Lawsuits Send D&0 Premiums Soaring

NU Online News Service, June 17, 12:07 p.m. EST?Premiums for directors and officers liability insurance rose 29 percent in 2001, compared to an increase of only 11 percent in 2000, according to a survey released by Tillinghast-Towers Perrin.

Tillinghast-Towers Perrin's 2001 Directors and Officers Liability Survey attributes the premium hikes to an "alarming increase" in the cost of shareholder litigation and to widespread concerns about high-profile bankruptcies and the quality of corporate accounting and financial reporting.

Demonstrating the surge in D&O claim costs, the consulting firm reported that the average cost of claims closed with payment rose 75 percent over 2000 survey results, with U.S. survey participants paying an average of $5.7 million in 2001, according to the survey.

While the $5.7 million figure encompasses all D&O claims, the average indemnity paid to shareholder claimants was at an all-time high of $17.2 million, the survey reported.

At the same time, the report noted that D&O claim frequency remained stable.

Although the rise in D&O premiums last year, was the most dramatic increase since the hard market of the mid-1980s, "current conditions do not signal that there is a crisis in the market," said Mark Larsen, a Chicago-based Tillinghast consultant and the survey director, in a statement. He added, however, "claim severity trends are likely to continue, given the large number of D&O litigation cases outstanding."

He suggested that "companies?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."

While the survey also reported the total amount of D&O coverage offered by insurers in 2001 was down only slightly from the record levels of 2000, many D&O insurers have become increasingly restrictive as to which potential insureds qualify for their full coverage capacity, according to Tillinghast.

As a result, Jim Swanke, leader of Tillinghast's Strategic Risk Finance practice, noted that companies seeking coverage are building programs by purchasing smaller layers from several insurers.

In spite of market changes, policy limits purchased increased for the seventh straight year, with 15 percent of U.S. survey participants obtaining greater limits and less than 5 percent lowering them.

Tillinghast's annual D&O liability survey, is the 24th such survey in a series put out by the firm. This year's survey tallied responses from 2,130 participants (2,037 in the United States and 93 in Canada) in 15 business classes across all major industrial groups.

U.S. respondents had a median asset size of $50 million. Among the U.S. companies, 17 percent were nonprofits, 55 percent were publicly traded corporations, and 43 percent experienced a merger, acquisition or divestiture within the past five years.

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, the study said.

The survey also reported the following findings:

? Nearly one-third of all claims filed against U.S. companies are class actions.

? Issues related to financial disclosure continued to be the most common among shareholder claimants, representing 38.8 percent of shareholder claims and 9.2 percent of claims overall.

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

The 2001 Directors and Officers Liability Survey is available on a prepaid basis for $575 and can be ordered from the company by telephone, facsimile or e-mail at knoxs@tillinghast.com.

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Lawsuits Send D&0 Premiums Soaring

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