D&O Coverage Expands To Address Informal Regulatory Investigation Costs

Looking at litigation over the past several years, "there's been a fairly strong upward trend over the period from 2004-to-2009," he added, noting that the suit totals for the first six months of 2010–906 on an annualized basis–are now on pace with the levels recorded for 2008 and 2009 (884 suits and 1,062 suits, respectively).

REGULATORS MORE AGGRESSIVE
Like past reports, the latest Advisen analysis includes securities lawsuits beyond class actions brought in federal court. Two of the other case types–regulatory actions, such as SEC proceedings and law enforcement actions (both classified by Advisen under a category called "securities fraud suits"), and securities cases alleging breaches of fiduciary duty brought in state courts–are now more prevalent than class action lawsuits.

According to Advisen, regulatory actions dropped slightly in the second quarter of 2010 but remained the second-biggest category of securities suits (behind breach of fiduciary suits), accounting for 29 percent of the total.

"In the wake of some of the more notorious cases in recent years, [SEC] leadership has definitely promised more enforcement," according to Carol Zacharias, senior vice president and deputy general counsel at ACE North America in New York. To meet that challenge, the agency has realigned staff, reorganized divisions and moved more authority out into the field, she noted during the Advisen webinar, which was sponsored by ACE.

As a result, formal SEC investigations soared 113 percent in fiscal year 2009 compared to 2008, she reported, citing numbers from an SEC report. In addition, temporary restraining orders jumped up 82 percent, and disgorgement-of-profits orders surged 170 percent, she added.

Separately, New York-based NERA Economic Consulting, a division of Marsh & McLennan, analyzed SEC settlement trends for the first half of 2010, reporting that the number of settlements–354–increased for the second consecutive semiannual period. According to NERA's May report, the total also marked the third-largest number of settlements in any half-yearly period since 2005.

"Don't forget state regulators," warned Carl Metzger, a partner at Goodwin Procter in Boston, during the July Advisen webinar. "We've certainly seen AGs dusting off the state securities laws and looking to bring enforcement actions of their own. Indeed, sometimes state and federal regulators seem almost in competition with each other, and that creates a certain aggressiveness that gets beyond just an objective investigation."

The Dodd-Frank financial services reform bill, which President Barack Obama signed into law a few days after the Advisen webinar, also has greater whistleblower protections to entice people to help the government nab securities law violators, and provides substantive money awards if the SEC recovers more than $1 million using information that a whistleblower provides.

Louise Pennington, managing principal at Integro Insurance Brokers in New York, noted that in spite of passage of the Dodd-Frank bill, there has been "a very recent expansion of coverage in the D&O insurance marketplace" to address the costs of responding to informal regulatory investigations.

"Normally, when regulations come out, as when Sarbanes-Oxley did, carriers respond by constricting and contracting their policies quite significantly," she observed. Uncharacteristically, "we have now gotten alignment of a broadening of coverage in a very significant regulatory area, at the same time that we've gotten a large expansion of government enforcement coming out in this [Dodd-Frank] bill," she said.

TERMS BROADEN, PRICES DROP
Michael Rice, chief executive officer of Aon Financial Services Group in Denver, Colo., observed that buyers are benefiting from the broadest terms and conditions seen in years, with leading carriers including changes beyond the inclusion of informal investigations in their base policy forms.

"Rather than having to get policies endorsed in numerous ways, many carriers like Chubb and Chartis are rewriting their policies to encompass all those things," he said–referring, for example, to favorable language around issues such as severability and rescindability.

Whereas in the past, 30 or 40 endorsements would have to be added to get an off-the-shelf D&O policy to an ideal stage, the amount of work has been severely curtailed, he said.

In an ideal world, he said, carriers would like to charge as much as 15 percent in additional premium for the coverages they are adding. "But it's still a market of supply and demand, and clients have choices about whether to pay or not pay. And it's a competitive market with a number of carriers willing to match things at a different price," he noted.