D&O Liability Up As Claims Increase

Claim frequency and claim severity appeared to stabilize for most types of claims, although shareholder claims severity was up significantly.

Among closed claims, the survey found that U.S. participants paid an average of $5.72 million, up only slightly from $5.65 million last year. However, the average indemnity paid for shareholder claims increased significantly to $23.35 million, compared with $17.18 million last year and $9.62 million two years ago.

The hard market trend seen in 2001 continued into 2002, as D&O insurance purchasers faced a big jump in premium rates, with increases in the double and triple digits. Additionally, insurers implemented tougher underwriting guidelines for D&O insurance in 2002, according to Tillinghast.

"In light of recent events, a dramatic surge in premiums is not really that surprising," said Mark Larsen, survey leader and Tillinghast consultant in a statement. "Declining stocks on Wall Street and the unprecedented large corporate scandals that have plagued businesses over the past year were clearly the main drivers of the rate increases."

He continued that until there is some improvement in the stock market and shareholders believe that good corporate governance has taken hold, "we can expect to see this trend continue into 2003, and possibly beyond."

The survey also found that:

? Inadequate or inaccurate disclosure, including financial reporting and claims related to stock offerings, was most frequently at issue in U.S. shareholder claims, up from 38.8 percent last year to 46.4 percent this year.

? Even though some respondents purchased higher limits, average D&O policy limits decreased for the first time in eight years. This change indicates that most organizations faced tough risk management decisions when evaluating D&O coverage as a result of dramatic premium increases during the past few years.

? Discrimination in employment was the most frequently cited D&O issue among U.S. participants, accounting for 43 percent of employee claims, down slightly from last year (46.1 percent), and 27.1 percent of overall claims.

Among both U.S. and Canadian participants in the survey, the purchase of D&O insurance was common, with 97 percent and 90 percent of businesses, respectively, having secured coverage.

The average amount of coverage carried by U.S. participants was $18.9 million in total limits, which was down slightly from last year ($20.1 million). Survey participants that opted not to carry coverage reported seeing a lack of need for coverage and the high cost as the primary reasons for not purchasing.

"Current market conditions indicate that purchasers should take a longer-term view of D&O coverage," said Jim Swanke, leader of Tillinghast's Self-Insured Organizations practice. "Purchasers should be mindful of the financial strength and reputation of all D&O insurers in their programs and diligently evaluate the amount of coverage limits they purchase."

The 2002 survey suggests a leveling off of claim frequency and stabilization in claim severity as indicated by the average payments and legal costs in 2002. The U.S. indemnity payment for closed claims averaged $5.72 million, up from $5.65 million last year, and the average legal costs in the U.S. were down from $540,000 in 2001 to $520,000 million in 2002.

Private firms with fewer than 500 shareholders were less than half as likely to experience a D&O claim as their publicly traded counterparts. Companies with a history of merger and acquisition or divestiture activity were more than twice as likely to experience a claim against their directors and officers, the survey found.

The 2,275 companies surveyed were comprised of 2,187 from the U.S. and 88 in Canada, in 15 business classes across all major industry groups. The median asset size of U.S. respondents was $30 million, and that of the Canadians was $1 billion (Canadian dollars).