Each fall for the last two years, I have taken a look at the current trends and hot topics in the world of D&O. There are of course certain perennial topics that are always critical, but this overview is intended to focus on the issues the most significant current interest for D&O insurance professionals and their clients. Here is my list of the current issues to watch:
1. Limits Adequacy: The question of limits adequacy has long been one of the more challenging parts of the D&O acquisition process. Against a backdrop of basic affordability, the company must try to determine how much insurance is "enough"?
Several recent developments have surrounded these issues with even greater urgency. The most dramatic of these developments arises from the claims surrounding the collapse of auto parts supplier Collins & Aikman. The company carried $50 million D&O insurance limits, but the cumulative expense of the various civil, regulatory and criminal proceedings arising from the company’s demise have entirely exhausted the $50 million insurance program, leaving individual defendants to face ongoing criminal prosecutions and civil litigation without insurance available to fund their defense. (Refer here and here for further discussion of the Collins & Aikman case.)
There have been several other recent examples where astronomical defense expense has exhausted or substantially depleted entire D&O insurance programs.
The escalating cost of defense is only one of several factors raising limits adequacy concerns. The steady rise in average and median claims severity, as well as the growing threat of separate opt-out litigation following the settlement of class litigation (about which refer here), also underscore the growing complexity of limits adequacy issues.
In light of these developments, particularly the catastrophic potential for defense expense to deplete policy limits, it may be time to rethink traditional notions of limits adequacy, because past assumptions may no longer be sufficient.
2. Insurance Structure: For several years now, conversations in connection with the D&O insurance transaction have included the discussion of additional Side A insurance to provide additional protection for individuals’ liability and defense expense that is not indemnifiable due to insolvency or legal prohibition. In recent months, interest in Side A protection and other auxiliary D&O insurance structures has recently taken on increased urgency, as a result of two developments.
The first derives from the preceding topic; that is, concerns about limits adequacy inevitably lead to questions about structure, because even substantially increased limits may not be sufficient to address all concerns, given the potential for defense expense to consume available limits.
One way for corporate officials to ensure they are not left without insurance to protect them is through the creation of an auxiliary insurance structure dedicated solely to their protection. There are a number of different auxiliary D&O insurance products available to address these concerns. Most of these structures have been available in various forms for some time now. What has changed is the level of interest in these insurance structures.
A separate legal development is also driving interest in auxiliary insurance structures. In March 2008, a Delaware Chancery Court opinion in the Schoon v. Troy Corporation case held that a Delaware corporation may retroactively eliminate former directors’ advancement rights. (Refer here for my prior discussion of the case). The possibility that former directors could lose their rights to indemnification or advancement after the end of their board service may come as unwelcome news to many directors.
The typical D&O insurance policy provides coverage for former directors and officers. Under most circumstances, a former director from whom corporate advancement and insurance has been withheld would still be able to seek defense expense protection and indemnification under the company’s D&O insurance policy.
Directors who are concerned that events following their departure from the board could conspire to leave them unprotected (for example, if limits were exhausted or substantially depleted , as discussed above), yet another auxiliary insurance product is now available. A retired director insurance policy is dedicated solely to the protection of the named individual and cannot be terminated or discontinued by the action of others.
The point is that directors and officers rightly are more concerned about the availability of insurance protection when they need it most. As a result, interest in the wider variety of auxiliary insurance structures has increased.
3. Excess Insurance: For reasons that should be clear from the first point above, excess D&O insurance is an increasingly important part of the D&O claims resolution process. Perhaps because of excess D&O insurance’s increasing involvement, there have been a series of D&O insurance coverage disputes involving excess D&O insurance. These disputes have highlighted the importance of two particularly important issues concerning excess D&O insurance.
The first of these issues involves the excess policy’s language describing the circumstances under which the excess policy’s payment obligations are triggered. This language can become critically important if the policyholder reaches a compromise with an underlying insurer as a result of which the underlying insurer pays less than its full policy limits, leaving an insurance "gap" to be funded by the policyholder.
In two recent decisions, one involving Comerica (refer here) and one involving Qualcomm (refer here), courts interpreting policy language providing that the excess insurer’s obligations are triggered only if the underlying insurance is exhausted by the underlying insurer’s payment of loss held that the excess insurer’s obligations were not triggered even if the policyholder funded an insurance "gap."
These case developments have increased the awareness of the importance of excess insurance exhaustion language and coverage triggers. Alternatives now available in the marketplace allow payments by policyholders funding "gaps" as sufficient to trigger excess insurance payment obligations.
The second of the excess insurance issues involves coverage issues that so-called "follow form" excess insurers. The particularly troublesome issues arise when excess insurers raise policy defenses that the underlying insurers did not assert. Each policy of course represents a separate contract, but policyholders obviously expect each layer of a single insurance program to respond similarly to the same set of claims circumstances.
These issues have drawn even greater scrutiny in recent cases in which "follow form" excess insurers contend that their policy contains exclusions not found in the underlying policies, or that the excess insurer has policy application defenses different from the underlying insurers.
Although excess insurance frequently is described as "follow form," the increasing frequency of coverage defenses raised only by excess insurance suggest that, regardless of how the policy is characterized, the operation of excess insurance can be something substantially different than "follow form." The factors described above regarding escalating defense expense and increasing average and median claims severity ensure that these excess insurance issues are likely to be increasingly important.
4. Subprime Claims and The Cost of D&O Insurance: Largely as a result of the litigation activity surrounding the subprime meltdown, D&O claims activity has in recent months returned to historical levels after a period of reduced activity. Because much of the subprime litigation has been high profile, there is a frequent assumption that the cost of D&O insurance must be increasing.
As I noted in a recent post (here), so far, except with respect to certain marketplace segments such as the financial sector, D&O insurers generally have not restricted capacity, reduced coverage or raised prices. These buyer-friendly conditions are largely the result of the relatively positive results insurers have enjoyed in recent years. The insurance marketplace remains competitive.
The subprime litigation wave is continuing to spread. The risk for insurers is that in a competitive environment, pricing can fall below risk-related requirements, leading to an eventual correction. To the extent the current litigation wave produces significant insurance payouts, the current competitive conditions could change quickly, particularly if the litigation wave spreads beyond the financial sector. However, at this point, these possibilities continue to appear remote and the marketplace remains competitive.
Afterword: There are other developments that I think are important and worth watching, such as the growing potential for possible climate change disclosure issues (about which refer here) and the emergence of civil litigation arising from corrupt practices enforcement proceedings (about which refer here). These and other developing concerns still fall more in the category of emerging issues rather than current trends. The one thing that is clear is that the world of D&O continues to be characterized by constant change.
I have set out above what I consider to be the critical current issues but I am certain that others may have a different view of what the hot topics are in the current environment. I would like to encourage readers to use the comment function to add their own views about the current hot D&O insurance topics. Please note that comments can be added anonymously.