FEATURE/Directors and Officers Liability Premiums Jumped 29% in 2001, According to Tillinghast - Towers Perrin Study; Shareholder Claim Costs Reach Another All-Time High.

Business Editors

FEATURE...

NEW YORK--(BUSINESS WIRE FEATURES)--June 17, 2002

According to Tillinghast - Towers Perrin's 2001 Directors and Officers Liability Survey, alarming increases in the costs of litigation against directors and officers (D&O) - particularly shareholder litigation - as well as widespread concerns about high-profile bankruptcies and the quality of corporate accounting and financial reporting are among the principal reasons for a dramatic increase (29%) in D&O liability insurance premiums.

The survey, which included 2,130 participants, is the 24th in a series of studies on D&O liability claims and insurance purchasing patterns. Its primary objectives are to help organizations assess probable exposures to claims against their directors and officers and to construct appropriate financial protection programs.

Other significant survey results include:

- D&O claim frequency remained stable, yet severity generally increased, with
significant increases for certain types of claims. Among closed claims overall
- excluding those closed with no payment - U.S. participants paid an average of
$5.65 million to claimants, up more than 75% from the 2000 survey. The average
indemnity paid to shareholder claimants was at an all-time high of $17.18
million, compared with $9.62 million last year.

- The technology and biotechnology sectors, firms with a recent IPO and those
experiencing financial distress were hit especially hard by premium increases.

- Discrimination in employment was again cited as the most frequent D&O claim
issue, accounting for 46.1% of employee claims and 26.8% of claims overall.

- Issues related to financial disclosure continued to be the most common among
shareholder claimants, representing 38.8% of shareholder claims and 9.2% of
claims overall. Disclosures of publicly traded companies are an area of
increased concern among D&O insurers due to the significantly higher cost of
claims related to such disclosures, including those associated with stock
offerings (e.g., IPOs).

Premiums: A Hard Market for Hard Times?

The sharp rise in D&O premiums last year, higher than the 11% average increase reported in the 2000 survey, was the most dramatic increase since the hard market of the mid-1980s. These increases, however, also represent a reversal of five years of significant premium decreases, which, when combined with the growing costs of litigation, turned insurer profits into losses. While the total amount of D&O coverage offered by insurers in 2001 was down only slightly from the record levels reached in 2000, many D&O insurers have become increasingly restrictive as to which potential insureds qualify for their full coverage capacity.

"Current conditions do not signal that there is a crisis in the market," said Mark Larsen, a Tillinghast - Towers Perrin consultant and the survey director. "However, claim severity trends are likely to continue, given the large number of D&O litigation cases outstanding. Companies should diligently evaluate the adequacy of the amount of D&O insurance they purchase and take a longer-term approach in their negotiations to seek the best value. Business class, merger and acquisition activity and financial strength remain key elements of the premiums being quoted."

Coverage: A Cost of Doing Business?

Among American respondents, D&O coverage was virtually universal, at 97%. The average amount of coverage purchased was $20.1 million. Policy limits also increased for the seventh straight year, with 15% of U.S. participants obtaining greater limits and less than 5% lowering limits.

"Companies see D&O coverage as a necessity in spite of increasingly stringent underwriting by insurers, which requires many companies to build their D&O insurance program by purchasing smaller layers of insurance than they might wish or by employing quota share arrangements," says Jim Swanke, leader of Tillinghast - Towers Perrin's Strategic Risk Financing practice.

Claims and Litigation: A Matter of Class?

The survey shows a leveling off of the frequency of D&O claims, but an increase in their severity, as indicated by the rise in median and average payments and defense costs. The average indemnity payment among closed employee claims was $0.25 million, up slightly from $0.24 million last year. Defense costs for closed claims overall increased to $0.54 million from $0.49 million in the 2000 survey. Note that nearly one-third of all claims filed against U.S. companies are class actions, which are typically expensive to defend and often result in very large payments.

D&O claims were more than twice as likely against companies with a history of merger and acquisition activity, and publicly traded companies were more than twice as likely to experience a claim than their private counterparts.

Employment practices liability (EPL) is also a growing concern of U.S. risk managers due to a culmination of statutes enacted since 1990, such as The Americans with Disabilities Act of 1990, The Family and Medical Leave Act of 1993 and The Civil Rights Act of 1991. For example, the Civil Rights Act introduced both punitive damages and jury trials into EPL litigation -- an explosive combination.

Participant Profile

The 2,130 companies surveyed were comprised of 2,037 in the United States and 93 in Canada, in 15 business classes across all major industrial groups. The median asset size of the U.S. respondents was $50 million and that of the Canadians, $500 million. Seventeen percent of the American respondents and 12% of the Canadians were nonprofits and governmental organizations; 55% of the American companies were publicly traded corporations versus 82% of the Canadian participants. Forty-three percent of American respondents experienced a merger, acquisition or divestiture within the past five years while 63% of the Canadian companies experienced such restructuring.

The 2001 Directors and Officers Liability Survey is available on a prepaid basis for $575 and can be ordered by contacting Susan Knox at [phone], via fax at [phone] or e-mail at [e-mail].

About Tillinghast - Towers Perrin

Tillinghast - Towers Perrin provides actuarial and risk management consulting services to corporations, health care institutions and financial services companies worldwide. As a premier and independent advisor to the Fortune 1000, Tillinghast's major clients include many of the world's largest organizations. The firm operates globally with consistent professional standards through a network of 42 offices in 20 countries. Tillinghast is part of Towers Perrin, one of the world's largest management and human resource consulting firms, with over 9,000 employees. Towers Perrin helps organizations manage their investment in people to achieve measurable performance improvements. More information about Tillinghast is available at www.tillinghast.com.