Technology sector still presents tough risks for D&O carriers.

Combined, the technology and telecommunication sectors account for the highest frequency of lawsuits within the directors and officers insurance market, placing them among the toughest classifications of risk for carriers, experts say.

D&O carriers have been watching the tech space closely, alarmed by the enormous size of monetary settlements in recent years. In terms of severity of claims, the sector is second only to the financial industry, namely banks and mutual funds.

According to broker Aon Corp.'s industry sector severity analysis, during the past 12 years, the three-year average size of telecom settlements is about $145 million; the average settlement in the infotech sector is about $86 million.

More daunting for carriers is that there are roughly 825 claims, out of more than 3,000 claims filed since 1994, still awaiting final disposition, said Mike Rice, a managing director with Aon Financial Services, who co-hosted a Web seminar on the issue.

"We don't know what's going to happen with those claims, but our actuaries tell us the implied range of settlement for those claims is somewhere between $9 billion and $37 billion," Rice said. "I'm not saying all of these claims are going to be covered by insurance, but if we hit $30 billion, and we estimate 50% are going to be settled, we're looking at $15 billion worth of claims to be paid on a marketplace that's collecting $7 to $8 billion of premium a year. It's not the healthiest marketplace still."

Also contributing to the unhealthy D&O market is the regulatory environment, which remains extremely hostile and challenging for tech companies, said David Kistenbroker, a securities attorney with Chicago-based law firm Katten Muchin Rosenman.

Recently, the U.S. Securities and Exchange Commission stepped up its investigations into option grant timing, a well-known methodology for compensating executives and top-performing employees in the technology industry, he said.

Federal regulators suspect executives are backdating their option grants to precede the release of favorable corporate news, thereby enhancing the value of their compensation.

One tech company, Mercury Interactive, "has gone through a very expensive investigation and restatement process because, after all, they have to look at all of the option grants in the relevant time period," Kistenbroker said. "There are multiple tax issues, disclosure issues and accounting issues that go along with that. The effort to get restated financials when you're suffering under this kind of scrutiny by the SEC can be an exceedingly expensive undertaking."

Indeed, the insurance marketplace has been reacting to the happenings in the tech sector. Of the roughly 40 directors and officers insurers, only about half are willing to write tech and telecom companies, Rice said.

There's been no new capacity added in the past 12 months, and fewer of the highest-rated insurers are operating in this sector. "Genesis has exited the market, and Quanta, which wrote coverage in this space, has been so dangerously downgraded that you have to pay close attention to the viability of them on your particular risk," he said.

Rice said while some underwriters are offering more capacity on a particular risk, many are reluctant to use their full capacity.