditors committee against the company or its directors and officers.

“I would never use the words bankruptcy proof because you can't do anything to circumvent the bankruptcy code. But you should do what you can to prepare for that [bankruptcy] filing and not lose or in any other way adversely impact your coverage.”

Mr. Blinn, giving another reason for buyers to pay special attention to how their D&O policies might respond in bankruptcy situations, reported an Advisen finding that 77 percent of large public companies (those with assets of $250 million of more) had securities class action lawsuits filed against them within a year of filing for bankruptcy.

The percentage of securities class actions within a year of a bankruptcy filing used to be only 35 percent (for bankruptcies filed in 2000 through 2006), he said.

See related article: “Tough Times Raise Stakes For D&O Insureds“