Corporate Buyers Can Still Be Choosy When Shopping In D&O Market

The fact that carriers are charging more and getting higher premiums may encourage more players to come into the market and open up more competition for accounts, she said.

Ms. Rosenberg advised buyers to carefully review terms and conditions because carriers are attempting in some instances to make policies more restrictive.

"Insureds need to pay attention to what is on the table and what is off the table," she said. They also should "fight hard to retain or enhance favorable wording."

But is this doable in the current market?

"In my experience, yes," she said. "Insureds would be well served by doing a detailed review, choosing those items that are critical to them to have as enhancements on the policy, or maintained from the existing policy," so that carriers "don't apply a cookie-cutter approach to every insured."

Insureds, Ms. Rosenberg added, should also avoid attempts by carriers to add additional exclusions or restrict coverages, such as coverage for punitive damages.

She said they also should be on the lookout for attempts to add coinsurance requirements and watch for restrictions on securities claims coverage for the entity.

Rick Betterley, president of Betterly Risk Consultants Inc. in Sterling, Mass., said when looking at D&O coverage, it's important to distinguish between publicly held and private markets.

D&O carriers, he said, are "quite happy with the privately held companies because they don't have the stockholder issues," He said carriers are putting more emphasis on the private market and are more likely to moderate rate increases and retention increases.

Mr. Betterley explained that carriers "wondering how they're going to successfully write the public companies" may decide to write more private business "to make up for the public business they don't want to write."

Although this practice will lead to a more healthy, competitive privately held company market, "companies that are publicly traded are having a hard time getting reasonable rates and form from the carriers," he said.

Another problem for buyers in publicly held companies is "great skepticism and probably cynicism" on the part of underwriters who "may not believe" financial reporting information supplied to them.

He explained that underwriters considering a D&O risk with a publicly traded company may be "skeptical that they are getting the whole storybecause they are paying claims on companies they thought were the cream of the crop."

From the risk manager and broker standpoint, "this is an enormous problem," he said. Underwriters now need everything to be proven, and "even then, you're looking at doubling and tripling of premiums."

The problem for buyers, he said, is "two-fold. You have to supply an enormous amount of information in exactly the form the underwriters want, and if you're not willing to do it, they have other customers who are."

"How do you prove you are telling the truth?" he asked.

"You do that by relationship building. So if you were lucky enough to have foresight several years ago, you're probably benefiting from that right now."

A personal relationship between the underwriter and the risk manager is also important, he said. Although the broker provides an "enormous contribution," he said, "letting the broker do it all just isn't going to be enough anymore."

Mr. Betterley added, "It's been a long time since we've seen a market like this, and a lot of folks haven't seen a market like this before."

Worsening the situation is the fact that because of problems with some U.S. businesses, "boards are putting an enormous amount of attention on their D&O coverage," he said. As a result, risk managers are under more pressure to make their boards "happy and confident" about their coverage, he said.

Some board members want reassurance that they are covered regardless of what happens to the company.

"What if the company is unable to indemnify the director and what if the company's insurance proves to be uncollectible?" he asked.

"There are a few cases in which the bankruptcy court has taken the proceeds of a D&O policy and refused to have it paid to the individual directors, and instead has put it back into the assets of the company."

As a solution, he said his firm has on occasion "had the client buy two separate limits. The higher limit is for the individual directors and officers and the lower is for the corporate reimbursement and/or entity coverage."

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, December 2, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.