A consulting firm poll has found that public and private companies have received a record number of inquiries from potential board members who had concerns about their current directors and officers (D&O) liability insurance.
Towers Perrin in Stamford, Conn., said more than 66 percent of company respondents reported they had such an inquiry–an increase of 16 percent from 2005.
The information was contained in the firm's D&O Liability 2006 Survey on Insurance Purchasing and Claims Trends.
Towers Perrin said nonprofit respondents received similar D&O inquiries from approximately 32 percent of their boards, up 3 percent from 2005.
At the same time, the survey shows that companies are responding to these inquiries by providing broader personal liability protection for directors and officers.
Towers Perrin said 14 percent of those surveyed purchased Side A-only coverage in the past year. Side-A coverage provides D&O coverage for personal liability for those not indemnified by the organization.
The Towers Perrin survey, which included 2,875 participants, is the 29th in a series of studies on D&O liability insurance purchasing and claims trends.
Popularity of Side A-only coverage reflects directors and officers' desires for improved personal coverage, Towers Perrin said. According to the firm, this is particularly true for public companies, where 38 percent reported purchasing a Side A-only D&O policy this past year.
It noted that the majority of stock option backdating claims seen so far have resulted in shareholder derivative claims, a common source of Side A D&O claims.
Among repeat survey participants, there was a 53 percent increase in organizations that purchased a Side A-only D&O policy. Twelve percent of repeat participants purchased such a policy, up from 8 percent in 2005. Although public companies are the most likely to purchase a Side A-only policy, the largest percentage increases occurred with private and nonprofit organizations.
Looking ahead, Towers Perrin said it expects to see an ongoing demand for Side A-only coverage, but also anticipates even greater changes in the types of coverage required by independent board members.
Towers Perrin's D&O liability insurance average premium index dropped 18 percent in 2006 after dropping 9 percent in 2005 and 10 percent in 2004.
For repeat participants, the average premium reduction was 6.5 percent. But while the downward change in premiums points toward a softening market, Towers Perrin said nearly the same percentage of companies experienced a premium increase–36 percent compared with 38 percent who had a decrease.
Consistent with the 2005 survey, 15 percent of participants reported increasing their D&O limit. The average limit purchased across all participants was $11.55 million, a reduction from 2005 that Towers Perrin said is based largely on increased participation by smaller organizations.
For 2006, claim susceptibility across all business classes decreased 2 percent from 2005, to 14 percent. Public companies showed significantly higher claim susceptibility (31 percent) than private companies (9 percent) and nonprofit organizations (4 percent).
Forty-nine percent of the claims against public participants were brought by shareholders. In contrast, 92 percent of the claims brought against nonprofit participants were brought by employees.
Forty-six percent of claims against 2006 participants have been closed, which remains consistent with last year's survey. The large majority of closed claims were closed by settlement–61 percent–while the percentage of claims closed by litigation increased slightly from 10 percent in 2005 to 12percent this year.
Towers Perrin is offering the 2006 Directors and Officers Liability Survey free online at www.towersperrin.com.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.