A competitive insurance market is not the only force fueling the design of new directors and officers liability products, according to experts, who say consumer demand is also creating a market for policies that offer clearer terms.
Large-scale corporate meltdowns in the early 2000s demonstrated how the limits of D&O policies can be exceeded defending the entity, leaving the individual directors, and in some cases the officers, to fend for themselves and settle litigation out of their own pockets.
This has led to a demand for products that offer terms coverage to directors and officers that is separate and distinct from coverage for the entity through what have become known as A-side policies.
“It’s not a new problem, but it’s one that the industry has digested,” said Tony Galban, vice president and underwriting manager responsible for the D&O liability business for Chubb Specialty Insurance in Warren, N.J.
With the possibility of settlements consuming the limits of D&O programs in total, “more and more providers of products, as well as buyers, are giving thought to different types of [policy] structures [that] make absolutely sure that certain constituents are protected,” Mr. Galban said, referring, for example, to independent directors, or to other directors and officers as individuals, apart from the corporation.
Examples of settlements exhausting D&O coverage are not exactly widespread, but the fallout is significant when they do occur, experts say.
Steve Wilson, co-founder and president of Retired Directors Assurance Underwriting Services, a program agency for ACE Westchester, cited a case involving Just for Feet, a bankrupt sportswear retailer, in which, he said, five outside directors had to pay $41 million out of their own pockets to settle shareholder litigation. Multimillion-dollar personal settlements also occurred in cases involving Enron, WorldCom, Tyco and others, Mr. Wilson said.
These few but glaring examples have led directors and officers to examine their own standing, prompting questions from them–and inevitably coverage solutions.
“If you were an independent director and you were getting sucked into some of these cases, you wanted to know, ‘Is there going to be some limit left for me, to protect me individually? Is there a broader coverage I can get just for me individually?’” said Mike Cavallaro, director of ARC Excess and Surplus, a wholesale broker in New York.
The details of the questions revealed more sophistication among consumers, in particular the directors and officers themselves, he said.
In the past, directors and officers only asked if the company had D&O coverage. Now, they inquire about A-Side coverage, and even about specific policy provisions, Mr. Cavallaro said. (See related article, “What’s Old Is New,” for historical perspective on development of A-Side.)
Exactly what the newest A-Side (Side-A-only) policies can do for directors and officers will vary depending on the form.
Four of the most recent additions are: Chubb’s Executive Elite, RLI’s Executive Plus, Monitor Liability’s Independent Directors Liability, and ACE Westchester’s Retired Director’s Assurance.
o Chubb’s Executive Elite: Limits Dedicated To Board Committees
According to Chubb’s statement announcing the product, “Executive Elite helps protect directors and officers when other D&O insurers fail to meet their obligations or rescind the policy.”
Mr. Galban explained, “It’s designed to sit above a traditional A-B-C tower [and] to be there for the directors and officers when everything else isn’t.”
He said that Executive Elite will protect directors and officers not only if the company refuses or is unable to indemnify, but also if the underlying D&O carrier goes insolvent or if coverage on the underlying policy is denied for various reasons.
Additionally, he said, coverage would be provided to directors and officers as a group, if the traditional D&O tower gets consumed by a settlement or lawsuit.
Executive Elite is designed strictly for the insured person, and does not have indemnifiable or corporate coverage. “In fact, it specifically states that it doesn’t provide any coverage to the company,” Mr. Galban said.
Executive Elite’s Director Protector Endorsement serves two additional purposes, according to Mr. Galban.
First, it can make coverage specific to a company’s independent directors as a group. “There is some demand among boards to have coverage allocated to independent directors,” he said.
The endorsement can also allocate specific limits of coverage to certain committees of boards of directors. Mr. Galban cited the audit and compensation committees as two that may be particularly exposed to lawsuits. This aspect of the Director Protector Endorsement, Mr. Galban said, is unique to the marketplace.
o RLI’s Executive Plus: Focus On Clarity
Like Chubb, RLI said Executive Plus protects the personal assets of the directors and officers when the corporation cannot or will not indemnify, or when other insurance has been exhausted or is not available.”
Establishing clear definitions of what is covered is where Executive Plus seeks to separate itself from others on the market, said A.Q. “Skip” Orza, a vice president in the Executive Products Group for RLI Insurance Co., who is based in Summit, N.J.
He explained that these definitions include coverage for individuals and events that are either excluded or not mentioned in other products. Among other features, he said the RLI product specifically includes:
o Coverage for trustees, controllers and the in-house risk manager.
o Arbitrations and appeals in the definition of claims.
o Civil penalties in certain situations under its definition of loss that other products do not, such as the Foreign Corrupt Practices Act.
o An explicit carve-back to the insured-versus-insured exclusion to put back coverage for whistleblowers.
He said Executive Plus is the only product that specifically covers civil penalties assessed under Sarbanes-Oxley Section 308, known as “Fair Fund for Investors.”
The main objective of Executive Plus, Mr. Orza said, is to remove the gray area with respect to coverage that exists in some other products. “We’ve probably addressed everything that we can think of,” he said.
o Monitor Liability’s IDL Insurance: Cover Follows The Individual
Monitor Liability Managers Inc., a member company of W.R. Berkley Corp., has released Independent Directors Liability Insurance, designed specifically for individual independent directors.
According to Joseph Haltman, Monitor Liability’s vice president of underwriting for directors and officers, this policy follows the individual, as opposed to a group or a company. As such, it can be tailored to suit the needs of one specific person, as opposed to a group of directors or officers.
“What is unique about it is the fact that you can sit on a nonprofit board, a publicly-traded board or a private company board, and your policy follows you and your actions,” Mr. Haltman said.
He said the policy was designed after having conversations with brokers regarding the specific needs of clients. Members of nonprofit boards, in particular, expressed a desire for higher limits than the nonprofit organizations were willing to purchase.
“So we were asked, ‘Have you ever thought about providing a policy that would follow [a client's] personal activities?’”
One aspect of the policy that is fairly uncommon is that it is generally purchased by the individual, instead of by the company. While Mr. Shappell said products sold directly to individuals can create issues with respect to cost effectiveness, Mr. Haltman said IDL is price competitive.
For nonprofits or private company boards, a policy with a $1 million limit can be purchased for as low as $1,000. For members of public company boards, the minimum price is $3,500, he said.
o ACE’s Retired Directors Assurance: One For The Benefits Package?
ACE’s Retired Directors Assurance offers a unique six-year policy term for directors who retire from a company.
While past directors are covered under a company’s traditional D&O policy, Mr. Wilson said those policies are traditionally one year in length, and that terms can vary from year to year.
“There’s no guarantee that that coverage will be renewed, [and] there’s no guarantee that [the company] will be able to obtain the same terms and conditions after you’ve retired,” he said. “As a retired director, you just don’t have any control over what goes on after you leave the corporation.”
Mr. Wilson said that clients can purchase up to $15 million in individual limits, or even more if desired. The policy has no deductible and cannot be rescinded by ACE. Additionally, clients can select their own counsel, rather than having to use an underwriter’s pre-approved firm.
Like Monitor Liability’s IDL product, Retired Directors Assurance is designed for, and can be purchased by individuals. Mr. Lupica said this solves issues of severability that arise in some D&O contracts.
Explaining the concept of severability, he said that D&O insurers typically have language in their contracts that says if the individual who signs the application for insurance knew of a wrongful act that could rise to a claim, then that voids coverage for everybody on the board.
Speaking to those who would purchase Retired Directors Assurance for themselves, Mr. Lupica said, “Since these people are signing the contract on their own behalf, they don’t have to worry about what someone else is representing to them.”
Mr. Lupica explained that the six-year policy term covers retired individuals throughout the five-year statute of limitations under Sarbanes-Oxley. ACE added an extra year because there are certain SEC statutory limits of up to six years.
While offering the product directly to individuals can be beneficial in tailoring policies to suit the needs of a specific person, it also comes with challenges.
“We’re having a tough time reaching the individuals, but when we do, the individuals all want the coverage,” Mr. Lupica said.
“Right now it’s a matter of distribution. Brokers are reluctant to sell it, quite honestly because it’s a one-time sale. It’s not a renewable event. So they’d rather sell you more A-Side.”
Mr. Lupica said ACE is selling the product through benefits consultants hoping that companies will buy the coverage as part of their directors benefit packages, but he noted that companies may be reluctant to purchase it. Risk managers, he noted, have budgets, and may not want to spend those dollars on an individual who is retiring.
He said that when a retiring individual asks the company’s risk manager if he will be covered after retirement, the risk manager generally says yes–that the D&O policy covers past, present and future directors.
However, the risk manager may not tell the retiring individual the limits of a standard D&O policy are shared with all directors, and the coverage might change or be subject to certain exclusions.
Mr. Wilson agreed. “The legal interests of someone who has retired and left the organization are most likely going to conflict with the legal interests of the current directors and officers at an organization in the event that there’s litigation that names all of those parties,” he said.
Despite the challenges, Mr. Lupica said, “we are gaining momentum. [The product] is starting to pick up a lot of interest.”
As to the value of A-Side policies in general, that may depend on an individual’s or company’s overall philosophy.
Mr. Cavallaro said, “If you believe that the purpose of the [D&O] policy is to protect the directors and officers to the greatest extent possible–that that’s the main purpose–then buying an A-Side policy certainly has some real benefits to it.”
He noted these policies are more popular with larger public companies, while smaller firms don’t typically buy it, mainly because they don’t have the dollars available.
In addition, he said, “if you have a private company that’s controlled by a family…their actions are tied up in the company anyway.” So if they have a policy covering the corporation and themselves, there’s no conflict.
In contrast, Mr. Shappell said smaller companies may find value in such products because they can run out of money faster than larger companies.