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Experts agreed that coverage of investigation costs was among the hottest topics in directors and officers insurance in 2011, but their opinions diverged as to whether insuring those expenses ultimately would help or harm the market.
The introduction of investigative cost coverage for whole companies—as opposed to individual executives—was the industry's best and worst development in 2011, according to Doug Miller, executive liability practice vp for the Hylant Group Inc. in Ann Arbor, Mich. The coverage is intended to mitigate expensive and often unforeseen costs associated with complying with the investigative requests of regulators worldwide.
Mr. Miller said the products—offered primarily as a stand-alone policy by only a small number of carriers—could be very valuable given increased enforcement efforts by a number of U.S. and foreign agencies.
However, Mr. Miller said the product may yet prove to be unsustainable due to the unpredictable nature of the underlying risk.
“It seems like it's going to be very difficult to actually underwrite those products on a consistently profitable basis,” Mr. Miller said, adding that the volatility of commercial regulation likely will cause underwriters to favor larger premiums and deductibles and conservative retention levels. “If you do that, you run the risk of scaring off the initial buyers,” he said. “It's sort of a catch-22 in terms of introducing it into the marketplace.”
In the legal world, experts said a federal appeals court's July ruling forcing Federal Insurance Co. and ACE American Insurance Co. to pay out $30 million for D&O claims made by MBIA Inc., an Armonk, N.Y.-based financial guarantee insurer, was among the most significant legal decisions made regarding executive liability. Joseph Monteleone, a New York-based partner with the Tressler L.L.P. law firm, said the decision was a significant, high-profile win for policyholders, noting that it likely will help protect businesses and keep them from being blindsided by pre-litigation costs.
Dan Bailey, chair of Columbus, Ohio-based Bailey Cavalieri L.L.C.'s D&O liability practice, saw it differently.
“(The ruling) could expose insurers to potentially very large company costs which most insurers have not intended to cover and could significantly dilute policy limits available to the insured directors and officers,” Mr. Bailey said.