D&O: excess carriers face heavy burden.

Securities class-action settlements saw a 33% increase in mean settlement value to $27.1 million in 2004, according to National Economic Research Associates Inc. In this environment, insurers say the personal assets of independent directors can be exposed as never before. With that in mind, Best's Review met with John Keogh, president of National Union Fire Insurance Company of Pittsburgh, which is American International Group Inc.'s lead underwriting company for directors and officers insurance. Keogh, speaking at the recent annual conference of the Risk and Insurance Management Society Inc. in Philadelphia, touched on the latest developments in D&O and what this market can expect in the coming months.

What D&O trends are you seeing?

We're seeing one trend manifested in terms of the settlements that have been announced over the past couple months. This would be settlement values that are historic in nature, the most recent one being an energy company that settled its shareholder lawsuit for $468 million in cash and stock. Unfortunately, that's not an unusual amount of money any longer. Four or five years ago that would have been breathtaking, as opposed to today when it's almost accepted in terms of size.

Secondly, there's the makeup of the settlements. Besides money, we're also seeing many settlements with change being mandated, whether that's change in the make-up of the board or change in the way a company does certain types of business.

There's also most notably, and probably of the greatest concern to the men and women who serve on boards, the settlements that have come down so far this year where outside directors have had to put their own personal assets into the settlement despite the fact that perhaps there was insurance available that would otherwise have been used toward the settlement. That's a trend that I think is of most concern to the individuals who get involved in providing leadership at a company's board. The large settlement dollar amounts are also a concern to them as they are to us as underwriters.

Concerning the changes being mandated in these settlements, that's fairly new?

Yes. Traditionally, and of course this is a generalization, it's always been about money. And that's not to say that money is not an important and featured dynamic of the settlement today. In fact, it's a bigger number today in most cases. But in addition to that, you often have plaintiffs involved today who are large institutional investors. Besides wanting a lot of money based on their belief of how much they lost, they also want to be able to demonstrate that they fought for change in the settlement, and that would concern investors in the future.

What's the burden on AIG of these mega-settlements?

The burden on us is twofold. First, obviously, just in terms of the dollar amounts that we end up paying out as insurers. The days when, as the lead carrier in the case, we were able to negotiate a settlement for something less than your limit--that still happens but it doesn't happen that often. More often than not in cases that you're dealing with these days, your limit is being exhausted. And it's more often being exhausted lately by legal fees than as part of the settlement coverage that we provide. It's not unusual today to see the lead player in insurance clearly exhausting his funds in lawyers' bills in defending these actions and then when the settlement comes, exhausting the excess carriers above us that are responsible for the settlement itself.