D&O Demand Stabilizes, Coverage Broadens

In a post-Enron corporate world, directors and officers of local corporations and nonprofit organizations are more aware of their exposure to malfeasance lawsuits than ever.
A corporation leader’s actions are scrutinized as anxious shareholders demand more accountability from directors and officers. As litigations costs have increased, and as shareholder awareness of the fiduciary duties of directors and officers, the supply of directors and officers’ liability insurance policies was forced to rise to the new demand, insurers said.
“Investors will require a corporation in which they’re investing to purchase D&O coverage, just because something like the Ken Lay situation might take place,” said David Vaughan, vice president of Rich & Cartmill, Inc., 2738 E. 51st St.
“Shareholders don’t want to be left holding nothing,” Vaughan said. “They want to be able to have some recourse against the board. That’s been the most frequent cause for writing D&O insurance for me lately, especially in the local petroleum industry.”
Members of nonprofit organization boards are especially aware of their exposure, said Chris Tedford of Tedford Insurance in Jenks.
“Folks who are volunteering their time to be on a board are concerned that if they make a decision and get sued they will have to foot the bill themselves,” Tedford said. “They don’t want to expose their personal assets to the cost of defense in a lawsuit.”
One of the largest areas of exposure to lawsuits lies in hiring and firing decisions, Tedford said. Unless a board of directors purchases additional coverage, often the basic D&O policy does not insure against employer claims.
“You have to buy the employers’ liability insurance, which is a completely different package,” Tedford said. “It quickly gets more expensive.”
Companies and nonprofit organizations in the market for a directors and officers’ liability insurance policy should shop wisely, Tedford said.
Check the Fine Print
A claims-made form ensures that the company is always paying the insurance carrier premiums and that any claim made during the policy period is covered, Tedford said.
“That way the insurance company is getting 2006 dollars for 2006 claims,” as opposed to occurrence forms in which claims are covered in an instance where wrong-doing is discovered years after it took place.
“In that case, the occurrence form policy from those years ago pays the claim, whether I continue to have insurance or not,” Tedford said.
Directors and officers need to keep in mind that the majority of the expense in defending a claim is not the settlement, but rather the legal fees.
“We have had claims where the defense costs far exceeded what the settlement was, in the neighborhood of $2 million for defense for a $800,000 judgment,” Tedford said.
“That’s why you want to buy this type of insurance,” Tedford added. “It’s not because you want the insurance to pay the settlement, but more so because they’re going to pay for your defense. Otherwise, you’re going to have to pay for that defense out of your own pocket.”

Demand for D&O
Public visibility of corporate scandal can cause premium prices to spike by as much as 10 percent, Vaughan said.
However, both Tedford and Vaughan said demand for D&O policies is more solid than ever.
“As long as there is money and public trust, I think there is always going to be a need for D&O,” Vaughan said.
As demand for D&O has stabilized, so have premium prices and the availability of policies with a wider scope of coverage, Vaughan said. Comprehensive policies now include such coverage as employment practices, fiduciary and Internet liabilities, in addition to workplace violence.
Such broad policies run $2,300 for $1 million in coverage for a small nonprofit with approximately five board members, Vaughan said. ?

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