Mercator Risk Services | Public Companies

Directors and Officers Liability

Public Companies

Directors and Officers (D&O) coverage is a critical coverage for publicly traded companies. Directors and officers (also referred to as Ds & Os) of publicly traded companies have legal responsibilities to shareholders and other corporate constituencies. These responsibilities, and the role of corporate directors and officers, have changed significantly over the past two decades. Ds & Os are increasingly being held accountable for their role in situations that adversely effect the financial condition of a company and its shareholders.

Recent judicial decisions, regulatory scrutiny, corporate takeovers and industry consolidation have increased the exposures and liabilities affecting the Ds & Os of publicly traded corporations. Added to this is a volatile stock market and a plaintiffs bar waiting for each mistake. Underwriting results at many insurers of public company D&O have not been favorable. Continued volatility in the stock market could lead to an unprecedented number of claims against corporate executives.

The D&O market for public companies is undergoing change as underwriters are reassessing their approaches. The past few years have seen intense competition and deteriorating loss experience in this segment. This turmoil has created a great opportunity to compete for new accounts, and to market existing accounts.

Exposure

Everyone has read of the high-profile claims hitting directors and officers of publicly traded companies. From high profile accounting fraud to overpaying for acquisitions, D&O claims continue at an increasing pace. For the public company segment, securities claims are the largest type of D&O claims.

While the 1995 Securities Reform Act was expected to slow the onslaught of securities claims, it has not had the desired impact. The Act raised the standards for securities lawsuits, but did not slow the pace of lawsuits. For example, the number of federal securities class actions has risen by 250% since 1996, and the average settlement value has risen by approximately 50% over the same period.

A wide variety of factors impact D&O underwriting. Size and industry are key starting points, but many other operating and financial characteristics impact the underwriting process. Underwriters look at corporate practices in addition to other exposure indicators when underwriting a D&O risk. Accounting policies, Board make-up, and the role of the audit committee are also important risk factors.

Directors & Officers Professional Liability Insurance

Directors & Officers coverage, sometimes called D&O or management liability insurance, is available from a wide range of specialty lines insurers. Coverage and pricing vary greatly depending upon the type and size of business, along its location and financial characteristics. See our Directors & Officers page for a more detailed description of general D&O coverage issues. Specific coverage provisions are important for D&O coverage. For example, public companies require coverage with special provisions to protect their Ds & Os from public shareholder claims. Usually called securities coverage, public companies should have this securities coverage included for maximum protection. (Surprisingly, a few public companies do choose to forgo this coverage.)

Depending upon the account's specific situation, securities coverage can get complicated and expensive. Underwriters sometimes include securities coverage with a sub-limit if the exposure is greater than normal. Underwriters may also add a large shareholder exclusion or other special endorsements to control their exposure on unique accounts. Since underwriters' approaches vary considerably, it is important to work with an expert and a range of markets until a relationship is built up on a particular account.

Many insurers have been expanding D&O coverage, including coverage enhancements such as entity and EPL coverages. While this extension of coverage can provide additional protection to the company, it may actually erode the coverage available to the primary beneficiaries of the coverage, the Ds & Os. In certain situations the entity and EPL exposures can be quite significant. If a large claim occurs involving these coverages there may be little limit available to protect the Ds & Os. EPL coverage is particularly inexpensive, often with deductibles significantly lower than those provided under the corporate reimbursement section of the D&O policy. A separate, stand-alone policy for EPL coverage is often a more effective solution than combining the coverage with D&O. As a minimum, this issue should be discussed with the insured.

D&O coverage is provided on a claims-made basis. Limits and deductibles vary with the size and type of insured. Standard limits for most small to medium sized organizations start at $1.0 million, but most public companies buy at least $5.0 million in coverage. Policy forms can vary significantly. Multi-year policies have been available over the past few years, but this option is more unusual than usual these days. In addition, discount rates for multi-year policies have been reduced or eliminated.

Mercator Risk Services Inc. ("Mercator" or "Mercator Risk Services") provides coverage for all types of D&O accounts, including publicly traded companies. Types of D&O accounts include financial service companies and companies doing initial public offerings (IPOs). Please let us know your client's needs and we will provide you with information and assistance with your particular situation or account, and professional liability coverage.

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