When Michael Turk, senior consultant for Towers Perrin, pulledtogether figures for his firm's annual directors and officersliability insurance survey back in 2007, something just didn't seemright.

"I didn't even believe the numbers," he said, referring tosurvey findings revealing that 14 percent fewer insurance buyershad purchased a Side-A-only D&O policy.

The conclusion didn't fit together with the growing level ofinterest Mr. Turk saw in the market for Side-A coverage–whichresponds to non-indemnifiable D&O losses, where a corporationcan't indemnify directors because of statutory prohibitions in astate, because the corporation is financially impaired, or someother reason.

A year later, the Side-A purchase figures came roaring back.According to the Towers Perrin 2008 report published late lastmonth–based on a survey conducted in third-quarter 2008–Side-Apurchases jumped 33 percent for repeat public company surveyparticipants.

"I think it is still going to grow more," Mr. Turk said, citinga table in the report indicating that 43 percent of publiccompanies said they have had Side-A coverage at some point. "It'sstill less than half," he said–noting, however, that purchases aregreater for larger companies.

Among all organizations with assets over $10 billion, 73 percentbought Side-A-only coverage, according to the report. In contrast,only 1 percent of those with assets less than $6 million had thecover, with the percentage rising to 16 percent for those in the$50-to-$100 million range, and 57 percent for those between$5-to-$10 billion.

Pulling together the overall results for public and privatecompany survey participants of all sizes, the report indicates that11 percent said they had purchased Side A at some point on the 2008survey, compared to just 9 percent in 2007.

A change in the distribution ofsurvey participants may explain some of the differences between theresults in the two years. The report notes that there were 11percent fewer participants in 2008, and that the largest decline inparticipation came for a group with assets between $6 million and$10 million (a 59.4 percent reduction).

Still, the trend in the Side-A survey figures makes sense to Mr.Turk. "There's a greater awareness of the benefits of a Side-Apolicy," he said, adding that many insurance purchase decisions arespurred when people see the coverage at work on actual claims.

"There's a D&O claim, and whether it's because of insolvencyor some other reason, the company does not reimburse the directorsand officers, and people see these individuals can get protected bya Side-A policy. A lot of companies will look at that and ask, 'Dowe have this insurance?'"

This is what makes D&O "such a dynamic coverage. It'sconstantly changing based on claim experience," he said, referringnot just to buyer appetites, but also how insurers react toenhanced coverage.

Like the 2007 survey, the latest Towers Perrin report has oneset of results Mr. Turk finds puzzling–figures revealing low buyerappetites for coverage similar to Side A that is known asIndependent Directors Liability coverage.

He explained that IDL is "the next step" in D&O coverage,which not only focuses on individuals by removing Side B corporatereimbursement and Side C entity coverage, but also removes internaldirectors and officer from coverage.

It's basically Side A just for the outside directors, Mr. Turksaid.

"Last year, we had a lot of people that were looking at that,"he noted. In fact, 2007 survey results revealed that 23 percent ofthe participants were evaluating IDL coverage.

According to the just-published 2008 survey, however, "less than1 percent of public companies reported buying it [and] there was abig reduction in the number of companies that were even consideringit," according to Mr. Turk.

In total, only 3.2 percent said they considered IDL–1.7 percentof public companies and 4.3 percent of private firms. The muchhigher comparable figures from the 2007 survey were 21 percent ofpublic companies and 30 percent of private firms.

"There could be a number of reasons," Mr. Turk said, speculatingthat the economic downturn was a big one. "As the economy startedto deteriorate, people may just be saying, 'We've got to be verycareful about how much we're spending on all this kind ofcoverage,'" he said.

The low take-up rates are probably not that surprising toinsurance brokers, based on the comments delivered by two brokersduring a recent webcast.

On the webcast, hosted by New York-based Advisen late lastmonth, Phil Norton, vice chair for the Midwest Region at A.J.Gallagher in Chicago, said one reason IDL policies are not popular"is because the Side-A policy is so much easier to place."

"IDL insurers seem to ask for somuch more information, even though fewer people–and some of thesame people–are included in Side A. Side A just covers a few more,"he said. "They want more information for a product they mayoverprice."

He also noted that the Side-A form is more attractive to thetypical buyer he deals with–the chief financial officer, treasureror risk manager–who may opt to buy Side A, reasoning that "thiscould cover me, too."

In contrast to IDL, Mr. Norton said there's been "an amazingtrend" toward increased Side-A purchases since 2006. In that year,he said roughly 50 percent of his clients bought Side-A-onlypolicies or added limits to the Side-A limits they already had."Then the next year, 50 percent again."

Kevin LaCroix, a partner with Oakbridge Insurance Services inBeachwood, Ohio, said "the value proposition for Side A has gottena big boost recently with the settlement in the Broadcom case,"referring to a $100 million derivative lawsuit, which is anon-indemnifiable claim.

While the company is not insolvent, excess Side-A insurerscontributed $40 million, he said. "It's the first example outsidethe insolvency context where excess Side-A carriers had tocontribute substantially toward settlement–[making] the need forthis type of protection…much more apparent."

Mr. LaCroix noted that the question of whether a broker'sdiscussion of IDL turns into a sale depends on who is on the otherend of the conversation. "When you're having it with the CFO ortreasurer, it's a different dialogue than if you're having it withthe board and the outside board members," he said.

He reported that while teaching at the Stanford Law SchoolDirectors College earlier this year, he addressed "a roomful ofoutside board members, all of whom" wanted to talk about D&Oinsurance designed specifically for them, although they didn'tnecessarily refer to the IDL product name.

The trend now, he said, is toward creating insurance that"continues to get more refined–so on top of the A-B-C D&Opolicy, and on top of excess Side A, there's yet another layer thattakes out the risk of the Dennis Kozlowski effect–of an insideblack-hat person [or wrongdoer] soaking up all the insurance, andleaving outside directors with nothing left to defend themselves."(Mr. Kozlowski, the former chief executive of Tyco International,was convicted in a corporate scandal in 2005.)

"This is the newest trend," Mr. Norton agreed. "We are seeingthese triple-layer programs." He likened the new structure to alayered dessert parfait topped off with "a little tower that's anIDL-type policy."

Mr. LaCroix suggested that the top layer need not be a true IDLpolicy, but instead could be an excess Side-A policy written fornon-officer directors as a group.

Explaining the distinction, he explained, "when you compare theprotection available under an IDL policy to what's available undera state-of-the-art excess Side-A DIC, the IDLs just haven't keptpace–in part because there was no competitive pressure to doit."

MOST COMPETITIVE SEGMENT?

Chris DiLullo, a senior vice president in Lockton's Washington,D.C., office, believes competition for broad-form Side-A coverageis more intense than any other sector of the D&O industry rightnow.

On a coverage basis, Mr. DiLullo said examples of expansionsinclude the removal of insured versus insured (or company versusinsured exclusions) and the addition of reinstatement-of-limitsprovisions (sometimes limited to just the independent directors)."I've even seen one contract that didn't have a bodilyinjury/property damage exclusion," he said.

David Bradford, executive vice president of Advisen, said hisfirm has seen some Side-A policies that clearly cover ERISAliability.

"Generally speaking there's a lot of competition on a pricebasis for broad-form A-side coverage," Mr. DiLullo observed. "Iwould think there would be a lot of support for that statement inthe industry." He declined, however, to quantify the level of pricedeclines.

Brokers and consultants over the years have told NationalUnderwriter that one significant obstacle to Side-A coveragepurchases has been the high price tag.

Giving one reason for high Side-A premiums, Mr. DiLullo saidcarriers "are underwriting the financial solvency" of the insured.Insolvency "is obviously one of the key moments in time that thebroad-form contract could be called upon."

With bankruptcy filings now multiplying and potentiallyprompting insurer claims payouts under more Side-A policies, pricecompetition could start to disappear, experts confirm, but theyexpect competition to stick around for a little while longer.

"Logic would tell you that as loss payments occur, underwriterswill react," Mr. DiLullo said. "They haven't always reacted tofrequency of the claims, but their pricing dispositions havereacted when they're actually making the payments. We're not reallyin that period yet."

Mr. Bradford agreed. "In theory, the spike in bankruptcies andassociated securities claims would put Side-A policies at risk,[but] I haven't actually talked to any underwriters who arewringing their hands at this point in time over the Side-Aexposure….It's something that people talk about a lot, but Ihaven't seen the real angst in the marketplace that there's acrisis going on with Side A."

Interestingly, some figures in the Towers Perrin report–whichare notably based on survey responses that are a year old–seem tosuggest Side-A rates are rising, while A-B-C rates fall.

According to the report, the average rate per $1 million limitfor A-B-C coverage was $16,624 in 2008, down from $21,422 in 2007,while the average rate per $1 million limit for Side-A-only was$15,638 in 2008, up from $11,015 in 2007.

Mr. Turk said he is not entirely comfortable drawing theconclusion suggested by these numbers–that A-B-C rates fell 22percent while Side-A rates jumped 42 percent. He said that sincethe average rate figures in the report are not just for repeatparticipants, "there could be some explanation for [the changes]based on a change in the makeup of the firms participating."

The figures for just 2008, however, put the Side-A average rateper million ($16,624) very close to the average A-B-C rate permillion ($15,638).