Securing D&O in a hard market. (Insurance).Post-Enron, publicly traded companies publicly traded company A company whose shares of common stock are held by the public and are available for purchase by investors. The shares of publicly traded firms are bought and sold on the organized exchanges or in the over-the-counter market. have little choice but to purchase directors & officers liability in order to ensure filling executive and board positions. The D&O market has tightened, with further tightening expected, as demand is climbing. While insurance has historically been viewed as a necessary expenditure for publicly traded companies and a safety net for privately held organizations, insurance has not generally been a top priority for many senior executives. Today, however, that's no longer true. Following more than a decade of market softness, the insurance marketplace is changing rapidly. Property & casualty carriers are tightening contracts, increasing deductibles and raising rates in an attempt to recoup recoup To sell an asset at a price sufficient to recover the original outlay or to offset a previous loss. from years of inadequate pricing and from mounting defense costs and increasingly higher settlements and awards. Concern over the fallout fallout, minute particles of radioactive material produced by nuclear explosions (see atomic bomb; hydrogen bomb; Chernobyl) or by discharge from nuclear-power or atomic installations and scattered throughout the earth's atmosphere by winds and convection currents. of recent accounting scandals Accounting scandals, or corporate accounting scandals are political and business scandals which arise with the disclosure of misdeeds by trusted executives of large public corporations. has added fuel to the fire. One line of coverage -- directors and officers liability (D&O) -- is generating perhaps the greatest interest among today's corporate leaders, and for good reason. For public and private held companies, understanding the factors contributing to the current state of the marketplace, combined with ample preparation for renewal, is key to managing the purchase of this essential coverage. Today's shareholders, employees, regulatory authorities Noun 1. regulatory authority - a governmental agency that regulates businesses in the public interest regulatory agency administrative body, administrative unit - a unit with administrative responsibilities , customers and competitors expect more from corporate leaders than ever before. This conduct and integrity is being scrutinized with new vigor. Directors and officers can be held responsible for actual or alleged wrongful wrongful Forensic medicine An adjective with considerable medico-legal currency, used in several contexts. See Negligence. Wrongful Wrongful death An event that is usually regarded as negligent. See Negligence. acts, errors or omissions, including negligent advice, misstatements, or improper disclosure. D&O policies are designed to cover defense costs and settlements incurred as a result of such allegations. In the post-Enron era, publicly traded companies have little choice but to purchase D&O liability, since without it, they would have difficulty finding individuals willing to serve on boards. Furthermore, opting to go without D&O insurance could expose the company and its board to financial ruin. The Changing Landscape The D&O market has tightened over the past 12 months, and further tightening is expected as insurers realize the impact of increased securities claims on the policies written during the last decade. Due to an abundance of capacity, intense competition and generally favorable loss trends, policies written throughout the 1990s offered very broad coverage at extremely competitive rates. The premium dollars banked are, in general, woefully woe·ful also wo·ful adj. 1. Affected by or full of woe; mournful. 2. Causing or involving woe. 3. Deplorably bad or wretched: inadequate to settle expected litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute. When a person begins a civil lawsuit, the person enters into a process called litigation. costs. In March 2002, the Stanford Law University Securities Class Action Clearinghouse reported a sharp increase in federal class action lawsuits class action lawsuit A lawsuit in which one party or a limited number of parties sue on behalf of a larger group to which the parties belong. For example, investors may bring a class action lawsuit against a brokerage firm that has actively promoted a tax filed in 2001 -- a 60 percent increase in the number of suits from the prior year. That's a surprising number, particularly in light of legislation passed in recent years. The Private Securities Litigation Reform Act The Private Securities Litigation Reform Act of 1995 (PSLRA) implemented several significant substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation and awards fees and , enacted by Congress in 1995, was designed to deter frivolous Of minimal importance; legally worthless. A frivolous suit is one without any legal merit. In some cases, such an action might be brought in bad faith for the purpose of harrassing the defendant. suits by requiring that potential litigants meet a higher standard in order to bring suit. As the statistics show, the plaintiffs' bar is still very active, and settlements continue to grow. A larger percentage of this litigation activity centers on allegations of accounting fraud, with revenue recognition issues emerging as particularly significant causes of litigation. Stanford Law further reports the dollar magnitude of settlements has increased noticeably, particularly in the settlement of "mega cases." There have been several post-Reform Act settlements in excess of $200 million: * Cendant -- settled for $3.25 billion * Bank of America
Bank of America (NYSE: BAC TYO: 8648 ) is the largest commercial bank in the United States in terms of deposits, and the largest company of its kind in the world. -- settled for $490 million * Waste Management -- settled two separate class actions for $457 million and $220 million * 3Com -- settled a class action proceeding for $259 million. According to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. industry representatives, 2001 rates for D&O insurance rose a minimum of 30 percent to 40 percent over the prior year. Public companies in industries hit hard by the decline in the stock market have been paying upwards of 125 percent over their 2000 D&O premiums. Additional pricing changes were applied in the form of raising self-insured retentions, carving back on coverage enhancements and/or sub-limiting extensions of coverage under the contract. In some instances, coinsurance A provision of an insurance policy that provides that the insurance company and the insured will apportion between them any loss covered by the policy according to a fixed percentage of the value for which the property, or the person, is insured. on the policy was applied on risks with higher than normal exposures or loss history. D&O rates are expected to continue rising throughout the next year as insurers attempt to recover on their incurred and trended losses. Through the first quarter of 2002, carriers have sought rate increases in excess of 100 percent. The good news, for now, is that D&O insurance is still available. The situation could become far worse if major carriers choose to exit the market, leaving some companies unable to obtain adequate insurance. This is a distinct possibility if the reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. market -- which provides insurance for primary insurance companies -- begins to pull back the limits or availability of coverage. Preparing for Renewal Relationships are important, especially in the D&O business. Insurers make it their business to get to know their customers. Customers who are prepared to tell their story, address any concerns regarding operations or results and encourage ongoing dialog with their insurers will fare better than those who fail to take a proactive approach to managing their insurance program. D&O policies should not be viewed as commodities to be purchased from different Insurers each year, depending upon who offers the lowest premium. To the contrary, jumping from one carrier to the next can raise several red flags to an underwriter. Among those: * The company may have a cash flow problem. Moving coverage in order to recognize savings on insurance expenditures may indicate that long-term viability of the company could be in question. * The company does not understand the importance of coverage, indicating a possible lack of sophistication so·phis·ti·cate v. so·phis·ti·cat·ed, so·phis·ti·cat·ing, so·phis·ti·cates v.tr. 1. To cause to become less natural, especially to make less naive and more worldly. 2. for running other parts of the business. * The company is not interested in developing a long-term relationship. Underwriters may be better served spending time "Spending Time" is the first single released by Christian artist Stellar Kart. The lyrics describe the band members desire to spend "more time with God". "Sometimes it’s a real struggle to spend time with God. and resources on other deals that may be more fruitful. * The expiring carriers may have uncovered problems that could lead to litigation and thus refuse to offer terms. Future underwriters should beware. While none of these red flags may apply to all companies that moved from one carrier to another, the lack of an ongoing relationship with one insurance company may put insurance buyers at a disadvantage as the market continues to harden hard·en v. hard·ened, hard·en·ing, hard·ens v.tr. 1. To make hard or harder. 2. To enable to withstand physical or mental hardship. 3. . It's especially so in hard market cycles, when submission activity increases significantly, every client wants to be sure he or she is getting the best deal, but underwriters have a limited amount of time to review risks. Companies are advised to take the time necessary to prepare a quality submission and tell their story. If the submission lacks detail, it will be pushed to the bottom of the pile. Furthermore, be upfront on company issues or concerns. If sales are behind, a cover note should address this matter, along with the plan of action to improve results. Provide the underwriter with progress on the plan, as well as any anticipated adjustments. Be willing to meet with underwriters to explain any significant issues, shed light on any notable items and demonstrate that concerns are being addressed. If the underwriter discovers an unexplained unexplained Adjective strange or unclear because the reason for it is not known Adj. 1. unexplained - not explained; "accomplished by some unexplained process" problem and is not able to see that the potential insured is on top of the situation, it's likely that the risk will be declined. Much has changed for managing D&O policy renewals in a tough and continually hardening hardening, in metallurgy, treatment of metals to increase their resistance to penetration. A metal is harder when it has small grains, which result when the metal is cooled rapidly. market. A big difference is a proactive approach: actively participating in the renewal cycle, making key players available for meetings or conference calls and taking on a greater part of the risk -- in terms of higher retentions, co-insurance or sublimiting coverages. RELATED ARTICLE: Preparing for D&O Renewal in a Hard Market * Develop a relationship with your D&O underwriters, and communicate regularly * Address financial concerns upfront * Discuss industry developments, challenges, opportunities * Explain unusual activities or deviations from business plans * Outline an action plan to address underwriting Underwriting 1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt). 2. The process of issuing insurance policies. concerns * Make key players available for meetings Jack Goodwin is the worldwide directors & officers liability practice leader in the Professional & Financial Risks Division of Royal & SunAlliance, part of London-based Royal & SunAlliance Insurance Group plc, www.profin.royalsun.com. He can be reached at Jack_Goodwin@RSAUSA.com, 615.231.7604. |
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