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Litigation could create flux in directors and officers insurance market


A seemingly placid market for directors and officers liability coverage renewing in January could change depending on the pace of litigation brought later this year.

Alan G. Gier, director of global risk management and insurance corporate risk management for the treasurer's office at Detroit-based General Motors Co., said there were no unpleasant surprises when he recently renewed the automaker's D&O coverage.

“For D&O, we found the market pretty flat,” Mr. Gier said. “It was really business as usual and we made few changes to our program.”

Mr. Gier said the renewal also was aided by the company's recently simplified business model as the federal government in 2013 shed the ownership stake in GM it had acquired in 2008 during the financial crisis. “We are in a situation where our risk profile is improving year after year, so that benefitted us,” he said.

For the D&O market as a whole, rate increases were generally negligible in the renewal period, a marked contrast to the double-digit increases many faced when renewing the past three or four years, said Ann Longmore, New York-based executive vice president of FINEX North America, a unit of London-based Willis Group Holdings P.L.C.

“We are in a disinflationary period,” Ms. Longmore said. “Many accounts will continue to have increases, but they will be lower than in the past.”


Moreover, large price increases will be tougher to sustain given an expected increase in capacity as new insurers enter the D&O market, Ms. Longmore said.

“On the public company side, we are looking at a number of new markets entering,” she said. “Hiscox is now open on a test basis, and Berkshire Hathaway is gearing up for the D&O market in 2014 — and they are not slow movers.”

“Our expectation is that Berkshire is a large-capacity player and this will be a turnaround from the smaller and smaller layers of coverage that the U.S. carriers had been writing,” she said. “They have good people and deep pockets and are not "toe-in-the-water' type people.”

In addition to the new entrants, new products are also affecting the market, such as American International Group Inc.'s August announcement of $100 million in limits for Side A D&O liability insurance, Mr. Gier said.

Ms. Longmore said many terms and conditions for D&O coverage are expanding, citing express coverage for climate change and policy enhancements designed to address the exposures to the personal liability of individual officers as prime examples of new options now available on D&O policies.

“The D&O world has evolved phenomenally in the last five years in regard to terms and conditions,” she said. “We are broadening terms and conditions regardless of what's happening on the rate side.”


Capacity issues aside, legal trends are shaping much of the D&O market.

“One traditional measure of the market is securities class action lawsuits,” said Mike Karmilowicz, New York-based head of Zurich North America's management solutions group.

While securities class actions declined in 2012 and the first half of 2013, according to Cornerstone Research Inc. and the Stanford Law School Securities Class Action Clearinghouse, litigation challenging mergers and acquisitions has increased, Mr. Karmilowicz said.

“Bump-up” suits, where shareholders allege a company's directors and officers accepted an undervalued bid, are increasingly common, he said.

“They are low-hanging fruit for plaintiffs,” Mr. Karmilowicz said. “We are now seeing almost 50% of loss costs coming from non-securities-related actions.”

Another trend he is keeping an eye on is lawsuits against operations in foreign countries where his clients do business.


“If you talk emerging risks, one of the biggest things we are seeing is around regulatory risk and the Foreign Corrupt Practices Act,” he said. “These can lead to derivative lawsuits.”

For health care companies, ongoing deals and transitioning to accountable care organizations as a result of the Patient Protection and Affordable Care Act present greater D&O risk, said Mark Karlson, Hartford, Conn.-based health care practice leader at Marsh Inc.'s FINPRO unit.

“With the ACA, there is a feeling across the health care industry that you have to have size to be competitive,” he said. “That leads to M&A activity, which has always been one of the biggest sources of D&O claims.”