Looking at litigation over the past several years, "there's been a fairly strong upward trend over the period from 2004-to-2009," he added, noting that the suit totals for the first six months of 2010–906 on an annualized basis–are now on pace with the levels recorded for 2008 and 2009 (884 suits and 1,062 suits, respectively).

REGULATORS MORE AGGRESSIVE

Like past reports, the latest Advisen analysis includes securities lawsuits beyond class actions brought in federal court. Two of the other case types–regulatory actions, such as SEC proceedings and law enforcement actions (both classified by Advisen under a category called "securities fraud suits"), and securities cases alleging breaches of fiduciary duty brought in state courts–are now more prevalent than class action lawsuits. (See related chart on page 13.)

"In the wake of some of the more notorious cases in recent years, [SEC] leadership has definitely promised more enforcement," according to Carol Zacharias, senior vice president and deputy general counsel at ACE North America in New York. To meet that challenge, the agency has realigned staff, reorganized divisions and moved more authority out into the field, she noted during the Advisen webinar, which was sponsored by ACE.

As a result, formal SEC investigations soared 113 percent in fiscal year 2009 compared to 2008, she reported, citing numbers from an SEC report. In addition, temporary restraining orders jumped up 82 percent, and disgorgement-of-profits orders surged 170 percent, she added.

"The SEC took $2 billion in disgorgement in 2009 alone, and penalties were up 35 percent for a total of $345 million," she said. (See http://www.sec.gov/news/press/2009/2009-249-fact-sheet.htm for more details.)

Separately, New York-based NERA Economic Consulting, a division of Marsh & McLennan, analyzed SEC settlement trends for the first half of 2010, reporting that the number of settlements–354–increased for the second consecutive semiannual period. According to NERA's May report, the total also marked the third-largest number of settlements in any half-yearly period since 2005. (See related text box for more results from the NERA report.)

"Don't forget state regulators," warned Carl Metzger, a partner at Goodwin Procter in Boston, during the July Advisen webinar. "We've certainly seen AGs dusting off the state securities laws and looking to bring enforcement actions of their own. Indeed, sometimes state and federal regulators seem in almost competition with each other, and that creates a certain aggressiveness that gets beyond just an objective investigation."

He also suggested that states have financial incentive to be active in this arena. "Even though we all think right now that state budgets are getting cut, on the enforcement side, these cases make money for the state," he said.

As for the SEC, Ms. Zacharias said the federal securities regulatory agency is not just becoming more assertive in its prosecutions, but it is also actively promulgating more regulatory guidance that could create new minefields for directors and officers, such as recently issued rules about executive compensation and climate change disclosures.

In addition, the new Dodd-Frank Act "has invigorated the SEC by allowing it to bring actions for aiding and abetting, not just for someone who knowingly provides substantial assistance to another person in violation of the securities acts, but also for somebody who recklessly does so."

The Dodd-Frank financial services reform bill, which President Barack Obama signed into law a few days after the Advisen webinar, also has greater whistleblower protections to entice people to help the government nab securities law violators, and provides substantive money awards if the SEC recovers more than $1 million using information that a whistleblower provides.

CUTTING-EDGE COVERAGE

Louise Pennington, managing principal at Integro Insurance Brokers in New York, noted that in spite of passage of the Dodd-Frank bill, there has been "a very recent expansion of coverage in the D&O insurance marketplace" to address the costs of responding to informal regulatory investigations.

"Normally, when regulations come out, as when Sarbanes-Oxley did, carriers respond by constricting and contracting their policies quite significantly," she observed. Uncharacteristically, "we have now gotten alignment of a broadening of coverage in a very significant regulatory area, at the same time that we've gotten a large expansion of government enforcement coming out in this [Dodd-Frank] bill," she said.

Speaking to NU, Ms. Pennington said carriers started unveiling coverage for informal investigations, sometimes referred to as pre-claim inquiry coverage, within the last few months, putting some introductions in the late-April, early May timeframe.

"At the time, there was a question about whether all the financial reform would actually pass, but I think people generally thought that it would. It was just a matter of what it would look like," she said. "So it's an interesting contrast," she added, distinguishing the recent coverage expansion with more typical restrictions that carriers introduced in similar situations historically.

Giving some historical perspective on coverage grants for regulatory proceedings specifically, Ms. Pennington explained that it has been readily available for a fair amount of time "when the trigger under the definition of claim is a formal investigation."

Although such coverage was not necessarily included in all off-the-shelf forms, "there was a distinction between formal and informal investigations" from a coverage perspective, with coverage for formal investigations either encompassed by the definition of claim or obtainable. She explained that in the SEC context, a formal investigation is launched once the SEC issues a Wells Notice or sends a target letter.

"What has always been problematic is what happens in the event of informal investigation," she said, noting that the SEC and other government entities have the right to "essentially poke around" in a company's books and records and interview employees to amass information that may later fuel formal investigations.

Clients that have not been through that process may not necessarily appreciate that such informal investigations can take weeks, months or years–"and that translates into potentially enormous defense costs for an insured," which are not covered with D&O policy triggers requiring formal probes, Ms. Pennington pointed out.

With the recent enhancements, she said terms such as "informal investigation" and "pre-claim inquiry" are becoming part of the definition of claim. "A lot of the carriers are following the lead of a few primary carriers that were out in front of this," she noted, adding that she couldn't give an exact count on the number now expanding the definition.

"It's so new," she said, echoing Mr. Metzer's observation during the webinar that this is a "hot topic" in the D&O market right now.

The newness of these changes also prevented Ms. Pennington from making generalizations about whether excess carriers would be willing to follow expanded claim definitions. "So far, in situations we've been involved in, they have not had a problem with following the language."

On the primary side, "Chartis was first in line [to] put out a brand new D&O form that captured this," she confirmed, referring to a policy known as Executive Edge, which the New York-based carrier announced in May. "Most of the others are doing this by endorsement, at least right now."

Ms. Pennington noted that carriers are seeking to charge extra for the expansion of coverage, although they have not yet committed to specific percentage increases.

"What will be interesting to see is if, in fact, they are able to procure that additional premium in light of the continued soft market," she said. "There's so much capacity that they may not be able to get the added premiums they're looking for because of the dynamics of the marketplace."

TERMS BROADEN, PRICES DROP

Separately, Michael Rice, chief executive officer of Aon Financial Services Group in Denver, Colo., observed that buyers are benefiting from the broadest terms and conditions seen in years, with leading carriers including changes beyond the inclusion of informal investigations in their base policy forms.

"Rather than having to get policies endorsed in numerous ways, many carriers like Chubb and Chartis are rewriting their policies to encompass all those things," he said–referring, for example, to favorable language around issues such as severability and rescindability. (See related article, page 12, for more on these topics.)

Whereas in the past, 30 or 40 endorsements would have to be added to get an off-the-shelf D&O policy to an ideal stage, the amount of work has been severely curtailed, he said.

In an ideal world, he said, carriers would like to charge as much as 15 percent in additional premium for the coverages they are adding. "But it's still a market of supply and demand, and clients have choices about whether to pay or not pay. And it's a competitive market with a number of carriers willing to match things at a different price," he noted.

"So what they want to charge for it and what they ultimately get could be two different things," he said–later commenting, however, that he believes many clients are most interested in breadth of coverage.

"I think many will seriously consider paying more money to get the right coverage, especially in light of the fact that premiums in most industries have decreased so dramatically in the last three- or four years," he said.

D&O prices continued to drop in the second quarter of 2010, Mr. Rice confirmed, revealing that preliminary data for Aon's D&O second-quarter price index fell 16 percent from second-quarter 2009.

Commenting on a similar result for the first quarter, showing that prices on D&O insurance renewals had dropped 15 percent, he said pricing tends to move with changes in frequency. (Aon's first-quarter report is available at http://bit.ly/buo1kU, page 12.)

"The last half of last year saw a pretty big decline in the frequency of D&O litigation," he said, referring primarily to a drop-off in class actions related to the subprime/credit crisis targeting financial institutions insureds.

According to Advisen, FIs were hit with 40 percent of all securities suits in 2008 and 2009, but the figure dropped to 31 percent in first-quarter 2010, picking up a little–to 34 percent–in the second quarter on the heels of the SEC's April 16 suit filing against Goldman Sachs. (See related NU article, http://bit.ly/aE7qGi, for details of Goldman case.)

Pricing for FI insureds plummeted 31 percent in the first quarter, according to Aon. "The main reason for that is it had been up so high in the previous year's renewal cycle, and potentially even the year before that," Mr. Rice said. "So after seeing their pricing go up for the better part of two renewals, for the first time in a while, FIs saw pricing go down."

During the second quarter, FI D&O prices look to be down again, but only by about 3.5 percent, according to Mr. Rice.

Contrasting the indication with the unusual first-quarter result, he said that "part of it is a blip, part of it depends on who renews in any one quarter, and part may be that there are a lot of firms that renewed in the previous year that hadn't gotten an underwriting break."

As to whether the Goldman case or the reported second-quarter uptick in securities suits generally would spur a harder D&O insurance market going forward, Mr. Rice said "the reality is the pricing tends to lag [changes in suit frequency]. It takes a while for the carriers to figure that out."

(For Ms. Zacharias' perspective on potential future suit frequency, see related article, "More Securities Suits Ahead.")

Mr. Rice said that even energy companies continued to see price breaks in the second quarter, although decreases were smaller than for other industry sectors (only single-digits).

Separately, the Risk and Insurance Management Society Benchmark Survey (administered by Advisen and released in late July) revealed that average D&O premium fell 3.5 percent in second-quarter 2010. Ms. Pennington said Integro has seen declines at both ends of the range–Aon's 16 percent drop and RIMS' 3.5 percent decline. "It is absolutely fair to say that decreases are available in the marketplace," she said, also agreeing the FI insureds are now experiencing softer pricing after several years of increases.

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