Category Archives: Directors and Officers Liability

Private Company Directors & Officers Liability Renewal Premiums

In speaking with the underwriting community about private company D&O renewal policies, they are unanimous in their assertion that there has been a significant deterioration in claim experience.

Historically, losses were the result of Employment Practices Liability claims, especially following the economic meltdown of 2008. Now that the worst is behind us, private company D&O claims have manifested the more traditional types of loss scenarios. As a result, employment practice claims are no longer a large factor in driving the market’s swings in pricing. However, make no mistake – pricing continues to be an issue.

One reason for this is that private company D&O policies are written to be much broader in terms of the coverage they afford than their public company counterparts. Under public company forms, the “entity” coverage is restricted to securities claims only. Under the private company forms, the “entity” coverage is actually written on an all risks basis. Therefore, claims scenarios are wide open and can even allege such wrongdoing as “false advertising, misleading promises” and the like. Such allegations aren’t covered under the public company form, so a public company policy would never entertain this type of claim to begin with.

Under a policy for private companies, employees are covered and by ’employees’ we mean not just the directors and officers who might also be employees, but employees in any capacity who work for the company. Many such lawsuits don’t even bother to mention or name the directors or officers of the firm. However, such claims are covered under private company D&O Liability policy forms.

In addition, under private company policies, coverage is usually written on a “duty to defend” basis where an insurer is obligated to defend its insured against third-party claims. All an insured needs to do is establish that there is a ‘potential’ for coverage under the policy in order to give rise to this insurer’s obligation. The reason for this is because the insurance policy is a contractual obligation which is undertaken by the insurer. Thus the insurer has taken on responsibility to pay for all legal defense costs and assume a defense for its insured. In addition, the insurer may owe a duty to defend even in cases where ultimately no damages are awarded. Not only must the insurer assume control of the claim defense process, but they must also select counsel as well as pay all the legal bills. This is diametrically opposed to public company D&O Liability policies which are written on a non-duty to defend basis. Non-duty to defend (or duty to pay) policies require only that the insurer reimburse the insured for funds expended by the insured in defending a claim. These are termed “duty to pay” policies.

The take away here is that private companies should be prepared to pay more on its next renewal and so considering a higher deductible or lower limits might be an answer to keeping the cost within budget.

Karen Skoler

Rate Increase On Directors and Officers Liability Policies

While it is true that insurance companies are in business to make money, and most insurers are looking for increases of between 5% and 15% on an annual basis, the  D&O (directors and officers) market remains an anomaly. Now that the worst of the financial crisis appears to be over and bankruptcy filings are declining, most carriers are willing to settle for very low rate increases on their D&O book of business provided the risk is a good one.  Why, when other lines of business are looking for more aggressive increases, is this market behaving differently?

The answer is that previously many carriers actively fought to obtain and retain this business.  Now, having suffered significant losses, they are actively underwriting their books and they are being much more selective as to which policies they will offer to renew and what terms and conditions they are willing to offer. Thus, they are underwriting more by experience of a risk than by market segment, size of risk, or size of premium. This is especially the case with smaller privately held companies.

As for publicly traded companies, the underwriting philosophy is not much different.  The huge swings in pricing are a thing of yesterday.  The renewal premiums on publicly held policies will be rather flat even though it is widely believed that pricing and retention on such policies are not really where they should be. As a result, carriers will be reviewing and scrutinizing all underwriting data and carefully choosing the accounts they want to provide with the most aggressive pricing. In view of the losses which carriers were forced to absorb during the financial crisis, they are trying desperately to get back to making their books profitable once again. One way of accomplishing this is by increasing retentions and making sure that the premium charged are reflective of both the exposures presented as well as the loss history of the account. Basically, they will pick and choose what they care to write rather than automatically offering a renewal.

So, it is suggested that you determine the largest retention you can live within an effort to keep your premiums reasonable and then use this to negotiate any proposed rate increase offered by your carrier. Talk this over with your agent or broker, prior to your renewal, to ensure that you obtain the most cost effective renewal proposal available in the market.

Karen Skoler, CPCU

How Much Directors & Officers Liability Coverage To Buy?

blog-directorsRecently, I was asked to join the Board of Directors of a small LLC and my first question to the owner, a good friend of mine, involved her Directors & Officers Liability insurance. While I understand the need to balance cost, with the need to protect board members, I certainly didn’t want to put my own assets at risk in case of a loss. Nor was I interested in pursuing quotes for personal directors and officers liability. I already knew that my friend had purchased a $1 million policy and I set about to find out if that limit and her coverage was satisfactory.

• Since this Board was a privately held corporation, my benchmark was to look at the experience and types of claims filed against similar privately held companies. My concern, therefore, didn’t include any litigation that might be brought by shareholders, government organizations, or industry regulators. This board had no shareholders except for the members of the family that owned it. It wasn’t listed on the stock exchange and wasn’t highly regulated by the government or any other organization.

• I reviewed whether or not defense costs were included within the limit of liability as opposed to being unlimited. My concern was that I didn’t want the entire $1 million to be used for defense leaving nothing left in case of any award for damages against the LLC and/or against any of the board members. I knew only too well, from prior experience, that sometimes investigating claim facts and defending lawsuits could run into a lot of money. In fact, many businesses purchase this coverage mainly for the defense costs afforded by such a policy.

• I needed to ensure the policy provided protection for the individual directors and officers from claims in which the business was not legally or financially liable to indemnify a third party in case of a claim. In addition, I needed to confirm that the coverage provided for reimbursement to the business should it have to advance monies to compensate and provide legal fees on behalf of directors and officers. With D&O coverage, it is essential that there be coverage for the individual directors and officers as well as for the company, itself, known in D&O Liability jargon as the “entity.”

Actually there seemed to be little data available concerning the limits of liability chosen by companies with assets as limited as those of my friend’s business, but I was able to confer with underwriters and find out what types of losses similar companies had suffered and what the defense costs and the claim awards had been. Since the limit of liability did, in fact, include the defense costs, my friend was gracious enough to indicate that she’d be willing to increase the coverage limit from $1 million to $2 million just to be on the safe side. That decision was sufficient to allow me to say “yes.” However, we also discussed that on the next renewal she would consider a policy in which defense costs were outside the limit of liability and in that way she might consider going back to a $1 million limit.

It is strongly suggested that prior to joining a Board or purchasing this coverage, you speak to your agent about what you need to protect both your board members and your company in case of a loss.

– Karen Skoler, CPCU

Directors and Officers Liability Insurance

blog-directorsDear Sherri: I sit on the Board of a large non-profit organization that already has Directors and Officers Liability. As a result of my work on this Board, I was recently asked to join another Board of Directors also of a non-profit organization. Will the policy I am currently insured under provide coverage for me on this second board?
Sincerely,
NY Boarder

Dear NY Boarder,
Oh God, now I’m bored! Anyway, in answer to your question, yes, the original D&O policy will provide coverage, provided that it includes coverage for “Outside Directorship”. This is an automatic extension that provides coverage for directors serving on other non-profit boards as part of their duties. I know this sounds like a “Who’s On First” skit, but it is something important to consider before accepting an invitation to sit on another Board. So check the policy to make sure that “Outside Directorship” coverage is included and that the second Board is also a NON-PROFIT ENTITY.

Be sure to call your insurance agent for more details.