Looking At The Aftermath Of Brokerage Settlements, Finite Re Probes

And while these firms cannot ask their insurers to indemnify any regulatory settlement costs, they are not prohibited from seeking to recoup other related expenses from their E&O insurers.

"In the first half of 2005, the brokerage companies began settling with the New York attorney general–beginning with Marsh at $850 million, followed by Aon at $190 million and Willis at $50 million," recalled Theodore Boundas, senior principal at Chicago-based Boundas, Skarzynski, Walsh & Black LLC, an attorney who has spent more than 30 years specializing in professional liability insurance and financial institutions.

According to the 10-Q SEC filings by Marsh and Aon, as part of their settlement agreements with the attorney general, the two firms agreed that they would not–directly or indirectly–seek or accept indemnification pursuant to any insurance policy or other reimbursement for any amounts payable under their settlement agreements.

"However," Mr. Boundas said, "it remains to be seen whether the regulatory settlements will have an effect on any attempt by the brokerage companies to recover their fees and costs incurred in the attorney general's litigation."

Additionally, it also remains to be seen whether any recoveries are available in the private civil litigation that followed on the heels of the attorney general's probes beyond those amounts agreed to in the settlements, and whether any such amounts might implicate the brokers E&O coverage.

Mr. Boundas also said that in 2005 his firm has observed a spike in high-profile litigation arising out of the sale and purchase of finite reinsurance products.

"The regulatory scrutiny and the recent insolvencies of some companies who used this financial engineering to misleadingly improve balance sheets has, of course, impacted the underwriting process," he said.

"This will lead not only to a greater focus on these types of transactions in the underwriting process, but outright exclusion," he noted.

Mr. Boundas commended the industry's efforts to develop guidelines for greater transparency in finite reinsurance deals. "The NAIC Property & Casualty Reinsurance Study Group, for example, has recently recommended changes to the interrogatories in the annual statement blank to provide additional information on reinsurance contracts that may be deemed finite," he said.

These additional disclosure requirements would provide more meaningful information for the users of financial statements–and the improved transparency will likewise translate into enhancing the underwriting process for financial institutions E&O and D&O insurers, he said.

Michael Ha is a former Assistant Editor for National Underwriter. He is now working as a freelancer in New York City.

Finite reinsurance investigations will lead not only to a greater focus on these types of transactions in the financial institution D&O and E&O underwriting process, but to outright exclusion.

Theodore Boundas, Senior Principal

Boundas, Skarzynski, Walsh & Black