Between a rock and a hard market: Navigating the turbulent D&O insurance waters in the wake of September 11. (D&O Insurance Update).

MONTHS BEFORE last year's terrorist attacks, the market for D&O liability insurance was changing from a buyer's to a seller's market. The attacks and the havoc they wreaked upon insurers fueled a further hardening of this market. But even in today's market, there are steps you can take to increase the odds of getting the D&O coverage you want.

What You Can Do to Soften the Blow of a Hard Market: First, don't panic, even if you get a letter from your D&O insurer a few months before your policy expires stating that it will not renew the policy. A "nonrenewal" letter can be less ominous than its name suggests. In many instances, the insurer is not terminating its relationship with your company; it is simply giving you the advance notice legally required of an insurer that decides not to renew its policy or to materially restrict coverage on renewal. This letter protects the insurer's options. There's no question that you will face higher premiums, which is the bad news. But this is also good news in a way. Surging premium rates have attracted new capital to the insurance markets. This means insurers have underwriting capacity, and they need to put this capital to work.

Second, explore new territory. For example, it might be a good move for a financially solid company to solicit quotes with ultrahigh retentions (deductibles) to reduce a sky-high premium quote. A client recently did exactly this. It purchased a $25 million primary policy with a $25 million retention! This corporation will have to bear the first $25 million of covered losses before the insurer pays out dollar one. In essence, the insured corporation became the primary insurer and the nominal primary insurer became the de facto excess insurer. Because premiums for excess insurance are significantly lower than for primary insurance, the client's insurance tab was significantly reduced.

Third, continue to negotiate policy terms. There is still give and take in the market. However, be sure to allow extra time -- I recommend three months -- for your negotiations. This will allow time for your broker to find other insurers if negotiations with one insurer bog down.

Specific Negotiating Points: Some insurers are seeking to reintroduce co-insurance into their new policies, a provision they dropped doing during the soft markets of the late 1990s. What is co-insurance? It is a way for insurance companies to shift additional risk to you and to get you invested in the effort to curb settlement and defense costs. In the event of a claim, a co-insurance provision obligates you to bear a portion of the loss, above and beyond your retention. For example, if your D&O policy provides for 5% coinsurance and there is a loss of $1 million above the retention, you would pay $50,000 (in addition to your retention) and your insurer would pay $950,000. Without co-insurance, your insurer would pay the entire $1 million. If you are offered a policy with co-insurance, don't accept it lying down. Most policies we recently negotiated have not ended up with this provision. Insurers cannot say that coinsurance is the industry norm.

Another restriction some insurers are trying to reintroduce is the maintenance-of-insurance exclusion. A common version of this exclusion reads: "The insurer shall not be liable for payment for loss in connection with a claim based upon or arising out of the failure to effect and maintain insurance." What does this mean? It means that if you are sued by shareholders for losses resulting from your negligence for failing to purchase a certain class of business insurance, your insurer can refuse to cover such losses in reliance on this exclusion.

To be sure, directors and officers can be held liable for losses resulting from their negligent failure to manage their companies. However, D&O insurance was created to insure such losses. Why exclude negligence related to the purchase of insurance but not negligence in the performance of other management duties? It makes no sense, and you should say as much to any insurer seeking this exclusion. Based on recent experience, there's a good chance the insurer will back down.

The Tough Get Going: In our post-September 11 world, the going is tough for buyers of D&O insurance -- and it is likely to remain so into 2003. But while higher premiums are inevitable in this environment, overreaching exclusions and restrictions need not be. So watch for unfamiliar policy provisions when you enter the D&O market for the first time, or renew an existing policy, and be ready to pick a few choice battles. After all, hard markets call for hard negotiations. If you give yourself time and are prepared to consider different policy structures, you will increase the odds of securing the coverage you need at a more affordable price.

Stephen J. Weiss is a partner in the law firm of Holland & Knight LLP, Washington, D.C., and is one of the nation's leading authorities on D&0 insurance and employment practices liability insurance.