August 31, 2013 Articles

Uncertainty in the Marketplace: Emerging Trends in D&O Coverage

New risks following the 2008 financial crisis have raised the normal tension between policyholders seeking to maximize coverage and insurers attempting to manage risk exposure

by Andrew Deutsch, Louis Chiafullo, Erin Doran, and Michael Smith

Corporate directors and officers face a wide range of personal liability. Corporate law allows organizations to indemnify their leaders for much of that risk. Directors and officers (D&O) insurance fills the gaps, reimbursing the organization for costs incurred in the indemnification of its executives and covering the directors and officers directly when their company is unable or unwilling to provide indemnity. Of course, only rarely is it so simple—D&O policies contain the myriad exclusions and restrictions typical of modern insurance. Unlike other standardized forms of insurance, however, D&O policies are largely customizable. Policyholders can purchase individualized coverage add-ons and protection against risks of particular importance to a given industry, organization, or individual. So long as the insurer can adequately measure the risk of loss, policyholders are widely able to negotiate and procure specialized coverage.

D&O insurance accounted for only 1 percent of premiums written in 2012 [1] but nonetheless maintains a relatively high profile, especially in light of the financial crisis of 2008 and the ensuing recession. Many want to see the executives responsible for the collapse held personally accountable—a desire fundamentally at odds with D&O insurance, the very purpose of which is to reduce the personal risk to executives from their professional missteps. In the wake of the financial crisis, some are calling for increased regulatory oversight to avoid a repeat performance. Others believe that the best way to kickstart the lagging economy is to reduce the red tape hindering innovation and growth. The resulting uncertainty affects insurers, insureds, and brokers as each of those players looks to insure, or avoid, the risk of emerging claims.

Emerging claims stemming from the regulatory response to the crisis include clawbacks of executive pay and bonuses, as well as the enforcement activities of the newly formed Consumer Fraud Protection Board. Other developing risks arise from what have been termed “crowdfunding” activities and ever-larger initial public offerings. These new risks raise the normal tension between policyholders seeking to maximize coverage and insurers attempting to manage risk exposure. Also of particular applicability to D&O insurance is the question of what types of liability are properly insurable as a matter of public policy. This article discusses these tensions and examines emerging issues in D&O insurance coverage.

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