Seventeen billion—that's “billion” with a “B”—is a number that'sdifficult to truly comprehend.

In 2014, that's the amount Bank of America agreed to pay inresponse to the government investigation into the design of thebank's mortgage-backed securities and its purchases of MerrillLynch & Co. and Countrywide Financial Corp, making it thelargest civil settlement in U.S. history.

The second-largest settlement in 2014 was Citigroup's $7 billiondeal that also centered on mortgage-backed securities.

How much insurance played a part in those settlements isunknown—the exact details of D&O insurance claims are seldommade public. What is known is that the severity of claims has beenincreasing, with apparently no end in sight. “The statistics arealarming,” says Phil Norton, Ph.D., managing director in Arthur J.Gallagher's management liability practice.

Norton keeps a rolling tally of the 50 largest D&O claimsincurred in the last eight years by publicly traded companies. Thedollar amount of those claims continues to climb, with the 50thlargest D&O claim on the 2014 list more than double that of2006. Average claim severity over that same time period has alsodoubled to $58 million, according to NERA Economic Consulting. Partof the increase in claim value is due to increased regulatoryscrutiny of public companies.

“Agencies that regulate publicly traded companies are betterfunded, are more visible, and are more comfortable sharing andpublicizing the value of the success of their actions,” saysAnthony Galban, senior vice president and global D&O productmanager, Chubb Specialty Insurance.

In addition to regulatory claims, publicly traded companies faceincreased loss severity from securities-related class actions andmerger objections. In 2014, more than 90% of merger &acquisition deals valued over $100 million were litigated, withplaintiffs' attorneys typically alleging that the board ofdirectors breached its duties by conducting a flawed sales processthat failed to achieve maximum sale value to shareholders.

(Photo: Shutterstock/Aysezgicmeli)

One of the largest non-regulatory cases last year was a $275million settlement that mass media company Vivendi paid to resolvea shareholder derivative lawsuit related to its sale of a stake inActivision Blizzard Inc. According to Activision, the settlementwas paid by “multiple insurance companies, along with variousdefendants.”

Although small, privately held companies are generally sparedfrom the regulatory and shareholder action that publicly traded andlarge private companies face, they are not immune from D&Oclaims. “The areas that have been troublesome in D&O on theprivate side are theft of intellectual property and breach ofnoncompete clauses,” says David A. Schooler, partner and trialattorney specializing in professional liability at Minneapolis lawfirm Briggs and Morgan.

Although these types of claims are not new, the growth ofelectronic information has been a game-changer in both the causeand defense of claims. “The battleground is over electronic data,”Schooler says. “No matter how sophisticated people are, youinvariably end up taking something, putting it on a thumb drive orsending it to your home e-mail, putting companies at risk. Computerforensics involved in defending against claims are complicated andexpensive, which is just one reason why private companies needD&O.”

Counterintuitive pricing prevails

Although claim severity is on the increase, pricing on excesslayers of D&O has remained competitive, with high-single-digitdecreases seen on average accounts and even stronger competitionfor the best risks.

“Buyers are currently very fortunate to have an overflow ofexcess D&O capacity,” Norton says. “There can be 30 or 40potential writers out there for a particular account.”

In the primary market, carriers are still trying to getincreases but are able to achieve only low single-digit pricebumps. “If anything, that pricing line is trending downward towarda zero increase on primary-attachment renewals,” says Norton.

D&O coverage also has trended in a directioncounterintuitive to increased severity. “There has been steadypressure on carriers to make terms and conditions more expansive,”Galban says.

Brokers have steadily chipped away at carrier exclusions,including insured-versus-insured, pollution, and conduct-relatedlimitations. Side-A D&O coverage, which protects executivesagainst claims that a company cannot legally or financially cover,has been broadened with no-exclusion language anddifference-in-condition excess forms that cover gaps in primarypolicies. Even though broad coverage is available, however, brokershave to know how to get it.

Complexity can be a barrier

“Complexity is a barrier to breaking into this market,” Nortonsays. “Doing business in D&O almost requires you to know asecret code. If you know what to ask for, carriers will generallysay yes and may not even charge for it—but you have to know what toask.”

Complexity also comes in the form of non-standard coverage.Although D&O forms share the same basic building blocks ofSide-A, -B, and -C coverage, each insurer has its unique coveragewrinkles. In general, Side-Acoverage indemnifies individualdirectors and officers when they are not indemnified by theircompany because of legal or financial limitations; Side-B providescoverage for the organization when it indemnifies directors andofficers; and Side-C provides coverage to publicly tradedcorporations for securities claims brought against it.

The insurance cycle itself also challenges brokers. “It's notunusual for publicly traded companies to request dozens of wordingchanges to their policy each year. There is a lot of activity on atypical D&O policy,” says Galban.

Brokers determined to break into the market can make use of theservices provided by insurers. “Most carriers are good aboutproviding material that can help you through a basic conversationon D&O with a business owner,” Galban notes. “In advising abusiness of any scale, it does you no harm to at least present theidea of D&O.”

Brokers also can explore the relatively untapped market ofprivately held companies that are less likely to purchase thecoverage than publicly traded counterparts, most of which carrycoverage. “We are a long way from saturating the market for D&Opurchases by private companies,” Galban says.

(Photo: Shutterstock/dotshock)

Smaller businesses need D&O coverage,too

In a Chubb survey, only 28% of privately held companies purchaseD&O insurance. That low number exists in part because businessowners mistakenly believe that they are protected by generalliability insurance and in part because they believe their exposureto loss is small. The challenge for brokers is to convince businessowners otherwise.

“There's a strong feeling on the part of smaller, family-runcompanies that they don't need this coverage. They say 'mycustomers love me, my employees love me, so I don't need D&O.'Unfortunately, for many companies, learning about the risks comesfrom experience,” says Galban.

In its survey, Chubb found that D&O suits cost privatecompanies an average of nearly $700,000, including judgments,settlements, fines, and legal fees.

“Agents need to educate the customer as to the risks they'refacing,” says Schooler. Those risks include allegations of breachof fiduciary duty, false adverting and other claims that attempt to“pierce the corporate veil” by targeting directors and officers, aswell as disputes among business owners and family members.

“Professional services and financial firms, architects,engineers—they have no idea that a single claim will put them outof business just from defense costs alone,” says Schooler. “Acouple thousand dollars a year in premium for a policy is peanutscompared to having to absorb the cost of one lawsuit.”