Soft D&O market offers policyholders chance to assess, restructure coverage

Continued decreases in premium rates and retention levels for directors and officers liability insurance provide policyholders abundant options for increasing limits or buying more coverage, experts say.

Some, though, may want to assess whether they’re already buying more coverage than they need, one broker said.

A May report by The Baldwin Insurance Group Inc. in collaboration with Nasdaq Inc. revealed that nearly half of the public companies it surveyed saw D&O premium rates stay within 10% of the previous year’s, with only 12% of companies seeing reductions greater than 30%. The report said 4.3% of companies experienced modest premium increases.

Average retention levels decreased for most companies in most market cap ranges, the report said.

Some public companies seeing rate and retention reductions are using the savings to buy higher limits, said Washington-based Ruth Kochenderfer, D&O product leader for the U.S. and Canada at Marsh LLC.

“In the first year of softening market conditions, you saw clients reinvesting and buying higher limits they may have reduced during the hard market, and some of our clients decided they couldn’t buy what they used to,” she said.

Baldwin advised in its report, however, that some companies could be buying too much D&O coverage because data from Stanford University’s Stanford Securities Litigation Analytics project shows the average cost of settling a securities class action is $8 million, with additional costs of $12 million to $15 million. As a result, a company purchasing $40 million in coverage is using only half its limits.

For smaller companies, carrying too much D&O coverage could be a misuse of capital, said New York-based Mike Tomasulo, Baldwin’s senior managing partner & national D&O practice leader.

While there is no danger in having excessive D&O coverage, it could be a hindrance, Mr. Tomasulo said.

Carrying excess coverage becomes a potential “pot of gold” for securities plaintiffs to look at and prolongs litigation by taking management’s time and effort away from securing a dismissal or a quick settlement, he said.

Lilit Asadourian, a Los Angeles-based insurance recovery partner at law firm Barnes & Thornburg LLP, said, “If you have more limits, it’s more chum in the water for securities plaintiffs lawyers.”

There is a “cottage industry” of securities class action plaintiffs lawyers who profit from collecting attorneys fees by filing routine cases, Ms. Asadourian said.

“Certainly, some claims are legitimate, but a lot are formulaic, ending up in a de minimis settlement, some corporate governance changes and a big payout to the attorneys,” she said.

Companies should focus on policy language rather than coverage limits, she said.

“You can have a policy with a lot of limits, but it’s an empty vessel, if the language isn’t as good as you can get on the market,” she said.

The 4th U.S. Circuit Court of Appeals’ ruling in Towers Watson & Co. v. National Union Fire Insurance Co. of Pittsburgh, Pa., is a prime example of the importance of policy language, she said. In that case, the appeals court agreed with a lower court judge that a “bump up” exclusion relieved the insurer from covering two shareholder class action settlements totaling $90 million as well as $17 million in attorneys fees.

Some policyholders seeing rate and retention savings also should consider broadening their protection by purchasing entity investigation and/or shareholder activism coverage, which may come with an additional premium, Ms. Kochenderfer said.

Mr. Tomasulo said some companies are also buying more limits for Side A coverage for individual board members.

“If you’re a director and officer on a board of a company, are you ever going to feel like there’s too much insurance out there to protect you? I don’t think you’re ever going to see anyone on a board ever saying a company is buying too much coverage for directors and officers,” Ms. Kochenderfer said.