D&O Policies Get Pricey, Particular

Even the most scrupulous directors and officers of Arkansas corporations are probably watching each other more closely these days. Sweeping changes in directors and officers (D&O) insurance coverage have given corporate brass a whole new level of exposure when it comes to potential liability for lapses in corporate governance.r

John D. Copeland, a professor of business at John Brown University in Siloam Springs and an executive in residence at JBU’s Soderquist Center for Leadership and Ethics, said to blame it on the Enron and WorldCom scandalsr

“The Sarbanes Oxley Act of 2002 and changes in New York Stock Exchange rules came as a response to the failures in executive leadership and board oversight that we saw in the last few years,” Copeland said. “We’ve seen a greater emphasis on what they should have been doing all along. Directors are supposed to help govern corporations and not rubber stamp every executive decision. Now the insurance companies are responding in their D&O risk assessment.”r

Last year saw the largest number of shareholder federal class-action lawsuits in history — 487, a 125 percent increase over 2001. Those figures from the Insurance Information Institute, a nonprofit insurance think tank in New York, have caused many insurers to cut D&O coverage limits that used to run $50 million-$100 million back to the $10 million-$15 million range. Some premiums, Copeland said, are up 500 percent in one year.r

D&O programs formerly made up of three to five insurers covering up to $100 million now generally take eight to 10 providers to offer the same coverage limit. Many insurers have gotten out of the D&O or errors and omissions (E&O) policy business altogether.r

One of the biggest D&O policy writers in Arkansas is still Chubb Group of Insurance Cos. in Warren, N.J. Nationwide, the Insurance Institute said, American International Group in New York handles about 35 percent of D&O premium volumes followed by Lloyd’s of London (14 percent) and Chubb (13 percent). The firms wouldn’t disclose the make up of their Arkansas premiums.r

Tony Galban, Chubb’s vice president/D&O underwriting manager, said the most significant change has been the restoration of the policy application process.r

“In the last soft market, insurers got away from the core practices because of the hypercompetitive environment,” Galban said. “It became one of the dynamics of the soft market that brokers would pressure underwriters to be less invasive and accept less information. Sarbanes-Oxley has forced better underwriting discipline and stronger commitment to accurately represent on behalf of a customer.”r

Galban said company directors and officers need to ask questions about their D&O programs to know how they’re protected. Chubb is still writing policies that include a “severability” clause, but many D&O providers are not.r

Copeland said that means that where in the past one director might void his or her coverage by “self dealing,” now a single person’s misdeed could void the entire board’s coverage. Sarbanes-Oxley, therefore, is forcing directors to be accountable as a group.r

“We review all proxy information including the biographical information on directors and officers and keep an eye on people in newspaper clippings,” Galban said. “What we’re underwriting essentially is behavior, and we have to assess what kind of people directors and officers are.”r

Copeland, the former executive vice president for ethics at Tyson Foods Inc. in Springdale, said there’s also another wrinkle. He said firms that have to restate their earnings could face litigation regarding whether or not they filed a false D&O insurance application. If they get sued over the earnings statements, Copeland said, coverage could be denied and the boards could be exposed.