Companies are increasing their insurance limits for coverage of liability against directors and officers, according to an annual survey by global professional services firm Towers Watson.
The survey also found an increasing number of corporate directors and officers are showing more interest in the insurance programs their companies use to protect them against potential litigation.
Among the 401 public, private, and non-profit organizations that purchased D&O liability insurance in 2011, the survey revealed that 25 percent of public companies and 14 percent of private and non-profit companies said they had increased their D&O limits at renewal. It also found that 69 percent of respondents said they received an inquiry regarding the amount and scope of their D&O insurance coverage in 2011, an increase from 57 percent in 2010.
Experts say the findings indicate that directors and officers are growing more concerned over the wide range of risk exposures confronting them. “The fact that more directors and officers are asking about their specific programs clearly shows they are concerned about the exposures they face and ensuring their personal assets are protected,” said Larry Racioppo of the executive liability group in Towers Watson's Brokerage business and author of the survey.
Among other survey highlights:
- Seventy-five percent rated the scope of coverage for directors a concern, and yet few firms (7 percent) actually purchased insurance dedicated to independent/outside directors;
- Nineteen percent of survey respondents that filed a D&O claim last year were dissatisfied with the insurer's handling of the claim, suggesting that insurers should make claim handling a priority in terms of improving customer service; and
- Despite increased interest from their directors and officers, less than half (47 percent) of the respondents conducted an independent review of their D&O policies in the past two years. Among those that did, 45 percent used a law firm, while 36 percent completed the process through a broker.
“Whether it is traditional securities class-action litigation, M&A-related activity, derivative actions, or threats from a wide range of regulatory or law enforcement agencies, directors and officers—and the companies they represent—are seemingly under siege from a wide array of potential claimants,” Racioppo added.
Regulatory claims again topped the list of D&O liability concerns overall, with 81 percent of respondents citing these as a top three concern, an increase from 78 percent in 2010. More than two-thirds (68 percent) of respondents ranked direct shareholder and investor lawsuits as a top three concern, followed by derivative shareholder/investor litigation (58 percent).
Source: Towers Watson.
Cost to Private Companies
The Towers Watson survey also revealed that 18 percent of private and non-profit organizations reported a greater increase in their primary D&O policy premium, with only 11 percent attributable to a primary limit increase. “Unlike public companies, where rates for D&O coverage have either declined or remained relatively flat over the past few years, the private sector has seen some hardening,” said Racioppo.
The growing number of claims brought by employees at private companies and the increase cost to defend such claims are some of the reasons insurers are seeking to drive rate increases. In the public sector, based on the responses, prices remained relatively stable, but public companies are also beginning to see a market transition, as well.
“After nearly 10 years of diminishing premium levels, 2012 may very well be a year of transition in the D&O marketplace,” said Racioppo. Many factors are affecting the D&O arena and underwriters have begun to push back in the private, non-profit and public markets.
Racippo concluded: “The actions of directors and officers today are being watched closely, and they are looking for certainty that their D&O program provides the level of protection needed in advance of the claim.”