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D&O Coverage Requires a Close Look

Posted on 26 May 2009

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According to insurance experts, a tough economy and less-than-stellar balance sheets have brought directors and officers liability insurance to the forefront for higher-ups at financial services firms.

Rising claims activity, including lawsuits by investors, tougher policy standards and coverage disputes, is one of the latest developments in the D&O insurance arena.

As a result, some carriers have added limits to policies, while brokers find new ways to protect their clients when applying for coverage.

“There's been a huge increase in claim activity with respect to financial services firms due to the crisis and the recession,” said Damian Brew, managing director of New York-based Marsh & McLennan Co.'s claims department. “There have also been more securities suits and other lawsuits that are rising out of ancillary issues, such as employment and pension trusts.”

Aside from run-of-the mill common-shareholder litigation, D&O activity popping up at financial services firms has wandered into unusual territory, including suits from exotic-equity holders and disputes between executives at the same firm.

For example, American International Group Inc. (AIG) is embroiled in a D&O spat with a group of insured former executives, including Maurice R. “Hank” Greenberg, the insurer's former chief executive and chairman.

Great American Insurance Co., a Cincinnati provider of coverage for AIG and its directors and officers, sought help from a New York district court this month in a $15 million policy dispute between AIG and the group of former officers.

Mr. Greenberg and the other former officers have racked up “tens of millions” of dollars in legal bills, which AIG helped pay, according to court documents. The insurer's payments toward the fees exceed both the D&O policy's $10 million deductible and its $15 million coverage, according to the documents.

However, Mr. Greenberg and the other former officers are pushing Great American to pay up on the policy and have threatened the insurer with arbitration. Meanwhile, AIG has told Great American not to pay the claim and has demanded that the group rescind its threat because under the policy terms, only AIG can take Great American into arbitration, according to court documents.

Great American on May 8 requested that the court determine who gets the $15 million in policy proceeds and that the court keep AIG and Mr. Greenberg from suing the insurer or taking it to arbitration.

Such contract disputes, though rare, have encouraged insurance brokers to consider a spectrum of contingencies when they write up D&O policies.

Perhaps the situation could have been resolved more quickly if the policy's terms had included optional arbitration provisions as opposed to mandatory ones, said Sean Brogan, a producer at The Graham Co., a Philadelphia insurance broker.


“This is a strange situation, and it might have been better to litigate the coverage dispute instead of arbitrate,” he said. “This way, we bring the parties to court and do it in a way that absolves Great American of duplicate liability.”

Certain policy endorsements may also help insured individuals figure out who has dibs on a policy's proceeds in the event that multiple parties file claims.

For example, a D&O policy for a mutual fund can cover executives but may also include advisers. An “order-of-payment” endorsement can dictate who gets paid first if multiple parties have claims, said Andrew J. Fotopulos, senior vice president at Starkweather & Shepley Insurance Brokerage Inc. of East Providence, R.I.

“These endorsements can be negotiated prior to coverage, and you can get wording that's flexible to both the board and the adviser,” he said.

When mutual fund groups and financial services firms apply or renew D&O, they also now have more hoops to jump through before they receive the coverage, Mr. Fotopulos said.

Carriers want to know what percentage of clients' assets are in-vested in mortgage- or asset-backed securities, the returns on those asset classes, as well as details about auction rate securities inside the investment portfolio, he said.

Regulatory investigations have also come under a new focus at the D&O carriers. Some insurers will cover formal investigations, including Wells notices from the Securities and Exchange Commission, but others will also provide coverage against informal investigations, Mr. Fotopulos said.

Although insurers have become pickier about whom they cover and how high rate increases will go based on a financial institution's health over the previous 12 to 24 months, it remains to be seen whether insurers will dispute certain claims.

“I think that as these claims mature, we'll certainly be on the alert for more carriers' pushing back and raising coverage issues,” Mr. Brew said.