The Directors and Officers (D&O) liability market is reportedly at a historic critical point, and insurers, brokers and their clients must reportedly work together to restore it to health. Recent corporate scandals like WorldCom and Enron, escalating securities litigation and rapidly rising settlement values are adding to the woes of a market weakened by years of underpricing, a panel of senior claims officers told a recent PLUS (www.plusweb.org) D&O symposium.
The worst is yet to come, according to Michael Mitrovic, president AIG Claim Services, Inc. “We are in the biggest crisis in this particular class of business that we have ever been in. I won’t be surprised if there are some more fatalities along the way.”
Mitrovic pointed out that 1997 to 2001 were very unprofitable years for the D&O class and insurers had not even started paying out losses for those accident years. “I don’t think we have gone far enough in addressing form and pricing changes to turn this business around.”
Kevin Gadbois, senior vice president, Great American Insurance Company, agreed. With some 1,200 securities cases pending today, the industry still had to deal with potentially $12 billion or more of losses.
“D&O is not meant to cover every exposure a corporation has. We never got the price to support everything we put in there,” Gadbois said.
Amid the turmoil, all agreed it was incumbent on everyone to sustain the pricing levels, tighter policy forms and other components of the hard market needed to improve the D&O line long-term.
Joseph Monteleone, vice president & claims counsel at Hartford Specialty, noted that the inclusion of entity coverage in D&O liability policies, was a major problem.
“Entity coverage is the single worst thing that has happened to this business in the last 10 years. That needs to be undone whether by coinsurance or pre-set allocation,” he observed.
According to Steven Gladstone, senior vice president, Executive Liability Underwriters, brokers also had a responsibility to make sure the D&O business was being conducted in the right way.
“Brokers do have a responsibility, not only to get the best coverage for their clients but to make sure companies proposing to clients are financially sound,” he said. “If you are pushing a company that is not financially sound, you are hurting the business.”
Commenting on the emergence of rescission suits in cases involving financial fraud, Monteleone stressed that this was not an issue that any responsible insurer treats lightly.
But with some cases of massive fraud out there he said it was “not surprising” that rescission does get raised in a number of cases.
Similarly, Gadbois noted that D&O liability insurance covers directors and officers of a company for losses that result from wrongful acts, but there is a fraud exclusion in the policy. “If we have a situation where the directors and officers have committed fraud or we highly suspect they have committed fraud, it is incumbent on us to use that,” he said.
Gladstone added that if insurers started to pay claims where there was clearly fraud in the insured’s application, it would hurt the company, its shareholders and other insurers in the D&O marketplace. “We have an obligation to fully investigate. But we don’t want to pull the trigger and use it as a threat over the insured’s head,” he said.
In dealing with large complex D&O losses, Monteleone suggested a practical way of resolving some cases might be to take a collective approach whereby insurers in all layers contribute something less than their policy limits to settle the claim.
“If the alternative is the case does not settle, there is coverage litigation or arbitration that gets played out to conclusion, it could be a more adverse outcome to the carrier,” he noted.
From the perspective of an excess insurer, dropping down when the underlying layers of insurance have not been exhausted would be less attractive, according to Gladstone. “I fully expect the underlying insurers to pay what they owe. When it is my turn I will step up to the plate as well,” he commented.
All agreed that close communication between the claims side and underwriting side was essential to have a better understanding of the D&O business.
The panel was moderated by James Skarzynski, partner, Peterson & Ross.
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