By Meg Green
A.M. Best Company, Inc.
The economic downturn and the resulting legal issues plaguing some company leaders, have many companies upping their directors and officers insurance limits. Tony Galban, senior vice president and product manager for Chubb Group of Insurance Cos.’ directors and officers liability lines, talked to Meg Green, senior associate editor at Best’s News Service, about the ways the recession has changed D&O and created opportunities at the same time.
Q: A recent survey I’d like to speak to you about by Towers Watson found that corporate directors and officers are showing more interest in their D&O coverage. And they’re seeing an uptick in questions companies are asking. Are you seeing an increase of interest in the product?
A: Absolutely. Particularly since any time we finish up with scandals and recessions and things like that, directors in particular are very interested in the product and how it’s maintained.
Q: Are there specific issues that are driving that interest? What are they asking you about?
A: Well, they want to know how much to buy. Which, frankly, brokers give them a lot of help with. They want to know how much they can buy and they want to know who it’s protecting. In other words, is it protecting insiders only or outsiders or both of them and how is the coverage built? So there is much more education out there now than there’s ever been before about the programs that they buy.
Q: That survey found one in four public companies and 14% of private companies have increased their D&O limits. Is that what you’re seeing?
A: Yes. And that’s fairly typical as the size of the settlements get more and more publicized people begin to realize that the amount of D&O capacity may not be as large as people thought it once was. Ever since about 10 years ago—the Enron, WorldCom days—these settlements in the billions of dollars have completely changed the face of how people think about D&O limits.
Q: And how would you describe the market today?
A: Transitional. You know it’s been soft for a long period of time and we’re now seeing it begin to sort of turn another way but it’s not a dramatic shift. It’s nothing radical. It’s just the gradual turning that takes place after years and years of price aggressiveness and decreases.
Q: There’s some concern from outside directors and independent directors that they may not have adequate coverage. Could you give us an overview of what that means?
A: One of the biggest disconnects in the business is that independent directors don’t necessarily understand the way they’re protected under D&O programs. A-side insurance is insurance which applies for non-indemnifiable loss, kind of a last stand for directors. A lot of independent directors believe that A-side insurance is purchased on their behalf exclusively and that it functions like independent director insurance, dedicated layers. In fact, they share that insurance with the inside offices. And so I think that there’s a basic educational disconnect that most independent directors think — I buy A-side, it’s for us. And the answer is — not really. You share with the insiders. And as you know, in most of these really strong criminal frauds that money will be long spent before the outsiders see it. So there’s an educational opportunity for us and a sales opportunity perhaps, but a lot of directors misconstrue A-side as being something exclusively for independents. In fact, it rarely is.
Q: And now that would cover fraudulent activity?
A: Well, it wouldn’t cover the people that are finally adjudicated but it certainly defends individuals what are being accused of that kind of activity. Most policies have a final adjudication trigger for fraud and illegal personal profit that stipulates the coverage ceases or stops or isn’t applicable if and when they are finally non-appealingly adjudicated.
Q: OK. But those independent directors might be out of luck if all the money was spent, if any, on the inside directors.
A: It has happened. These defense bills can get very, very large and, again, they’re likely the last to see the policy because typically criminal matters against insiders come before negligent oversight claims against independent directors. So, one of the opportunities, as I mentioned, is for us to understand collectively that independent directors are not as protected as they might think they are by A-side purchasing. I’ve been to enough situations with directors where I’ve had to sort of clarify that for them for me to believe there is a disconnect there.
Q: Do you offer a stand-alone policy for the independent director?
A: Yes, we have, but it’s fairly infrequently purchased. We basically make the policy applicable to independent directors only. It goes on the top of a program and it works the way a lot of them think it all should work. But we don’t sell as much of it as you might think and certainly not as much of it as the independents think they’re buying.
Q: And how about a director or an officer from a public company who is encouraged to volunteer on a nonprofit board? Are they covered by that corporate policy?
A: It’s another sort of undiscussed aspect of the business that probably deserves more attention, which is called ODL or outside directorship liability. It’s typical for companies to ask people to sit on other boards. It could be an affiliate board. It could be a joint venture. It could be a local charity. It could be a local Little League. Whatever it is, they can, in many situations as part of their community outreach, ask individuals to sit on various boards, nonprofit or for profit. The first thing that people don’t understand is that outside directorship service is covered as part of the basic D&O contract. So those seats also apply against the limit of liability. Not discussed much. Not really focused on. It doesn’t come up a lot, but it is sitting there in the weeds, so to speak, that all that sitting applies against the limit. Now, the other thing I would tell you is that you need a good program to keep track of this stuff. So good companies that have good internal controls will have a very strong sense of who’s sitting where, confirmation that it’s with our written consent or at our direction and that we govern who we want to cover for these situations and who we don’t.
There are disconnects here, too. Individuals that are employees that might hear the company espoused the virtues of a local charity or a local cause will go ahead and sit in that void in the belief that because the company sponsors it or because the company is in favor or speaks highly, that they’re covered. They actually aren’t covered for that sitting unless the company gives you their written consent or knowledge, knows about it or actually authorizes it in some way.
Q: And is that also an opportunity to do more business for companies like Chubb? Can you sell more coverage based on that?
A: Not so much. It’s more of just having good internal control practices which does have an underwriting value for Chubb. It’s not like there’s a lot of product in this because it’s endorsements to policies. You can charge in these situations but it’s not common to charge a lot. It’s really more common to underwrite the situation. Is the outside entity in a good financial state? If they go bankrupt does that present additional risk to our insured or the “mother ship” as we call it? So all of that exposure needs to be properly corralled and brought into a risk management process.
Q: Are there other trends you’re seeing in the line?
A: The only other trend which has been a key is, of course, we’ve seen a lot of claim activity in the mergers and acquisitions area and that’s generally well publicized. It’s been more recent that we’ve seen an uptick in those claims. We’re watching it. We’re paying a lot of attention to it. It’s been an area where the plaintiff’s bars have been very much attracted to, so generally speaking for companies that are in the midst of either being acquired or doing some acquiring, there’s more exposure today than there might have been say, five years ago. It’s something to watch. It’s something we’re keeping track of, but we don’t know yet what the long-term implications are going to be.
Video portions of the interview with Galban are available at http://www.ambest.com/media/MA.asp?vid=galban1312 Copyright: (c) 2012 A.M. Best Company, Inc.
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