Big Firms Buy More D&O For Execs: Willis

Big Firms Buy More D&O For Execs: Willis

By Daniel Hays

NU Online News Service, Sept. 23, 1:56 p.m. EDT?As stockholder suits continue to proliferate, large companies are taking out increasingly higher amounts of directors and officers liability insurance designed to protect executives personal assets, according to a new study.[@@]

The survey, conducted by Willis, the London-based global insurance broker, found increased used of so-called stand-alone A-Side coverage, which protects the directors and officers of a company where the company cannot indemnify them.

Willis said among the companies surveyed, the total average amount of stand-alone A-Side coverage purchased was $57 million, with the median at $52 million. The highest concentration was found in the larger firms, with approximately 55 to 60 percent of Fortune 100 firms and 35 to 40 percent of Fortune 500 purchasing some form of dedicated A-Side coverage.

Willis said the impetus for the purchases were shareholder claims brought on behalf of the company against directors and officers, where settlements or court awards are generally not indemnifiable by the company.

The brokerage study noted that the 1995 Private Securities Litigation Reform Act, designed to reduce frivolous suits, had required proof of questionable acts committed knowingly, which led plaintiffs to dig for evidence that executives benefited directly often via sale of stock or various forms of personal compensation, such as insider trading or pressuring boards for big salaries and bonuses.

Willis said companies that purchased only A-Side coverage protecting executives personal assets fell typically into two categories. The first included those with no claims histories and solid balance sheets that chose to structure their D&O coverage to address situations where they would not legally be able to indemnify their executives.

The second group of companies included those with robust balance sheets but a problem--they either had an adverse D&O claim history or were part of an industry sector experiencing severe D&O claim activity.

These companies, Willis said, found markets unwilling to offer them broader coverage, at least not at motivating rates.

For both categories, the minimum purchase of stand alone A-Side coverage was $50 million in limits and the maximum was $200 million.

Most A-Side coverage, Willis found, was purchased on an excess basis, over a broader base of D&O coverage that typically covered both the individuals and the company.

Willis said these combination programs had their A-Side coverage attaching as low as $10 million and as high as $250 million. Total A-Side purchases in these programs ranged from $5 million in coverage to $200 million. Approximately 87 percent of those who purchased A-Side coverage did so in combination programs.

William G. Passannante, an attorney with Anderson Kill & Olick in New York said A-Side coverage is rarely called upon because when an officer or director gets sued "almost always the corporation will pay to defend that suit. It only comes into play when the corporation can't or won't pay."

Among the high profile D&0 liability cases underway now is one against software giant Peregrine Systems its former chairman John Moores and other company officials accused of financial fraud. A judge in San Diego yesterday refused to dismiss the case against them.

Attorneys involved with that class action said Mr. Moores is a defendant and "his assets are something we would seek to recover from." Mr. Moores is known as the owner of the San Diego Padres baseball team. Lawyers said it was unclear if the team was held in an ownership structure that would allow them to go after it as an asset.

The Willis survey is the first of a semi-annual series reporting on D&O insurance purchasing trends.