"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.

History of Director and Officer liability Insurance

While a crude form of errors and omissions insurance for corporate directors and officers may have been available through underwriters at Lloyd's as early as the 1930s, serious interest in insuring directors and officers against personal liability did not occur until 1939. In New York Dock Co. v. McCollom, 16 NYS 2d 844 (1939), the court held that the corporation could not reimburse its directors when they had in fact successfully defended against a shareholder derivative action. This decision caused quite a stir. The idea that the corporation's directors would be out-of- pocket when they clearly prevailed in court sent shock waves through many board rooms. The outcome of McCollom was generally credited with the enactment in 1941 of the first corporate-indemnification statutes. While this was surely good news for directors and officers, it undoubtedly was also welcomed by underwriters in London, who had developed a D&O insurance product for which no real market had previously existed.

Even so, corporate interest in D&O insurance was slow to develop. By 1960 only a small number of D&O liability policies had been written, all of which had been developed by a handful of brokers and wholesalers through placement into the London Market. Few insurance and business professionals understood D&O insurance or even knew that such coverage existed. In 1962 and 1963, two domestic insurers, the St. Paul and AIG, entered the D&O market for the first time. Several other domestic insurers also entered, and then left the market during the next few years. Most of the business, either through direct placements or as reinsurance, continued to be placed in London.

Although a lot of quoting was going on, there were still relatively few policies sold as corporate buyers grappled with the question of whether there was a real need for the coverage. Between 1967 and 1968, important events unfolded that would solidify the demand side of the market.

Demand Soars

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 two 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 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 continued 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 until around the end of 2018.

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 – Q1 2021 Prediction

Around Q2 2019 the D&O insurance market began to enter a hardening period for some segments of public and private companies as well as healthcare. Such hardening, at least in the short-term was limited to specific areas such as California high risk exposures, for-profit education, crypto currency, cannabis related companies and companies with merger and acquisition exposures. In the short-term overall renewal rates remained flat for the most desirable classes with modest increases of up to 10% or higher for other sectors. The latter part of 2019 and throughout 2020 marked a widespread hardening of D&O rate escalation across the board as evidenced by the following:

 The Council of insurance Agents and Brokers' Commercial/Casualty Market Survey found that in the second quarter of 2020, the average D&O rate increased 17% over the prior quarter with 93% of respondents reporting an increase.

 Aon reported Q2 2020 D&O rate increases up over 70%

 According to a recent report by Marsh & McLennan Companies, in the third quarter of 2020 alone, D&O pricing for public companies rose by more than an astonishing 50% with over 90% of clients experiencing some form of rate increase

On top of increasing rates which are predicted to continue to increase significantly at least through 2021, many insurers are aggressively forcing companies to accept higher retentions by either not offering expiring terms and conditions or through premium incentives to accept higher retention amounts. Many insurers are also scaling back on primary limits capacity and breadth of coverage offered. Theses changes are expected to be particularly acute for high-risk and hard to place risks.

Public company D&O

For public companies with recent significant premium increases in 2020 or those with the most favorable risk profiles and loss experience, expect premium increases of approximately 20-50% for primary layers and 20-70% for excess layers. For Side-A/DIC expect increases of between 15-40%. Problematic accounts may face up to or greater than 100% increases with some insureds potentially facing non-renewal by incumbent insurers. Oil and gas, crypto, cannabis, hospitality, retail, higher education, and liquidity challenged risks will face the greatest challenges. All public companies can expect insurers to attempt to pull back on coverage, including but not limited to the removal or reduction of reinstated limits for Side-A DIC coverage, more costly extended reporting period (ERP) terms, and the reduction or elimination of investigation costs coverage for shareholder derivative demand investigation expenses.

These changes are driven largely by the following:  Derivative litigation. An increasingly large number of securities claims are being brought derivatively on behalf of the company against an individual director or officer. Once commonly settled for attorney's fees and changes in corporate governance, such as improvements in cyber security, such suits now frequently seek significant compensation. An increasing number of derivative suits are "event-driven" and have as their underlying allegation wrongful acts or inaction in response to events such as alleged discrimination, climate change, cybercrime, and other trending events. Most derivative suits are non-indemnifiable; however, affordable coverage has historically been available through side-A coverage. Because of the rising frequency and cost of derivative claims, companies should also expect modest premium increases and limitations in coverage for Side-A.

 Environmental, Social, and Governance (ESG) issues. Shareholders are increasing raising corporate governance concerns over emerging environmental and social issues. For example, there has been a growing focus by activist shareholders and the public over corporate management and Board diversity and climate change. Activists are seeking changes to corporate policies and greater disclosures on financial statements. Many companies have already been the targets of derivative securities suits alleging breach of fiduciary duty. Insurers are taking notice and companies can expect increased questions by underwriters into board composition and related policies.

 Securities Class Action (SCA) Frequency. Last year (2019), for the third consecutive year, more than 400 securities class actions were filed in federal court. Given the high volume of filings and the fact that the number of publicly listed companies has decreased by nearly two-thirds since 2000, the chance of a public company being named in a securities class action has grown exponentially.

 Initial Public Offering (IPO). Companies seeking to go public through a public stock offering will face significant challenges in securing even limited D&O insurance. These firms will face significantly higher D&O premiums than for established public companies. The market for IPO D&O insurance is limited so expect extremely high retentions of up to $10 million or higher as well as reduced capacity.

 Covid-19. D&O insurers are concerned about securities class actions by investors. Such claims often allege failure by companies to inform shareholders of or downplay the impact of COVID-19 on business. Inadequate company health and safety precautions to prevent the spread of COVID-19 is a growing basis for D&O claims. One wrongful death suit alleged that a major retailer failed to thoroughly clean and disinfect its store, implement and promote social distancing, warn employees of the risks of COVID-19, or to provide adequate personal protective equipment to employees, which allegedly resulted in the death of an employee. A similar wrongful death action was filed against a cruise line company regarding the death of a passenger who allegedly contracted COVID-19 aboard the company's cruise ship.

Companies should expect continued underwriting scrutiny and longer more rigorous renewal processes with account-specific coverage restrictions. Primary insurers are also limiting capacity for primary layer placements, so expect a reduction in the amount of primary coverage limits that will be available, and which may be between $5-10 million. Some insureds may find that reasonably affordable D&O coverage is not available and may be forced to consider alternative risk transfer vehicles, such as captive insurance programs.

Private Company/Not for Profit D&O

Private company and not-for-profit D&O renewal premiums are anticipated to also rise but such increases will not be as severe. Our survey of major D&O insurance brokers and agents indicates primary and excess layer renewals increasing 10-50%. Insurers will be seeking increased retentions of between 25-75% or more over expiring.

Private company and not-for-profit D&O coverage have traditionally been extremely broad, often including full entity coverage. Be alert for restrictions or elimination of some coverages as underwriters attempt to limit exposure to loss which may include but not be limited to:

 Elimination of separate Side-A coverage limits  Specific COVID-19 exclusions  Elimination of anti-trust coverage extensions  Addition of privacy and confidentiality exclusions  Governmental funding exclusions As with public company renewals, underwriters will be seeking additional information regarding COVID-19 as well as cyber and social justice exposures.

Cyber Liability

Sometimes as part of a D&O policy but increasingly written as a separate coverage grant, cyber liability insurance has entered a new phase. By some estimates there now are over 500 insurance companies offering some form of cyber liability or related coverage. The global cyber insurance market is projected to grow by 21%in 2021, approaching $10 billion in value, the result of greater recognition of the increasing cyber-threat exacerbated by the shift to remote working due to Covid-19.

Similarly, the number and severity of claims has steadily risen over the last several years, increasing from just under 100 claims in 2016 to nearly 1000 claims in the first three quarters of 2020. In response 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 have talked to continue to express frustrations in arranging larger layers or towers of coverage of more than $10 million on single placements and are starting to see pullback in cyber extortion coverage especially where Two-Factor email authentication is not present.

Expect year-over-year premium increases for both primary and excess coverage of 10-30% 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 30-100% or higher, with few insurers even willing to write such classes. Most insurers now focus heavily on employee training, security, outsourcing of data infrastructure, and how insureds handle sensitive data. Expect cyber coverage, either stand-alone or within a D&O policy, to evolve to address business interruption exposures and heightened work from home exposures because of the COVID-19 pandemic.

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 coverage, capacity remains stable, at least for domestic markets, but because of COVID-19 and continued social dislocations expect price increases of between 15-60% for primary domestic market placements. Expect similar increases for excess liability placements. Media and entertainment risks', healthcare, and distresses risks should brace even higher increases.

Coverage scope should remain stable except for retentions. As with D&O, insurers are seeking higher retentions of up to and more than 100% over expiring retentions. Underwriters will be carefully examining COVID-19 crisis response actions such as pay cuts, furloughs, and layoffs as well as location (state), percentage of unionized workers, and average compensation. Especially problematic will be California employers, and employers with highly compensated individuals. Retentions for such exposures may be even higher. Certain types of claims such as class action claims may similarly be subject to a higher retention amount. COVID-19 exclusions may also be added, although they are on a case-by-case basis at this time.

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 and other movements, underwriters will be giving increased attention to a company's internal policies and procedures, training, and claim management. Also, of concern to underwriters are 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. In Illinois, the Biometric Information Privacy Act of 2008 (BIPA) has been the subject of numerous recent class action claims and similar laws may be forthcoming from other states.

Because of the long tail for EEOC and Reduction-In-Force (RIF) related claims, adverse claims may develop well into 2021, and possibly beyond even if the economy returns to pre pandemic levels.

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.

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, and many other 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): 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