D&O market primed for customized solutions

“In light of heightened risk exposures, in light of the high dollar costs associated with this kind of area of litigation, this type of insurance, I would say the trend has been towards real specialization and sophistication,” said Patrick Bourk, senior associate at Integro Insurance Brokers. 

 

“I would say that more and more boards of directors these days are much wiser to what they are getting. While some might think a D&O policy is the same among any, it’s very much a customized kind of insurance coverage.” 

 

Bourk said the key for brokers operating in the D&O space “is to be a lot more specific in terms of what you are getting for companies, and to be able to walk through the details of the insurance policy with an insured to say, ‘Now, just so you understand, this is what’s being covered and this is not what’s being covered.’”

 

D&O coverage is typically offered in three parts. 

 

Side A protects individual company directors from personal financial liability. Side B protects the company when it must indemnify the company directors. Side C protects the company against suits brought directly against the organization. 

 

Providing an example of offering customized coverage, Bourk said some boards may opt to reduce excess insurance policy limits for the company as a whole in order to increase coverage for individual directors and officers. Offering expanded liability limits for the company’s individual directors and officers might fit within the strategy of a company wishing to recruit the best and brightest to be company board members.

 

Brokers have witnessed scenarios in which the company’s defence bleeds out the entire D&O policy’s limits, leaving little left for the individual company directors and officers. 

 

“You are having a lot more companies saying, ‘Wait a minute, if we’re going to attract the best board members we can, maybe we should make sure we are buying enough Side A-only coverage,” he said. “So a lot of times, what we end up advocating to our clients is: Why don’t you buy a primary policy that is Side A, B and C coverage? But rather than your excess policy being Side A, B and C coverage, let’s make your excess policy Side A only.”

 

A hypothetical, $20-million D&O insurance program might come with $10 million for Side A, B and C coverage, and $10 million for Side A. So if the company burns through its $10-million limit and still faces months of protracted litigation, it will need to cover the costs for itself. The directors, on the other hand, will still have access to a $10-million limit in excess coverage.

 

The costs for settling a securities claim has increased slightly in Canada over the past two years, as noted in a 2012 report by NERA Economic Consulting. “The median settlement for all Canadian securities class action settlements (excluding partial settlements) in NERA's database is $13 million,” NERA said. That is up from a median settlement cost of $12.5 million in 2011.

 

But as settlement costs increase, the Canadian D&O market remains competitive, meaning it is more likely brokers can find insurers to take on creative approaches to covering risks. A 2013 report on the Canadian market by global broker AON notes a high level of competition for excess layers of coverage in the commercial liability space, while the global broker Marsh describes the Canadian D&O market as “bifurcated.”

 

“Following a decade-long period of declining premiums, combined with rising claim and litigation costs, companies with U.S. securities exposure are seeing moderate increases in premiums,” Marsh says in its Canadian Insurance Market Report in 2013. “For companies with Canadian securities exposure or private companies, the insurance marketplace remains highly competitive as a result of an abundance of capacity.”

 

Marsh notes that insurance companies sought single-digit rate increases for D&O officers insurance related to U.S. public entities, while the rates for Canadian public entities remained stable (somewhere in a range between 5% decreases and 5% increases). 

 

“I’ve noticed a trend in the last year or two, in addition to generally high rates of competition, that there is a little bit of hardening when it comes to certain types of risks – particularly dual-listed accounts, where companies are both in Canada and the United States,” said Bourk.

 

“I had a risk recently where it was a very competitive renewal in the fall and, by the end of the year, the company did a listing on the New York Stock Exchange. The listing was not necessarily to sell more shares – they didn’t want to dilute their holdings – but the mere fact that they listed was enough for the insurance companies to call and say: ‘Hey, this a material change to the risk for us, and we’re going to need some more premium.’”