Demand For Separate A-Side D&O Spreads Beyond 'Fortune500'

From top corporations to smaller businesses, directors areclamoring for more A-Side policies

The use of separate A-Side directors and officers coverage amongthe biggest U.S. corporations has been growing by leaps and boundsduring the past couple of years--and now the smaller businesses arecatching on,.

The demand for this protection is spreading to beyond "Fortune500" and even "Fortune 1000" companies, a number of industryparticipants observed.

"The demand is beginning to spread out among corporations,especially in the financial area. Now, virtually any public companywith a meaningful market capitalization is showing an interest,"observed Greg Flood, executive vice president and chief operatingofficer of National Union Fire Insurance Company, a unit ofAmerican International Group in New York.

"Stand-alone A-Side is now becoming a basic purchase,particularly for large Fortune 500 companies. This was not the casefive years ago," added Tony Galban, D&O underwriting managerfor Warren, N.J.-based Chubb Specialty Insurance.

St. Paul Travelers' National D&O Liability Product ManagerMark Lamendola has also observed the soaring demand for the A-Sidepolicy. "It was once viewed as a Fortune 100, Fortune 500 product,but now our company is seeing demand spread to Fortune 1000 andlower."

Insurance law expert Dan Bailey, an attorney at law firm BaileyCavalieri LLC in Columbus, Ohio, reported that more than half oflarge public corporations now include A-Side policy in theirD&O program--thanks to the rising level of interest during thepast three years,

As a result of this heightened demand, supply has also been onthe rise, with more carriers jumping on the A-Side bandwagon fortheir clients.

New York-based Marsh's national D&O practice leader, Lou AnnLayton, said she sees a "very competitive marketplace" for A-Sidecoverage. "Some of the markets that didn't have a specific form forA-Side now do. [And] companies are offering new policy forms withbroader A-Side coverage," she said.

Pricing--while risk-specific--continues to be competitive andwill remain so at least for the remainder of 2005 and the firstquarter of 2006, she forecast.

One uncertain factor, however, is how profitable these newA-Side products will turn out to be, since these policies are onlya couple of years old.

"It's too early to tell what the profitability of these policieswill be given the current regulatory and legal environment as wellas the time it takes to settle claims," St. Paul, Minn.-based St.Paul Travelers' Mr. Lamendola cautioned.

Of course, traditional Side A/B/C D&O policies have beenoffering Side-A coverage for individual directors and officersbefore. Side-A, as opposed to Side-B, is designed to cover lossesfor directors and officers in cases when the corporation cannotindemnify, such as settlements/judgments in shareholder derivativelawsuits, or when the corporation is financially unable to providecoverage for a director or officer.

But what's really taken off in the past three years is thepopularity of A-Side-only excess policy. Industry participants saidcurrent challenges in the legal and corporate landscapes areforcing directors and officers to become much more sophisticated inmanaging their personal risk, and as a result they are pressuringtheir corporations to purchase more D&O liability insurancespecifically to protect their personal assets.

"You cannot ignore the increase in the frequency and severity ofshareholder derivatives lawsuits such as Oracle, Hollinger,Computer Associates. These recent settlements and developments willcontinue to fuel the demands for A-Side products," noted Mr.Lamendola.

(Derivative suits are brought by shareholders on behalf of thecompany, naming directors and officers as defendantes.)

Further, the non-rescindability of the broad A-Sidedifference-in-conditions policy is also a big factor in attractingthe interest of directors and officers, he added. (See side-bar foran explanation of different types of A-Side and theirfeatures.)

Indeed, nowadays when a corporation asks a potential officer ordirector to come on board, the candidate often demands a copy ofD&O protection so that it can be reviewed by a personal lawyer,observed Steve Shappell, managing director of Aon FinancialServices Group's legal and claims practice in Chicago.

Mr. Shappell said corporations are being receptive to thedemands by directors and officers to obtain more dedicated A-Sidecoverage, and thus, corporate risk managers are bringing moreoptions to executives to ensure they are getting maximumprotection.

Ms. Layton from Marsh also observed, "The outside directors aregetting advice from legal counsel, and are looking for more A-Sidecoverage. The overall general awareness of the D&O market hasincreased among outside directors."

Chad Berberich, manager of home office underwriting at Peoria,Ill.-based RLI Corp., another underwriter of A-Side policies, alsoobserved that directors and officers are now taking a much moreactive role in the placement of D&O insurance. "Directors andofficers now understand D&O insurance better than they everhave. As they become more intelligent buyers, risk managers aredemanding quotes for A-Side coverage. Demand is certainlyincreasing."

Already, the marketplace for the A-Side policy has gone througha transformation. Just a few years ago, CODA, an ACE Bermudacompany and a longtime benchmark and standard-bearer in A-Sideprotection, was just about the only carrier offering a separate,broad-form A-Side policy. Now, it faces competition from a numberof major carriers offering similar, competing CODA-likeproducts.

"We were the first to offer the A-Side-only coverage. The CODApolicy was created out of the hard marketplace in the mid-1980s,when D&O coverage was very difficult to obtain," recalled CarolZacharias, senior vice president and underwriting counsel for ACEUSA Professional Risk, part of Hamilton, Bermuda-based ACE Ltd.

Ms. Zacharias said the industry has been seeing a significantuptick in the number of clients buying separate A-Side to betterprotect directors' and officers' personal assets. She said she seesa number of factors behind this spike in demand.

"There are more severe cases, criminal cases, trials andregulatory actions against directors and officers," she said.

Ms. Zacharias's company is also recognizing the growing demandfor A-Side among small corporations. ACE, which insures asubstantial percentage of Fortune 1000 for A-Side products,recently introduced through its ACE USA unit an A-Side policy thatspecifically targets companies outside Fortune 1000.

Michael Ha is a former Assistant Editor for NationalUnderwriter. He is now working as a freelancer in New YorkCity.

Quote (Photo included)

"Stand-alone A-Side is now becoming a basic purchase,particularly for large Fortune 500 companies. This was not the casefive years ago."

Tony Galban, D&O underwriting manager, Chubb SpecialtyInsurance

Art caption:

Directors are pressuring their corporations to purchase moreD&O liability insurance--in the form of A-Side-only excesspolicies--specifically to protect their personal assets.