Great news – the survey is back. After year’s interruption, Towers Watson has resumed its annual D&O Liability Survey. The report for the 2010 survey (a copy of which can be found here) is full of valuable information about D&O insurance policyholders’ limits selection, program structure, and claims experiences, among many other things. The entire industry should celebrate the return of this venerable and highly valued survey report. Towers Watson’s February 22, 2011 press release about the survey report can be found here. Full disclosure: I was consulted in connection with the survey questionaire and results.


Preliminary Notes

The survey report contains numerous valuable insights, as discussed in detail below. However, a number of preliminary observations are in order, as these observations may aid in understanding the results.


First, the characteristics of the survey respondents provide important context for some of the report’s findings. In particular, the pool of 496 respondents to the 2010 survey was weighted toward large institutions and entities. Excluding nonprofit respondents, the survey respondents’ average revenues were $3.7 billion, and nearly two- thirds of all respondents had revenues over $1 billion.


The respondents’ average asset size is $4.6 billion, with about 70% of all respondents reported assets of over $1 billion. Even just the private company respondents include a significant number of very larger organizations. Thus, about 44% of the private company respondents reported assets of $1 billion or more.


The pool of public company respondents was also weighted toward large publicly traded companies. The average market capitalization of the public company respondents is $4.6 billion, with about 71% of public company respondents reporting market caps of $1 billion or over. Nearly a third of all public company respondents have market caps over $5 billion. 23% of all public company respondents have market capitalizations over $10 billion.


Second, the pool of respondents to this year’s survey is relatively smaller than prior years’. As the report itself notes, because "the sample size is smaller this year," the data are "less statistically reliable." (As I note below, everyone in the industry has a stake in trying to increase the size of the sample in future surveys, in order to try to address this concern.)


Third, the difference in the number of organizations represented in the survey response pools may be only one way that the two sets of survey respondents differ. The pool of respondents may well differ in other ways too, such as by industry or by size. Given the differences between the respondent pools, there is a possibility that apparent differences between the reported survey results may reflect only the change in the composition of the pool, rather than changes in the underlying behaviors. In other words, comparisons between different years’ survey results should be viewed cautiously.


The Survey Findings

1. The survey found that, excluding nonprofits, 53% of all respondents have international operations. Of the companies with international operations, 47% reported that they purchased local policies in foreign jurisdictions. (The 2008 survey found that only 2% of respondents purchased local policies in foreign jurisdictions.)


2. The average limits purchased among all private company respondents was $34 million. However, the average limit purchased by private companies with assets of less than $250 million was $7 million.


3. The average limit purchased among all public companies was $118.3 million. However, the average limits for public companies with market caps of less than $250 million were $26.1 million. The average limits for companies with market caps between $250 million and $499 million is $42.4 million, and the average limits for companies with market caps between $500 million and $999 million is $57.2 million.


4. 21% of survey respondents said they had increased their D&O limits at the last renewal. The survey report speculates that this could reflect a reaction "to the fact that D&O liability exposures are arguably at an all time high," but also acknowledges that at a time of generally declining prices, it "may also be likely that purchasers are reallocating a portion of their savings to buy additional limits."


5. The survey notes that 35% of nonprofit respondents and 22% of private company respondents were unsure of how their D&O insurance program is structures, about which the report notes that "brokers and other management liability consultants need to spend more time educating their nonprofit and private company clients about their insurance coverage."


6. 9% of all survey respondents reported that they purchase D&O insurance that covers only outside or independent directors. (The 2008 survey found that only 0.3% of all respondents purchased D&O insurance that covers only outside or independent directors.)


7. 75% of public company survey respondents reported that their company purchases Excess Side A insurance or Side A/DIC insurance, which the survey report notes is a "significantly higher" percentage than noted in the 2008 survey. 83% of companies with market caps over $10 billion purchased Excess Side A or Side A/DIC insurance, but only 50% of companies with market caps under $250 million purchased Excess Side A or Side A/DIC insurance.


8. The average amount of Excess Side A insurance purchased by public companies is $47.5 million, but only $14.5 million for companies with market caps of under $250 million, and $20 million for companies with market caps between $500 million and $999 million.


9. 35% of private organizations reported buying Excess Side A insurance, but only 20% of private companies with assets of under $250 million. The average amount of Excess Side A insurance purchased by private company respondents is $18.8 million, but only $6.2 million among private companies with assets under $250 million.


10. 31% of all respondents reported having a D&O claim in the last 10 years (up from only 17% in the prior survey report). Asset size had a direct bearing on the likelihood of a claim.


11. The most frequent type of claims for nonprofit respondents and private company respondents was employment related claims. Among public company respondents, the most frequent type of claim is the shareholder or investor suit.



This year’s report is full of interesting and useful information that will be valuable to insurance buyers and their advisors. Though I have summarized the report above, the report is replete with additional interesting detail, and the report merits reading at length and in full.


Many of the observations noted in the report may reflect in part the weighting of the respondent pool toward larger organizations. Thus, for example, the report’s observations about the following phenomena may reflect the number of larger entities in the survey pool: the relatively higher prevalence of entities purchasing local policies in foreign jurisdictions; the larger number of entities purchasing insurance solely for the protection of outside or independent directors; the increased prevalence of Excess Side A insurance or Side A/DIC insurance; and the reported increase in the number of claims experienced.


Indeed, the survey report itself notes with respect to each of these categories that prevalence of these phenomena increased as the size of the responding entity increased. Accordingly, the use made of the report’s observations of each of these items should take into account the survey respondent pool’s relative weighting toward larger institutions. Some of the observations may or may not retain their validity when compared to the universe of all firms or entities, or perhaps even when compared to a range of smaller firms and entities.


All of that said, with respect to many of the items measured in the survey, the survey report may be the only publicly available source of information. Particularly with respect to the many items measured in the report for which there is no publicly available alternative source, the survey reports provides indispensible insight


It is this aspect of the survey which ultimately makes it invaluable – that is, there is no other place where D&O industry professionals and their clients and customers can go to get the kind of information in this report. For that reason, the report’s return after a one year interruption is, as I noted at the outset, a cause for celebration.


Because just about everyone in the industry refers to this survey and because the entire industry benefits from the availability of the information in the survey, everyone in the industry has an equal stake in making the survey as broad and valid as possible. All of us have a stake in trying to make sure that future surveys reflect a broad cross-section of all firms and entities, and that as many respondents as possible complete the survey.


Now that the survey is back again, we can all look forward to the survey’s continuation in future years. We should all plan on trying to encourage maximum participation in future surveys as well.


Many thanks to Larry Racioppo of Towers Watson for providing me with a copy of the survey report..


Auction Rate Securities Litigation Grinds On: The mess left behind when the market for auction rate securities froze in February 2008 still has not been cleaned up. But the mess did beget at least one tangible byproduct – a mountain of litigation that continues to grind its way through the system. And though many of these cases, like the MRU Holdings case described below, have failed to survive initial dismissal motions, there have been a a very few, like the Akamai case described below, that have managed to overcome the initial pleading hurdles.


As discussed at length here, the MRU Holdings case arguably was somewhat distinct amount the auction rate securities cases. Unlike most cases, it did not involve purchasers of the auction rate securities themselves alleging to have been misled by their broker dealers (or by their mutual fund). The case did not even involve shareholders’ claims that they had been misled about the extent of a company’s exposure to its own auction rate securities investments. Rather, the plaintiffs in the MRU Holdings case were investors in a company that originated student loans and securitized the loans by putting them into pools for securitization. The investors claim to have been misled about the company’s dependence on the artificially favorable auction rate securities marketplace as a way to generate capital and free up income.


Though the MRU Holdings case represented a variant on the usual auction rate securities litigation, the case itself did not fare better than many of the other auction rate securities litigation cases.


In a February 17, 2011 order (here), Southern District of New York Judge Richard Berman granted the defendants’ motions to dismiss in the MRU Holdings case. Among other things, Judge Berman concluded that the company’s disclosure documents fully disclosed the company’s vulnerability due to its resort to the ARS marketplace. The disclosures, he found, "appear to have been based upon an appraisal of MRU’s financial position during an economically difficult timeframe and when read in their entirety not only bespeak caution but shout it from the rooftops." (citations omitted) Judge Berman also concluded that the plaintiffs had failed to plead scienter adequately as well.


By interesting contrast, in a February 15, 2011 order (here), District of Massachusetts Judge Joseph Tauro denied the defendants’ motions to dismiss in the individual action that Akamai Technologies filed against Deutsche Bank. Akamai claimed that it had been misled in connection with the company’s purchase of $217 million of ARS. Judge Tauro had little trouble concluding that Akamai’s allegations satisfied the pleading requirements. Significantly, Judge Tauro concluded that Akamai did not need to plead scienter since the PSLRA’s heightened pleading standard for scienter is inapplicable to a claim to Akamai’s control person liability claim.


I have added these cases to my running tally of credit crisis-related litigation dismissal motion rulings, which can be accessed here.


In Memoriam: It is with sadness that I note here the passing of Judge Richard L. Williams of the United States District Court for the Eastern District of Virginia. It was my privilege and honor to have clerked for Judge Williams many years ago, when I was just out of law school and he had only recently gone on the federal bench. My year clerking for him was one of the best years of my life. Following my clerkship, Judge Williams remained a mentor and a friend, for me as he was for so many others. He was an avid outdoorsman, an unequalled story-teller, a good judge and a good man. He taught me so much about how life should be lived. Judge, we will miss you.


The February 21, 2011 obituary for Judge Williams from the Richmond Times-Dispatch can be found here.