Michael A Rossi looks at developments in directors' and

Michael A Rossi looks at developments in directors' and officers' liability insurance in the US and Europe

In early 2002, the directors' and officers' (D&O) insurance market in the US began going through evolutionary changes as carriers were rocked by staggering losses after years of very low pricing and increasingly broadened coverage. Many insurers called for an end to entity coverage and introduced a host of new exclusionary and otherwise limiting provisions to protect themselves. Prices skyrocketed.

The winds of change began blowing in Europe several months later, as some insurers started to react to the impact of the US losses. Several started to adopt the same measures in Europe that were being taken in the US, especially in the light of a few 'test case' securities claims in Europe, which caused them to fear that European securities litigation could duplicate the US experience.

In the minds of many European risk managers, the current questions are what the state of the D&O insurance market in Europe is, and where it is going? Will prices continue to increase and coverages narrow? Will some carriers leave the market while those that stay reduce their capacity? Or has all the recent furore simply been the result of bluster by a few carriers, or a mere blip in the charts, so that, for the most part, D&O insurance is already, or soon will be, returning to business as usual?

The answers depend on whom you ask. It is clear from my work on D&O insurance renewals for European companies and from time spent talking to risk managers, brokers and underwriters, that there are several different perspectives.

The US market
In order to understand the changes taking place in certain segments of the European D&O insurance market, it is necessary to look at the current state of the US D&O insurance market. Here conditions vary, depending on the size of the company concerned.

Some Fortune 1000 companies have seen a tremendous increase in pricing, narrowing of coverage and reduced capacity. It is not uncommon for a 'bricks and mortar' Fortune 1000 company to pay between $40,000 and $60,000 per million for its primary layer policy, and 80% or more of that rate for the first excess layer (with that same 80% rate applied successively to each additional excess layer). Nor is it uncommon for a Fortune 1000 company in an industry perceived as risky, such as tech, telecoms and media, to pay between $80,000 and $120,000 per million for its primary policy. If a Fortune 1000 company has anything going on that the market does not like (a pending securities claim, weak financials, the recent departure of a senior executive, for example), the prices can reach the bounds of credibility. I have personal knowledge of companies paying as much as $300,000 per million for their primary insurance - in other words a $3m premium for a $10m limit!

Further, depending upon the circumstances presented during renewal, a company may be able to maintain entity coverage in its programme, or else be unable to obtain it for any price. The reason for this is that some of the insurers that have produced new D&O policies removing entity coverage are not insisting that their clients accept the new form at renewals. But they are insisting on using the new wordings if they are writing new business for a client. So, if a company's primary D&O insurer does not renew cover, and the company cannot get another D&O insurer willing to provide entity cover to quote, it will not be able to get entity coverage at renewal.

The same goes for other restrictions on coverage. Where companies renew expiring policies on the same conditions, the only change is increase in price. And some companies are fighting tooth and nail with their insurers to minimise the number of take-aways at renewal (Figure 1 shows examples of the changes hitting the US market). It all boils down to the market's perception of the company - risky or not, well managed or not, financially healthy or not? This has made the need for companies to meet their D&O underwriters more urgent than ever before. They must present a clear, comprehensive and credible story about why they are a good risk and why they should not be punished for the sins of others.

This is the situation for Fortune 1000 companies. What about middle market and small-to-medium enterprise accounts? Here it appears that market changes are more hype than reality, especially given recent developments.

The conditions discussed above began affecting middle market companies in late 2002, but they never really touched small-to-medium enterprises in any significant way, other than perhaps an increase in pricing. Now new carriers are entering the market for middle market and SME accounts and are already driving prices back towards the levels paid in the soft market of the mid and late 1990s. Although prices for primary coverage are not yet down to $10,000 per million, they have broken through the $20,000 per million threshold and are heading south.

While such carriers are not currently prepared to negotiate all the coverage enhancements that used to be available, it is anticipated that this will soon occur. Once the market reaches a certain pricing point (around $10,000 per million), it is unlikely to drop further. The only competitive strategy then left to insurers is to negotiate coverage wording.

The European market
As in the US, the impact of the hardening D&O insurance market in Europe has varied for different segments of the corporate buying community.

Some large, publicly-held European-based companies with direct listings on a US securities exchange have been hit by some of the same developments as their US-based counterparts. Interestingly, some of them without any US securities claim risk have also been hit by unfavourable market developments at renewal. Such companies' insurers are concerned, rightly or wrongly, that European securities claims risks, at least in certain jurisdictions, might rise to US levels. Either that, or else they perceive a particular problem with the company concerned.

However, many large European-based companies, whether or not they have US securities claims risks, seem to have avoided the worst of the D&O market developments. They have faced only an increase in pricing and a few narrowings of coverage. One of the most consistent of these is the deletion of blanket outside directorship liability (ODL) coverage for for-profit outside entities, in favour of a scheduling requirement for such ODL coverage.

The pricing for many large European companies still remains lower than for US-based corporations. Premiums for primary layers are in the $10,000 to $20,000 per million range, and rates charged by excess insurers are much lower than the 80% of the rate charged by underlying insurers that they require when selling D&O cover to US-based Fortune 1000 companies.

As far as European middle market and SME companies are concerned, discussions with underwriters and brokers suggest that there is no perception of a hard D&O insurance market. Indeed, the consensus of opinion is that it is still difficult to convince many middle market and SME companies in Europe to buy D&O cover. It seems that the perception is that there really is not much of a securities claims risk (especially for a company that has no direct listing or ADRs on a US securities exchange), and that the main D&O risk in Europe remains employment practices liability claims, involving issues like wrongful termination, discrimination and harassment. And for those companies that want it, it appears that there are more than enough insurers willing to sell them reasonably priced broad D&O insurance.

Survival guide
Against this background, should risk managers of European-based companies rest easy when it comes to their D&O insurance renewal in 2003/2004? I believe the answer is an emphatic no, for a number of reasons.

First, if your company is buying its primary D&O policy from an insurer that is mandating the use of its new, updated policy form by the time of your renewal, you may need to market your programme aggressively to obtain a new primary carrier, or at least to provide leverage to decrease the losses in coverage caused by your primary carrier using the new form. I am aware of at least one insurer that will be taking this approach. Complacency in this situation can be a a recipe for disaster.

Second, D&O underwriters want more information than ever before, will ask very detailed questions regarding the information presented, and will expect solid answers. Figure 2 shows examples of the type of information that US underwriters are seeking for US-based companies.

Risk managers need to prepare. The best strategy is to assemble a multi-disciplinary team, including the general counsel and chief financial officer, to develop and give a presentation to underwriters. That team must also be prepared to answer detailed questions during meetings with insurers. Guesswork should be avoided.

Having a good underwriting meeting where you go on the offensive and explain why you are a good risk and that you expect to be underwritten according to your risk, is important. It can prevent the price of your programme rocketing, and minimise adverse changes in policy coverage.

Third, risk managers need to review the policy wordings and discuss them with their broker so that they clearly understand how the wordings address the many important issues with which the directors of the company (especially independent directors) are concerned. For example, does the policy address all the 'Enron issues' (such as severability as to the application, severability as to exclusions, a priority of payments clause, no exclusion for claims brought by or on behalf of a trustee in bankruptcy)? Then, does the policy provide entity coverage or only corporate reimbursement coverage?

This attention to detail should not be limited to the terms/conditions of the primary policy. It needs to extend to all excess policies and overall programme structure. For example, are all the excess policies pure 'follow form' so that there are no non-concurrencies in the excess programme? Should the programme have some excess/difference-in-conditions (DIC) Side A coverage? There is a growing demand for this coverage in the US, and more carriers are introducing Excess/DIC Side A policies this year. These respond to non-indemnifiable loss in certain situations where the underlying insurance does not respond. Expect to hear more about Excess/DIC Side A insurance in Europe in the coming months, and if your company does not buy it, document the reasons for that decision so that you can show reasonable justification should a related claim arise.

It appears that the vast majority of European-based companies will be able to secure D&O insurance with much of the same breadth of coverage that they have always enjoyed and for a reasonable price. That does not mean, however, that the European D&O insurance market is not changing in important ways, or that European risk managers can be complacent about their D&O renewals in 2003/2004.

Michael A Rossi is president of Insurance Law Group, Tel: 001 818-649-7654 or 020 7877 0078, E-mail: mrossi@inslawgroup.com


  • Severability as to the application for insurance is being narrowed, or deleted altogether.
  • The 'judgment/final adjudication' trigger for personal conduct exclusions is being deleted ltogether, and such exclusions will apply if there is any admission of excluded conduct.
  • The insuring agreement for Side A coverage is being limited to non-indemnifiable loss; coverage is no longer provided for indemnifiable but not actually indemnified loss.
  • Express allocation provisions for even non-indemnifiable loss that are not favourable for insureds are being added.
  • The insured versus insured exclusion is being broadened and is being applied to all claims brought outside the US, as well as claims brought inside the US.
  • Secondary offering exclusions are being added.
  • Provisions that allow an insurer to deny coverage for claims arising out of a restatement of financials, or to rescind coverage for any error, omission or misstatement in financials, are being added.



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    Less than half of UK non-executive directors (NEDs) are protected by personal indemnity insurance, yet NEDs could soon take on further responsibilities and be held accountable for their work under revised corporate governance rules, putting businesses and individuals at risk, claim accountants and business advisors PKF. Only 43% of NEDs had personal indemnity insurance, according to The Non-Executive Director Survey 2003, a study of 1,000 NEDs by PKF in association with the Quoted Companies Alliance, Top Pay Research Group and Longbridge International.

    Smaller quoted companies are most likely to be at risk - last year's survey found that 98% had personal indemnity insurance, but this year the figure dropped dramatically following the inclusion of significantly more smaller companies in a larger sample.

    The recent Higgs report recommended that companies should arrange appropriate insurance cover in respect of legal action against their directors. Stuart Barnsdall, partner at PKF, said that when the Higgs recommendations are translated into a new corporate governance code, businesses must find a way to make sure they are protecting their directors.