Buyers of directors and officers liability are worried about regulatory claims, according to results of a recently released survey in which more than three-quarters of participants ranked such claims among their top three claims concerns.
According to the 32nd annual directors and officers liability survey published by Towers Watson, only 19 percent of 496 organizations surveyed ranked potential regulatory action against directors and officers as their No. 1 concern—far below the 41 percent that ranked direct shareholder suits as their top concern.
But with another 26 percent ranking regulatory actions as their second-biggest concern and one-third saying that such actions ranked third among their worries, a total of 78 percent of respondents ranked this category of potential claims headaches among the top three.
The 78 percent total eclipsed the 68 percent total for respondents ranking direct shareholder suits either first, second or third among potential claims headaches.
The possibility of litigation against directors and officers coming from any number of a broad range of constituents fueled the purchases of increased D&O insurance limits and resulted in more buyers of Side-A coverage, the Towers Watson survey found.
In addition, "the current state of the insurance market may have also contributed to the increase in limits purchased," Larry Racioppo, leader of Towers Watson's executive liability practice, said in a statement, noting that the D&O market is now a highly competitive market "with many insurers chasing fewer clients, which leads to reduced pricing."
According to Towers Watson's third-quarter 2010 Commercial Lines Insurance Pricing Survey (CLIPS), D&O pricing showed a decline for the fourth consecutive quarter, Mr. Racioppo noted. In addition to claims worries, "it is also likely that purchasers are reallocating a portion of their savings to buy additional limits," he said.
According to the firm's recent D&O surveys:
• Twenty-one percent of participants in the 2010 survey said they had increased their D&O limits compared to their prior D&O policy.
• This is a big increase over 2008, the last time the survey was conducted, when only 12 percent of respondents said they increased D&O policy limits.
• This time around, 75 percent said their D&O policy limits had stayed the same, compared to 86 percent in 2008.
• Only 3 percent of those surveyed for the 2010 analysis said they had decreased their limits.
Turning to Side-A coverage, Towers Watson noted a sizable increase in the percentage of organizations that buy such coverage, noting a jump for public companies in particular.
According to the 2010 report, 80 percent of public company respondents said they bought an excess Side-A policy. Although the report does not reference a comparable figure from prior studies, NU's prior coverage of the Towers Watson survey results indicates that just 43 percent of public company respondents to the 2008 survey reported having purchased Side-A coverage at some point in time.
Indeed, the 2008 study marked the first time that Towers Watson survey figures supported the popular view among brokers and consultants that Side-A was growing. Prior surveys had buying percentages down in the mid-teens at most for public and private respondents. Pulling together the public and private company responses for 2010, Side-A purchasers come in at 64 percent, with 35 percent of private organizations saying they purchased Side-A coverage.
Side-A policies, like the "A" coverage part of a full D&O A-B-C policy, respond to non-indemnifiable D&O losses—claims for which a corporation can't indemnify directors because of statutory prohibitions in a state, because the corporation is financially impaired, or some other reason.
Separate Side-A policies can provide added limits for certain groups of directors above the coverage of an underlying A-B-C policy and may provide drop-down (or difference in conditions) coverage or carry fewer exclusions than A-B-C policies.
When asked about the main impetus for the purchase of an excess Side-A difference-in-conditions (DIC) policy, 2010 survey participants gave a broad range of responses—a result that Towers Watson took as an indication that D&O insurance buyers understand that there is a wide range of benefits possible for purchasers.
Potential benefits and the percentages of respondents selecting each benefit as a reason for purchase were as follows:
• Broader coverage than traditional A-B-C policy: 47 percent
• Dedicated limit to the individual that is not depleted by corporate liabilities: 46 percent
• Protection against the lack of availability of corporate indemnity: 30 percent
• Protection against underlying insurer insolvency: 29 percent
• Board member/ individual director required it: 28 percent.
As was the case in 2008, Towers Watson's findings for 2010 indicated that larger companies are more likely to buy Side-A. Among private companies, for example, 80 percent of those with more than $10 billion in assets bought a dedicated excess Side-A policy, compared to only 20 percent of private companies with less than $250 million in assets.
In addition to information about limits and Side-A purchases, the latest Towers Watson survey also provides analyses of the buying patterns of international organizations (whether they are purchasing local D&O policies in foreign jurisdictions); respondents' overall knowledge of how their D&O programs are structured; the incidence of D&O limits sharing or blending with other coverages (employment practices liability insurance and fiduciary liability insurance); criteria for selecting insurers (financial strength wins over price).
According to the profile of survey participants, respondents were predominately public companies and large companies. Fifty-six percent of the respondents were from public companies, and 70 percent had assets of $1 billion or more.
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