Director's Insurance: It's a New World

JUST A FEW YEARS AGO, considering insurance coverage for company directors was a rather somnambulant exercise. Yearly, or even less often, directors would amble into a room with company lawyers, human resource officials and maybe the chief financial officer. After a brief talk, they'd rubber-stamp their next Directors & Officers policy. "Pre-1999, no one ever questioned D&O," says Jim Benson, president and CEO of Clark Benson, a financial planning consulting firm.

Today, however, is an entirely different story. Considering D&O can be a full-dress extravaganza not unlike mulling over a tricky merger. Directors anxiously pore over details of competing insurance products, including how far the indemnification goes, how bankruptcy and criminal convictions can be factored in and just what their personal liabilities are. Separate meetings, replete with personal legal counsel, are increasingly being held with insurance agents at request of independent directors. Company executives may or may not be invited.

Such is the Brave New World of D&O insurance. Post-Tyco, Enron and WorldCom, directors have been broadsided by the specter of personal liability for company misdeeds regardless of whether they had anything to do with the wrongdoing. The companies they help guide have been hit with exorbitant premium rate hikes. And Sarbanes-Oxley has opened up a whole new can of complexity and compliance.

Small wonder, then, that directors are taking matters into their own hands, even though the D&O market seems to have settled and rates have recently backed down. "Independent directors have a more vociferous presence in the D&O process than they have had for a long time," says Tony Galban, senior vice president and D&O underwriting manager for Chubb. "They ask more questions, they are more interested in the process and they get more and more involved and engaged in the D&O insurance purchase."

Who can blame directors for being wary? Just a few years ago, a chain of events including the bursting of the high technology bubble and several high profile corporate scandals sent oncedocile D&O premiums skyrocketing by 30, 40 and even 50 percent. By some accounts, some rates went up 103 percent in 2002. D&O insurance executives such as Galban say that the dramatic hike in rates was partly because insurers had been charging too little and were overcommitted.

Helping push up the rates were several big-time D&O insurance settlements. In 2001, Waste Management settled for $23.1 million to quell charges of improper salary and bonus awards and bad accounting allegations. One of the largest cases since Lloyd's of London introduced D&O insurance in the post-Depression 1930s involved Cendant's assessment in 2002 for claims totaling $54 million. The claim was based on a "derivative" legal action alleging that Cendant's officers and directors violated their fiduciary duties. Overall, Cendant agreed to a $2.83 billion payout to end a shareholder lawsuit alleging that Cendant fraudulently cooked its books to boost its stock price.

In this flurry of activity, independent directors sometimes found themselves facing liabilities they had overlooked. In some cases, insurance can be rescinded if the company is found guilty of criminal activity or goes bankrupt. As the dollar amount of settlements soared, directors scurried to make certain they were covered.

D&O insurers responded with products that provided more extensive coverage. These include Travelers, Chubb and Hartford, which "aggressively write privately held companies," according to Craig Goesel, managing director for management liability insurance at Mesirow Financial in Chicago. Other firms, such as AIG and XL, "provide excellent terms" for both private and publicly traded companies, Goesel adds. Other insurers often recommended include Zurich North America, Fireman's Fund, Great American and, of course, Lloyd's.

Addressing the needs of independent directors is a major concern of AIG's National Union unit, which handles D&O insurance. Heather Fox, director of D&O underwriting, says her firm introduced IDL Max insurance for independent directors and has others products under the "Max" heading that cover inside and independent directors. Another AIG product, Maximum A-Side Excess, helps officers and directors with non-indemnifiable claims.

Such products tend to go beyond the traditional "A, B, and C" coverage that has served boards since at least the mid- 1990s. Fox says that "having additional insurance is a good marketing tool to have people sit on your board."

AIG also offers portable D&O policies. "We have a product that is protection for a director on any board they serve on," says Fox. Changing conditions, however, haven't created that much demand. "A couple of years ago, it would have been common to see directors sitting on five boards. Now it is more likely to see them on one or two boards," she says.

Fewer directors are serving on multiple boards, in part because companies want their CEOs to focus on their day jobs. And watchdog groups such as Institutional Shareholder Services can downgrade companies if they feel directors are splitting their attention among too many boards.

At the moment, the D&O market appears to have settled. "The scandals have landed," says Galban, "and relative to what it's been, premiums are up only in the single digits."