Directors, Officers Might Need To Buy Separate Covers, Leading Attorney Warns

With the interests of directors and officers diverging more widely in litigation filed against them and their companies by angry shareholders, it might be time for risk managers and insurance carriers to consider separate coverage for each party, a leading D&O attorney suggests.

“The problem is there are conflicts emerging between the interests of directors–particularly outside directors–and the officers of a company,” according to Dan Bailey, chair of Bailey Cavalieri LLC's D&O Practice Group in Columbus, Ohio.

“Decisions on buying D&O coverage are being made by officers, not directors, even though the two may have different interests,” he added during last month's “Bermuda Perspective” conference hosted here by the Professional Liability Underwriting Society.

“If taken to an extreme, one could reach the conclusion that directors and officers should have separate policies,” he said–suggesting that Bermuda, given its reputation as an innovative market, could take the lead in offering such targeted coverage.

“For Bermuda, the big challenge is to remain relevant,” he said at the conference–which he led off with a review of the history of D&O, followed by his outlook for the island's insurance market.

Noting that many of Bermuda's product introductions have “gone mainstream” with the addition of new U.S. suppliers of D&O coverage “diluting the market,” he said Bermuda firms “don't really offer anything unique or essential, which were the hallmarks of your past.”

“You don't have to reinvent the wheel to remain viable,” he said, suggesting that Bermuda's D&O players must “remain creative and insured-oriented,” and continue to come up with “new products and new ways to write existing coverage”–with a possible directors-or-officers-only policy as only one example.

Another major D&O concern is the growth in “opt-out exposures,” according to Mr. Bailey, who called the phenomenon “the biggest threat to directors and officers and their insurers.”

Those eligible for a piece of a class settlement, he explained, “but who don't like the terms of the deal, can opt out and are free to sue separately.”

He added that “those institutional investors who did opt out got a lot more than they would have as passive members of the class.” Noting that such suits are “pursued on a contingency fee basis,” he asked: “What have the claimants got to lose?”

Mr. Bailey–co-author with William Knepper of “Liability Of Corporate Officers and Directors,” which PLUS cited as “the standard treatise on the topic”–said that because of the growth in opt-out actions, “insurers are no longer buying peace-of-mind with class-action settlements.”

For carriers, he said, the most difficult question is, “How do you anticipate those [opt-out] liabilities?”

“Now that the genie is out of the bottle, there is no solution short of new legislation, and I don't see that happening,” he added. “If you were an institutional investor, why wouldn't you opt out?”

He suggested that “maybe there is an opportunity here for a new insurance product, or at least a separate limit for opt-out suits.” Mr. Bailey noted that while “some would suggest just buying higher limits,” he argued that “separating this [opt-out] exposure could mean a cheaper premium” for buyers.

Beyond declining prices in a softening insurance market, Mr. Bailey observed that D&O terms and conditions are becoming “extraordinarily broad” for buyers.

For example, he said carriers are often dropping the IVI–Insured vs. Insured–exclusion, which, he warned, “could encourage corporate entities to sue their own directors and officers to get the insurance proceeds in a collusive sort of suit.”

He added that by dropping such exclusions, “we run the risk as an industry of doing something we've done over and over again–screw up a good thing.”