Tale Of Two Markets For Fiduciary Liability

Rates rise for public companies, stay flat for "everyone else"

Fiduciary liability insurance is increasingly gaining attention as a valuable product, although, as with many insurance products, this is only occurring because recent events have spotlighted why it is needed in the first place.

Once considered to basically be a "throw-in" with the traditional directors and officers coverage, a wave of major lawsuits in recent years has brought fiduciary liability coverage into the spotlight.

"The fiduciary liability market is getting some very rude awakenings," said Steve Shappell, senior vice president for Aon Financial Services Group. The industry is now seeing a number of large fiduciary claims and increased litigation activity, he said, with the Enron case being perhaps the most well known.

Fiduciary liability insurers, he added, are seeing one particular kind of litigation rising, based on the federal Employee Retirement Income Security Act. These ERISA-based lawsuits, which often "tag along" with a traditional securities lawsuit, can occur if the employee pension plan has purchased stock in the company--and the stock declines due to some adverse financial disclosure. In the tag-along suits, traditional securities lawsuit claims are repackaged to allege breaches of fiduciary duty.

Suits such as these are becoming more frequent, making for what Mr. Shappell called "a very volatile market right now."

Evan Rosenberg, a senior vice president and global specialty lines manager for Chubb Specialty Insurance, said the fiduciary liability market is currently being viewed as two separate groups: publicly owned companies with company stock in their 401(k) plans "and everyone else."

Although Enron was the first case to draw significant attention to the fiduciary liability issue, Mr. Shappell noted it was not the first case to raise those issues. "This phenomenon actually started before Enron--although not to the enormous size that we've seen in the last few years," he said.

Stan Quirk, president of ARC-Mid Atlantic Excess & Surplus Inc., also pointed to the rise of so-called "tag-along" lawsuits as a cause for the "turmoil" being experienced in the fiduciary liability market.

For buyers of insurance, Mr. Shappell said, the environment has led to an increased awareness of their responsibilities and potential liabilities when it comes to the employee pension fund investments.

When these investments lose money, or fail to live up to expectations, these parties "recognize they're at risk," he said. "It's their job to get that money back in the plan."

Cases for fiduciary liability have resulted in settlements, some of which Mr. Shappell noted were "very large" and not in line with the expectations held by many companies when policies tagged for coverage were written.

The reason companies--and their insurers--are agreeing to such large settlements, which are typically for the full policy amount, according to Mr. Rosenberg, is because the means of beating these claims remains undiscovered.

"There are no good court cases out there to show any good defenses," Mr. Rosenberg said.

In response to increasing claims payouts, Mr. Shappell noted that insurers have raised rates. "The corresponding result is that prices...have risen as companies have been taken by surprise a little bit," he said. While some claims are always expected by insurers, he said "the insurance market is being surprised by the frequency and the severity" of these claims.

As an example, Mr. Rosenberg said that a fiduciary liability policy with a $25 million limit and a $100,000 deductible would have cost roughly $125,000 two years ago. Now, he said, that same company could only get roughly $10-to-$15 million in coverage, with a deductible likely around $2 million and premiums as much as two-to-three times higher.

Mr. Quirk noted that insurance companies have also begun to keep a much closer eye on what coverage they are writing, trying to determine the extent of potential liability that a policy can carry.

"Insurance companies have a problem," he said. "They have to ask themselves 'Do I want to write this account?' and 'How do I feel about the risk?'"

Chubb is among those companies that have raised prices, and Mr. Rosenberg said the company believes that prices will continue to go up. He noted, however, that some of the company's competitors appear to feel as though prices are adequate.

As other companies maintain their rates for fiduciary liability coverage, he said that at some point--"in the next year or two"--their reinsurers will take notice of the exposure and begin reducing their capacity.

"It will take a while for the reinsurers to see," he said. Chubb is among the top three companies for fiduciary liability coverage, which Mr. Rosenberg said gives the company a better perspective on the market. "There tends to be a lag between what we see and what others see."

Mr. Shappell also feels the market can expect to see continued trends of increasing premiums and careful underwriting.

"The market is not hard," even though pricing for fiduciary liability coverage on its own "is catching up with D&O," Mr. Shappell said. "There's still room to go up."

But the problems facing fiduciary liability insurers are fairly limited to those companies with public ownership and company stock in their 401(k) plans, experts say. Conditions for the "everyone else" portfolio, Mr. Rosenberg noted, actually remain quite favorable. "If they don't have any company stock in their 401(k) plan, the market is actually very reasonable," he said, with policyholders seeing "modest increases" or flat renewals.

Going forward, Mr. Shappell said that fiduciaries, and their insurers, should not expect the wave of litigation to end at any time in the near future.

"Unfortunately, we're going to have to continue to feed these lions," Mr. Shappell said of the plaintiffs' bar, which he added has "found a niche" in these types of suits in which they can continue to make money.

From a legal standpoint, Mr. Shappell said, the problem is that "tag-along" lawsuits are "low-hanging fruit." In a securities lawsuit, he said, the plaintiffs need to prove there was some act of fraud, but the standard of proof for these ERISA-based claims is much lower, making it easier for plaintiffs to make their case and providing more inducement for defendants to settle.

Mr. Quirk took a similar line of thinking, explaining that public companies should just assume that if they face a regular securities class action lawsuit, then a "tag-along" ERISA suit is inevitable.

"We've got to deal with it," he said. "If you're going to get a securities claim and your plan has company stock, then guess what? You're getting an ERISA 'tag-along' claim."

Additionally, he noted that the cases have caused insurers to seek more restrictive limits on their fiduciary liability policies.

With seemingly no successful strategy for insurers in defending against these "tag- along" lawsuits, Mr. Rosenberg said that Chubb has been working to change the system on which they are based. The company has been meeting with the Department of Labor and several trade groups, he said, seeking to devise some rule to help limit these suits, or some industry "best practices" to help companies avoid them.

The insurance industry, on the whole, has achieved a fair measure of success this year in getting tort reform measures passed, such as class action reform legislation. But Mr. Shappell said it would be unrealistic to think that a similar solution will happen for fiduciary liability legislation, or even that such a solution would be proposed.

Given all the attention paid to cases such as Enron, or the more recent WorldCom case, he said, "it would be political suicide" for any policymaker to even suggest changing those laws.

"Tag-along" lawsuits are "low-hanging fruit," with much lower standards of proof required to bring these cases than securities lawsuits, Aon's Steve Shappell said.

"There are no good court cases out there to show any good defenses."

Evan Rosenberg, SVP, Chubb Specialty

Art caption:

According to fiduciary liability market experts, tag-along suits are an inevitable companion to securities lawsuits. "We've got to deal with it. If you're going to get a securities claim and your plan has company stock, then guess what? You're getting an ERISA 'tag-along' claim," says Evan Rosenberg of Chubb Specialty.

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Tale Of Two Markets For Fiduciary Liability

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