A major boost to demand for D&O insurance came in 1967 when Delaware passed new indemnification laws specifically authorizing the corporation to purchase D&O liability insurance. By 1973, twenty-five other states had followed Delaware's lead, enacting similar statutes. Prior to this time, it was not clear whether the corporation legally could pay the cost of the individual liability coverage part. It was common prior to 1967 for the premium to be allocated between the corporation for the reimbursement coverage, and the directors and officers for the individual liability coverage part.

In 1968 two landmark cases brought to the forefront the potential personal liability faced by directors and officers. In Escott v. Bar Chris Const. Corp., 283 Supp. 683 (SD NY 1968), all but one inside director were held personally liable under Section 11 of the Securities Exchange Act of 1933 for issuing a prospectus and other SEC registration documents containing omissions and misrepresentations. There was no evidence of fraud, but these directors were found to have had reason to believe the documents were incorrect. An outside director also was found liable when he failed to detect the misrepresentations (he did not read the documents). Because the corporation was insolvent, the directors were forced to pay defense expenses and liability out of their own pockets without the benefit of ¬corporate indemnification.

D&O liability became the topic of increasingly more articles in business, legal, and insurance publications. When it became well known that a good number of Fortune 500 firms had been purchasing D&O insurance for some time, many directors and officers were quick to give notice that they would not serve without the benefit of D&O insurance.

By 1968 two elements for a burgeoning D&O market were in place: potential buyers with a desire for coverage and multiple insurers competing for a piece of the pie. The primary London Market facility was underwritten by the Sturge Syndicate, using an open market form called the ALS, or Sturge Syndicate, Form. Another London facility, the Minnis Syndicate, was used by Stewart Smith (formerly Stewart, Smith, Haidinger, Inc.), for the underwriting of its SS Form. This policy was sometimes referred to as the Pacific Indemnity Form or the Leslie Dew Form (named after the lead underwriter). The other two major domestic insurers continued to be the American Home, which was considered quite aggressive, and the St. Paul, which was declining as a competitor. Other domestic insurers offering D&O liability coverage around this time included Liberty Mutual, Employers Mutual of Wausau, Lumberman's Mutual, and The Travelers. These markets, however, were little more than fronting arrangements with most of the risk passed to London underwriters. By 1975 the market for D&O insurance had significantly expanded to include the following principal underwriters and insurance companies [Directors and Officers Liability: An Analysis prepared by the Technical Development Committee of the National Association of Insurance Brokers (February 1975)]:

American Home Assurance Lloyd's of London CNA Home Insurance Company of New York Sequoia MGIC—Banks only St. Paul Fire and Marine Unigard Ins. Company GATX Insurance Company—newly formed subsidiary of General American Transportation Bellefonte Insurance Company—subsidiary of Armco Steel International Surplus Lines Harbor Insurance Company Seaboard Surety

Today, the specific number of insurance companies, underwriting facilities, and alternative risk-financing mechanisms offering D&O protection is likely not known with precision.

Policy Forms

Most of the original D&O policy forms had as their basis the old London wording. Policies following this format consisted of two separate policy documents, one covering the individual liability coverage part and the other the corporate reimbursement coverage part. The overall coverage grant was difficult to understand because it was in two separate policy documents with references back and forth between the forms. These required readers to flip back and forth between forms when evaluating coverage. (A copy of an early American Home Assurance Company form, consisting of separate director & officer coverage, form 2086 1/69, and corporate reimbursement coverage, form 2085 1/69, can be found in the Forms and Endorsements section.)

In 1976 Lloyd's introduced what it called Lydando No. 1, which was supposed to clarify some of the difficult language of the earlier policies. This form combined the separate policy format into a single contract containing two insuring agreements, much in the same way some domestic insurers had been doing with their forms for some time. While this streamlined the format, the policy still contained opaque language and was not very well received. By the early 1980s there were numerous new policy forms introduced that are the basis of many modern forms in existence today. By the 1990s underwriters at Lloyd's had for some time relinquished their position as market leader, with AIG, the Chubb Group, and others continuing to dominate the market.

The D&O Insurance Market – Historic

As in the infancy of the D&O marketplace a relatively small handful of insurers still underwrite the lion's share of all D&O business. Today it is estimated that as few as ten insurers underwrite up to 70 percent or more of the entire D&O market premium worldwide. The demand for D&O insurance has been sufficient, however, to support numerous competitors. These include both small- and large-size insurers—some writing a broad range of industry risks while others concentrate on specific focused segments or niches of the market such as not-for-profit, private company, and financial services. In addition, numerous captive insurance companies and risk retention groups have made advancements in offering alternatives to the more traditional forms of D&O insurance.

The D&O insurance market has experienced much competition for more than a decade, and because loss experience was generally favorable in the D&O market during this period, underwriters aggressively pursued new business by offering an ever-expanding array of new coverage enhancements. Many brokers and insureds alike reported that coverage enhancements in addition to favorable pricing were there for the asking. This phenomenon allowed many insureds to work on improving the quality of their coverage and to increase limits instead of concentrating solely on price and availability. Even after nearly three years of a highly competitive and buyer-friendly market, this condition is likely to continue. Coverage terms and conditions remain flexible and negotiable and minimum premiums for excess and Side-A coverage remain soft, at least for the most desirable risks.

Between about 2010 and 2012, there was a slow but significant hardening of the primary D&O market for domestic risks, however this phenomenon was and continues to be offset by widespread competition for excess layers of coverage. In 2014 and 2015, primary layer coverage renewals were experiencing premium increases in the 2-5 percent range but with overall program cost decreasing by 5 percent or more. Average rates fluctuated between +5 percent to -5 percent. Although we have been expecting the market to reach a state of equilibrium (at least temporarily), a rather soft market continues despite numerous insurer consolidations including the nearly $30 billion acquisition of Chubb by ACE in 2016. Although such consolidations should have had a stabilizing effect on premium decreases, the addition of new significant markets such as Allianz and Berkshire Hathaway increased supply and kept overall premiums down.

Many insurance brokers we surveyed reported that favorable market conditions continued in part due to a history of easing of securities class action lawsuits and a high rate of dismissals. In 2015 and 2016 however, we observed increasing settlement values, higher levels of SEC enforcement, and increasing cyber-related claims. During 2016 the SEC filed over 800 enforcement actions, not including the Volkswagen debacle. In 2017 the D&O market continued to be competitive even though class action lawsuits were filed at historically high levels. This phenomenon is partially attributable to a significant uptick in the number of federal court merger objection lawsuits (93), well above 2016 (80). The D&O claims environment is now and will likely continue to be more active and dynamic than in recent years. The frequency of D&O claims in several important areas, and the potential for significant D&O exposure in other areas, has increased with few signs of relief on the horizon. In addition, some recent case law, claims developments, a changing regulatory climate, evolving business challenges and new dynamics within the plaintiffs' bar create a potentially troubling future for directors, officers and their insurers.

The D&O Insurance Market –2019

As of Q2 2019 the D&O insurance market appears to be entering a hardening period for some segments of both public and private companies and healthcare. Such hardening, at least so far, is limited to certain specific areas such as California high risk exposures, for-profit education, crypto currency, cannabis related companies and companies with M&A exposures. In the short term overall renewal rates are expected to remain flat for the most desirable classes and see increases up to 10% or higher for other sectors..

Our ongoing survey of insurance brokers and insurers indicates continued availability of broader coverage with several insurers expanding Side-A coverage to include unlimited run-off for retired directors, coverage for fines and penalties, and expanded reinstatement of limits provisions. In addition, we have observed improvements in investigation and derivative claim coverage as well as new competitive forms being introduced. A very limited number of insurers may offer multi-year programs but expect underwriters to be more cautious in evaluating renewals and new business. Insureds who place an emphasis on insurer quality, financial strength and long-term relationships may experience slightly higher prices than our forecasts below.

Although insurance company premium volume growth is stalled across many D&O market segments, some insureds will still see flat renewal premiums. The most desirable risks could even see decreases of as much as 5%, but these will be the rare exception Overall, however, expect renewals to be flat to +10%.  Some sectors, such as primary coverage for public companies could see increases of as much as 20% Also expect increases in self-insured retentions especially for private and not-for-profit organizations. For excess layers we are seeing an upward pressure on pricing.  of between 5-10% for lower level excess and up to 5% on higher level excess on renewals. This phenomenon for higher level excess insurance appears to be sustained in part by record market capacity estimated to be more than $2 billion. Also, many new D&O insurers avoid participation in primary and mid-layer attachment points, which tends to drive up prices in those layers due to lessened competition.

Not-for-profit organizations and private companies are likely to see increases of up to 10% on renewals. Reasons for some firms experiencing increases will be due to company-specific factors such as loss history or class of business. Certain other market segments, such as initial public offerings, new public companies, high tech industries, healthcare, biotech and life science, and poor risks will continue to receive scrutiny by underwriters. Because there is a more limited marketplace for these exposures, buyers in these classes should expect moderate to large premium increases when renewing.

 Because we are now in a period of increasing rates use any soft-market opportunities now to aggressively negotiate improvements in coverage, shift, where appropriate to "blue chip" insurers, and hang on! Also consider locking in favorable rates now by negotiating multi-year contracts. (Yes, they are still out there, but not for long.)

Cyber Liability

Sometimes as part of a D&O policy but increasingly written as a separate coverage grant, cyber insurance over the past has entered a new phase. By some estimates there now are over 150 insurance companies offering some form of cyber liability or related coverage. This figure is expected to grow this year which is creating a more stable market with widespread expansion of coverage. Insurers are becoming increasingly sophisticated in their underwriting approaches often employing "big data" analytics and emphasis on evaluating corporate culture related to sensitive data. Some brokers we talk to continue to express frustrations in arranging larger layers or towers of coverage of more than $10-15 million on single placement; however, there is significant competition for excess insurance often written for as low as 50% of underlying rates per million of coverage. Insurers have become much more selective regarding classes of business and scope of coverage they are willing to write, especially in primary or working layers. Expect year-over-year premium increases for both primary and excess coverage of up to 5% to continue. For certain businesses, such as retail and healthcare, which has been particularly hard hit with claims, be braced for much higher year-over-year premium increases of up to 20 percent or higher, with few insurers willing to write such classes. Most insurers now focus heavily on employee training, security, outsourcing of data infrastructure, and how sensitive data is handled. Expect cyber coverage, either stand-alone or within a D&O policy, to evolve to address business interruption exposures.

Ransomware claims are expected to continue to grow. . In 2017, cyber-extortion claims estimated to be around $5 billion are expected to rise to over $11 billion in 2019. While ransomware threats have been around for about a decade, recent global surge of ransomware attacks has resulted in intense media coverage and worldwide awareness. Renewed focus on ADA claims and a never seen verdict that a Winn-Dixie Stores website was inaccessible to visually impaired visitors in violation of Title III of the Americans With Disabilities Act has many observers concerned. It is feared that the currently small number of plaintiff's law firms pursuing such claims will swell.

Coverage continues to evolve, and insurers are moving to affirmatively address coverage for claims stemming from new regulations governing data protection such as the recently enacted General Data Protection Regulation (GDPR) in the European Union (May 2018) and the California Consumer Privacy Act. Many other states and countries are considering similar regulations. We are also seeing coverage being available for loss of business income resulting from cyber events and a movement to address gaps in coverage under liability and property policies.

Employment Practices Liability

For EPLI coverage, which is often written in conjunction with D&O, capacity remains stable and short term renewal rates are expected to be flat up to +5%.  Smaller employers (less than 200 employees), California risks, and not-for-profit entities could experience increases of between 5-10% or higher. Media and entertainment risks should brace for increases up to 30%. Societal shifts and changes in corporate culture are increasingly holding companies and key executives accountable for employment issues related to gender bias, inclusion and diversity. Fueled by the #MeToo movement, underwriters will be increasingly looking at a company's internal policies and procedures, training and claim management. Also, of concern to underwriters is pay equity issues. California, Massachusetts and New York have all bolstered existing equal pay laws and insureds should expect inquiries from underwriters regarding whether pay equity reviews are performed.

Variations in Coverage

The expansion of the D&O market since its early beginnings has done little, however, to consolidate or standardize policy forms. Although many policies appear to be similarly based on one another, they each have their own mix of unique characteristics and provide varying levels of protection. This underscores the need of agents, brokers, and insureds to firmly establish an understanding of D&O liability and insurance before attempting an evaluation of coverage. In addition, many D&O policies are now designed to provide additional optional coverage parts such as employment practices liability, fiduciary liability, and other related coverage through endorsement or attachment of separate insuring agreements. Such package policies require an even higher level of examination and can complicate already tedious comparison of forms to one another.

Background

Commenting on the hazards of serving in the capacity of a corporate director, Robert M. Estes, General Counsel of General Electric, offered this advice in his article "Outside Directors: More Vulnerable Than Ever" (Harvard Business Review, Jan.–Feb. 1973, p.114):

If Congress and the courts propose to hold directors hostage for corporate performance in a widening range of economic and social contexts…then the corporation should be alert to provide its directors with every reasonable protection against legislative, regulatory, and legal hazards. I have mentioned some primary steps: providing directors with improved access to the managerial information network, involving them more directly and intimately in the strategic planning and decision-making process, and accepting the need for a higher order of record keeping.

Companies should supplement these with the best available insurance coverage and couple this coverage with optimum indemnity provisions in the company's by-laws.

A principal reason for the purchase of any insurance policy is to reduce uncertainty. However, in the field of D&O insurance the varied, tortuous, and sometimes confusing language of the available policies can create considerable uncertainty about the scope of coverage. In early 1990 a federal court, citing a previous case, made this comment regarding the complex structure of D&O insurance policies:

This case presents another illustration of the dangers of the present complex structuring of insurance policies. Unfortunately, the insurance industry has become addicted to the practice of building into policies one condition or exception upon another in the shape of a linguistic Tower of Babel . . . We reiterate our plea for clarity and simplicity in policies that fulfill so important a public service. (Comments of J. Wilson in Keating v. National Union Fire Insurance Co., 754 F.Supp. 1431 [C.D. Cal. 1990.])

Although it is easy to blame insurers for confusing insureds with hard-to-understand policy language, the laws imposing liability on officers and directors and the courts' interpretations of these laws are continually changing, sometimes in whimsical, sudden, or surprising ways. Thus, our legal system should share the blame for confusing the people who are trying to reduce uncertainty through the purchase of a contract of insurance.

To understand the full extent of the D&O coverage applicable to an insured, it is necessary to analyze and evaluate the application, the declarations page, the basic policy form, and the endorsements that the underwriter has attached. These elements of coverage then should be compared to the risks of the insured. To do this effectively, a basic knowledge of D&O liability exposures and insurance is needed.

This section of the FC&S is intended to help the insurance and risk management professional and others to better understand the complexities of directors and officers (D&O) liability insurance.

FC&S D&O provides a narrative discussion of the nature and history of D&O liability, the coverage format, and many of the terms, conditions, definitions, and exclusions found in D&O applications and policies; and, in an easy-to-read format, a listing of many of the key terms and conditions of numerous D&O policies is also provided.

Policy Comparison Charts and Policy Forms

Key features of this service are the policy comparison charts, which review various provisions of D&O policy forms, and the D&O coverage forms that are provided by various insurance companies for reproduction here. The policy comparison charts are provided in the Policy Comparison Charts section.

Contributors to FC&S D&O

Though many people took part in preparing this publication, the original details of analysis and draft were the work of Gary W. Griffin, ARM, of G2 Risk Consulting with the assistance of Alan P. Schreibman, ARM, of Integrated Risk Management.

Individual Contributors

Dan A. Bailey, Esq. Jim Blinn David K. Bradford Gautier Buernier Jeff Cohen Nicholas J. Conca, Esq. Joan Cotkin, Esq. Nan Roberts Eitel, Esq. Gary Friend George Friedman David Gauntlett Ed Godwin Jack Harding Cheri Hawkins Richard Heydinger Jane Keller Brendan Krainer Marc Miles John F. McCarrick Joseph P. Monteleone, Esq. Joe Robuck Evan Rosenberg Thorn Rosenthal Perveen Sethi Paula Tanguay Tom Vance Anne Wallace David Weed

Insurers

ACE Insurance Company, Ltd. Admiral Insurance Company/W.R. Berkley Insurance Group Agricultural Excess & Surplus Insurance Company (AESIC) American Guarantee and Liability Insurance Company (Zurich-American Insurance Group) ARECA Insurance Exchange Associated Electric & Gas Insurance Services, Inc. (AEGIS) AUSCO (Colonia Insurance Company) Carolina Casualty Insurance Company/W.R. Berkley Insurance Group Chicago Insurance Company Chubb Group Cincinnati Insurance Company CNA Insurance Companies Columbia Casualty/Continental Casualty Company (CNA) Connecticut Indemnity Company COREGIS Insurance Organizations Corporate Officers & Directors Assurance, Ltd. (CODA) E-Risk Services, LLC (Lloyd's of London) Evanston Insurance Company Executive Risk Specialty Insurance Company Executive Risk Indemnity Co. (Chubb Group) Federal Insurance Company (Chubb Group) Fidelity and Deposit Company of Maryland Fireman's Fund Insurance Companies G. J. Sullivan Company (Royal Insurance) Genesis Insurance Company/Genesis Indemnity Insurance Company Great American Insurance Companies Gulf Insurance Group Houston Casualty Company Illinois Union Insurance Company Liberty Surplus Insurance Corp. (Liberty Mutual Group) Lloyd's and Hudson Insurance Co. (Odyssey Group) London Market Monitor Liability Managers, Inc. NAS Insurance Services, Inc. National Union Fire Insurance Company Navigators Insurance Company (Navigators Insurance Group) Northland Insurance Companies Ohio Hospital Insurance Company Old Republic Insurance Company Phico Insurance Company Philadelphia Indemnity Insurance Company Philadelphia Insurance Companies Progressive Casualty Insurance Company/Progressive Corp. Reliance Insurance Companies RLI Insurance Group Royal Insurance Companies Royal Specialty Underwriting, Inc. SAFECO Insurance Company of America Shand Morahan & Company, Inc. Special Program Management, Inc. (MGA/Lloyd's Tribunal) Steadfast Insurance Company St. Paul Travelers Swett & Crawford Tamarac American (Great American Insurance Company) TIG Insurance Company Travelers Insurance Group Tudor Insurance Company United Capitol Insurance Company United Educators Risk Retention Group, Inc. United States Fidelity and Guaranty Company (USF&G) Westport Insurance Corporation X.L. Insurance Company, Ltd. Zurich American Insurance Group