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Directors and officers buyers increase coverage limits

Regulatory risks top list of concerns as range of exposures expands

Directors and officers buyers increase coverage limits

More companies are increasing the amount of directors and officers liability insurance they purchase and more private companies than public companies have paid rate increases over the past year, according to an annual survey by Towers Watson & Co.

In addition, more risk managers say top executives at their companies have been asking about the scope of the organization's insurance coverage.

One-quarter of public companies and 14% of private/nonprofit organizations said they increased their D&O program's total limits in 2011, according to the survey the New York-based consultant released last week. That compares with 21% of all respondents in 2010, when Towers Watson did not separate responses from public and private companies.

The report, “Directors and Officers Liability: 2011 Survey of Insurance Purchasing Trends,” surveyed 401 organizations that buy D&O liability insurance. The group includes public, private and nonprofit companies.

“Particularly in the public space, it just shows the level of concern they have in terms of the broad range of potential constituents that can bring a claim,” said Larry Racioppo, executive liability practice leader at Towers Watson in Stamford, Conn.

“We've seen that it's no longer the traditional shareholder class action claim,” he said. “It's much broader than that.” A larger pool of claimants exists in terms of regulatory-related claims, breach of fiduciary claims involving mergers and acquisitions, and derivative claims, among others, he said.

Within the past 12 months, 69% of respondents' directors and officers asked about the scope of the organization's D&O coverage, up 12 percentage points from the 2010 survey.

Seventy-seven percent of public company risk managers or D&O purchasers received an inquiry regarding the scope of D&O coverage in 2011 compared with about 58% for private companies, Mr. Racioppo said.

The increase in scope-of-coverage “shows the level of concern (directors and officers) have in ensuring that their personal assets are protected,” he said.

The average policy limits for all survey participants was $86.9 million in 2011, up from $80.4 million in 2010. Public and private companies reported average limits of $126.8 million and $36.3 million, respectively. That compares with $118.3 million for public companies and $34 million for private companies in 2010.

Sixty-two percent of public companies and 35% of private companies were able to achieve lower D&O pricing, according to the survey. But 18% of private organizations had higher premiums vs. 14% of public companies.

The state of the insurance market at the time of the survey was competitive and arguably still is, Mr. Racioppo said. “You had a lot of insurers chasing fewer clients,” he said.

While the public sector still may be showing signs of competitiveness, Towers Watson is seeing a “real hardening” in the private sector, Mr. Racioppo said, noting that increased litigation and legal defense costs may have contributed to higher private company D&O rates.

Consistent with last year's results, 60% of respondents indicated their primary D&O program structure included Sides A, B and C coverage. Six percent reported maintaining Side A-only coverage.

Side A coverage protects directors and officers from liabilities that cannot be indemnified by the company.

D&O protection and reimbursement for the company typically is provided through Side B coverage.

In addition, the survey found that the larger the company, the more likely it was to buy a local D&O policy in a foreign jurisdiction.

Sixty-three percent of companies with $10 billion or more in assets said they purchased local policies, while 35% of companies with $250 million to $999 million in assets did so in 2011. No companies with less than $250 million in assets purchased local policies, according to the survey.

Mr. Racioppo said that one part of the continuing trend to purchase local coverage has been an uptick in Foreign Corrupt Practices Act-related claims.

“Anytime you get outside of the United States, indemnification has the potential to become difficult,” Mr. Racioppo said. “I think this is evidence of the fact that organizations understand the complexities involved and are taking the appropriate measures.”

While the policy limits increased, 66% of the respondents said they did not have any claims against their D&O policy in the past 10 years. Of organizations with claims during that time, most continued to come from shareholders, with direct shareholder lawsuits cited by 45% and derivative shareholder lawsuits cited by 42%.

Eighty-one percent of the survey respondents again said regulatory-related claims were among their top three D&O concerns, compared with 78% in 2010 (see related chart).

“That speaks to while historically the regulatory piece may not have been among the type of claims we've seen, I think that's changing, Mr. Racioppo said. “Directors and officers are concerned about it,” Mr. Racioppo said.