The Management Liability Crisis: Surviving the Hard D&O Market

With premiums soaring and many companies unable to duplicate their coverage, Business Finance asked top D&O experts to offer guidance for finance executives at a recent roundtable discussion in New York.

Roundtable Participants:

Steven H. Anderson, Managing Director, Marsh Inc.

Fay Hansen, Contributing Editor, Business Finance

Bruce D. Hayes, Executive Vice President, Management Solutions Group, Zurich North America

Richard M. Inserra, Assistant Treasurer and Director, Risk Management, Praxair Inc.

Eugene Killian Jr., Attorney at Law, Killian & Salisbury PC

Steven H. Lawrence, National Practice Leader, Insurance Risk Management Practice, Ernst & Young LLP

F. Peter Logrieco, Managing Director, American Express Tax and Business Services Inc.

Michael D. Rice II, Managing Director, Aon Financial Services Group Inc.

Keith M. Thomas, Vice President, Commercial Markets, Management Solutions Group, Zurich North America

Business Finance: What has happened recently to premiums and coverage?

Richard M. Inserra: In very simple terms, premiums are twice as high as they were last year. I consider my company, Praxair, to be a good risk from a corporate governance standpoint, but the fact is that we are a Fortune 500 company, and from the D&O underwriters' perspective, any Fortune 500 company is at risk. The one item in our budget that is never questioned, however, is the cost of D&O. I'm not suggesting that underwriters have a blank check, but there is an element of that going on. I can sit across the table from an underwriter and tell him we're a good account and the governance is all there, but he'll look at me and say, "Yes? We've heard that before."

Steven H. Lawrence: If you have a company that has serious claims experience combined with a major downturn in its overall financial performance -- and these two often go hand in hand -- and if the underwriters are worried about this trend continuing for the next 12 months, then you're going to see a major reduction in available capacity. Some companies aren't buying the same limits even when they're available because the cost to fill out the program is astronomical. Companies are going to continue to buy D&O coverage as long as it's available, but how much coverage is enough becomes a key question when the cost is so huge.

Bruce D. Hayes: It's quite clear now that some of the well-intended benefits of "integrated programs" are being questioned. Combining coverages such as D&O, E&O [Errors and Omissions], fiduciary liability and crime with one aggregate limit may not have performed according to the underwriters' plan or, quite frankly, the customer's plan. While there are exceptions, there are examples where a D&O or E&O claim has depleted much of the available limit for other coverages. The original argument of combining similar insurance products where there can be an overlap remains sound but can be achieved by purchasing separate towers of coverage with the same carrier or group of carriers. The availability of reinstated limits for integrated programs is largely a thing of the past.

Inserra: There's no good answer to the question of how much coverage you need, but if you want to increase your D&O coverage, you may be putting the future availability of that level of coverage at risk. If the market continues to deteriorate, and more D&O underwriters leave, and they reduce the amount of capacity they put out on a risk, then at some point you cannot duplicate your coverage. And you're forced to go back to your board and your officers and say, "Well, you know that limit we had last year? We could only get 75 percent or 50 percent of it." No risk manager or general counsel wants to deliver that to the board. It has not been an issue in the past, but now, if you want to push the limit up, recognize the fact that you may not be able to provide that next year. There are accounts out there that cannot duplicate their limits.