Policies that focus coverage on directors and officers–as opposed to the corporate entity–get back to the purpose for which D&O policies were originally designed, according to some in the business.

“When D&O first came out, it was specifically for the individuals,” said David Lupica, president of ACE Westchester Professional Risk. This changed when lawsuits came in naming the entity in addition to the directors and officers, which led to allocation issues that placed the insurer and the insured at odds, he noted.

Until the mid-1990s, typical D&O policies had just two coverage parts:

o Side A, protecting individual directors and officers when their companies could not indemnify for judgments and settlements. (The companies might be financially unable to do so, or indemnification might violate the law in some states, for example.)

o Side B, reimbursing the corporation in situations where they could indemnify their directors and officers.

Because the policies did not cover the corporation itself, the corporation would remain uninsured if it was named in a lawsuit. Insurers often battled their insureds over how to allocate indemnity payments and joint defense costs between covered individuals and the uncovered corporation.

These allocation disputes became more contentious over time, according to Steve Shappell, managing director of Aon Financial Services Group, in Denver.

By the mid-90s, there was a market shift to A-B-C policy structures that remain commonplace today, he said–noting that the Side-C component added entity coverage to existing coverage Sides A and B, mainly to stop the allocation battles.

Now, in the wake of corporate scandals, directors and officers are asking for additional Side-A coverage, and insurers are providing it. “There's a bit of a refocus on protecting individuals separate and distinct from avoiding allocation battles,” Mr. Shappell said.

Although these products have been gaining in recent years, they are not entirely new. Mr. Shappell and Mike Cavallaro, director of ARC Excess and Surplus, a wholesale brokerage in New York, both pointed to CODA–an ACE company out of Bermuda–that has been offering Side-A difference-in-condition insurance products since the 1980s.

Some of the new products that have emerged recently are driven mainly by the current competitive market conditions.

A.Q. “Skip” Orza, a vice president of the Executive Products Group for RLI Insurance Company, who is based in Summit, N.J., said that while the severity of D&O suits has gone up slightly in the past two or three years, the frequency has trended downward, and that has attracted new players.

Mr. Orza warned, however, that D&O loss trends are volatile. For those offering coverages because they “perceive the market to be favorable,” he said, “I hope they have the stomach for being long-term players.”

Special Reports /

What's Old Is New: A, B, C & Allocation, Too

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