The brokerage community is welcoming—albeit with some reservations about its pricing—the newest product in directors and officer (D&O) insurance policy enhancements that cover the costs of informal regulatory investigations.
Unlike last year's flood of "pre-claim inquiry" offerings that focused on coverage for the investigation-response costs of individual executives and directors, Chartis' new "Investigation Edge" offering, a standalone policy introduced in March, addresses corporate costs, including the massive expenses associated with producing documents required by the Securities and Exchange Commission (SEC).
"There was a misperception of what coverage was available in the marketplace for SEC investigations before this Chartis coverage came out," says Carolyn Polikoff, senior vice president and leader of the Corporate & Executive Protection practice of San Francisco-based Woodruff-Sawyer. "Many companies believed entity-response costs were covered under a traditional D&O policy. The fact is they weren't, and it wasn't carrier-specific. No carrier was covering that [before Chartis] because it was so expensive."
Phil Norton, vice chair for the Midwest Region at A.J. Gallagher in Chicago, says "there has been demand for this coverage for close to 10 years," revealing that one of his clients—a large technology manufacturer in Silicon Valley—"in particular, was really pushy about the concept."
That prompted Norton to approach Chartis about designing a product a decade ago, but the carrier didn't have enough data then to evaluate it. "They said they would not know what to charge. They certainly were not going to throw it in for free because they saw it as costing a lot of money," he says.
With so many of SEC investigations occurring in the intervening decade, Chartis now feels it has the data to properly price the coverage—and they are the only ones taking a shot at it so far, Norton and other brokers report.
Chartis confirms that the new product covers the entity both for costs incurred after a formal notice of regulatory investigation, and those related to informal proceedings and requests for information before any formal notice.
The first evolution of informal-cost coverage came when Chartis included "pre-claim inquiry" coverage in a D&O product called Executive Edge in May 2010. Before that, only formal investigations against directors and officers were covered. "They had to actually be named in an SEC investigation," Norton says.
ENTITY COSTS HIGH; SO IS PREMIUM
Brokers agree that—especially for those that already have been through an SEC investigation—the new Chartis Investigation Edge policy is something that clients are eager to know about. Document discovery is covered under the policy, and "that's where the costs are," says Polikoff. "We've heard stories of companies spending $30 million"
But even the threat of that sort of enormous figure doesn't mean customers are rushing to buy the entity coverage, says Norton, who thought he might be close to his first sale last week.
"It's a fully priced product," he says, explaining that the standalone policy—which is separate from D&O insurance—is about as expensive as a D&O policy itself. The price tag gives potential buyers pause because they believe it should be just an add-on for which they might be willing to pay 20-25 percent of D&O premium.
Polikoff adds, "It's not only expensive. It's the way Chartis is offering it" that has been a sticking point with the subset of companies that would be willing to shell out a fair amount of premium. "There's a minimum $500,000 retention and 15 percent coinsurance." If one of those factors changed, "clients might be more interested," she speculates.
As for the premium, she's seen numbers approaching 5 percent of the limit, or $250,000, for example, on a $5 million policy. "D&O insurance is significantly less than that," she reports.
Louise Pennington, managing principal and head of client development in New York for Integro Insurance Brokers, says that the entity coverage offered by Investigation Edge is a talking point for clients, but to date her experience is that the Chartis product has not yet gained the traction that the Executive Edge product did.
"When their Executive Edge form came out, it was like lightning, the way it flashed through the marketplace." In contrast, Investigation Edge "has not been copied in great measure yet" by other carriers or widely embraced by corporate buyers.
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