Earlier this month I published a guest post in which John McCarrick and Paul Schiavone suggested various policy terms and conditions they proposed should be revisited as D&O insurers seek profitability. My comments on their proposals appeared as an appendix to John and Paul’s article. John and Paul’s article has provoked a series of responses. Last week, I published a second guest post in which Paul Ferrillo provided his thoughts in response to John and Paul’s article. And in yet another guest post, Gil Isidro provided his comments as well. Now, as set out below, Francis Kean adds his voice to the dialog. Francis is Executive Director FINEX Willis Towers Watson. I would like to thank Francis for allowing me to publish his comments. Here is Francis’s article.
With such distinguished authors and contributors (I too have known Paul and John for many years), it is with some trepidation that I enter the arena and offer my perspective. Like Kevin, I had a strong reaction to their “reverse coverage wish list” but it was more one of sadness than negativity. Let me explain.
I have always strongly believed that there is too much distance and disconnection between those who create and procure D&O insurance and the end users i.e. the directors and offices themselves. I used to be a partner in a law firm. Unsurprisingly, we all attached considerable importance to our professional indemnity programme. Accordingly, each year we deputed one of our more senior partners to negotiate and secure appropriate renewal terms from the insurance market. I suspect that this is what happens in most professional services firms and even those where the services in question are not provided by lawyers. The point is that the nature of professional indemnity cover is easy to grasp i.e. liability insurance in respect acts, errors and omissions in the provision of professional services with a few generally well understood exclusions and limitations.
D&O insurance is a close cousin of professional indemnity insurance at least in terms of species and origin. Like professional indemnity insurance, it is a form of liability insurance written on an annually renewable claims made basis. Its principal purpose is to protect directors and officers from management lability arising from acts errors and omissions committed in their capacity as directors and officers. That concept is inherently uncomplicated. Over the years though, it has become increasingly obscured by webs of complexity (some well-meaning and others less so) spun both by the purveyors and creators of the product (among whom I must count myself).
Complexity breeds more complexity since with each coverage dispute which ends up in victory or defeat in the courts (depending on perspective) attempts are made to shore up perceived weaknesses on both sides by further wording tweaks. I have seen many D&O wordings with sixty or more defined terms and as many pages in length to say nothing of the additional length often provided by amendatory endorsements. This makes the task, even for hardened industry professionals, of understanding what the cover is almost insurmountable.
Although perhaps not the only reason for the disconnect between the end users and the product itself, I believe that complexity is a major contributory factor. Therefore when I read Paul and John’s “reverse coverage wish list” I am struck by the thought that, no matter how intelligent and well informed, any director or officer would struggle either to navigate such a list or to place it into an appropriate order of priority. (It is interesting that even Paul and John do not seek to do that). In fact, the crisis of complexity is even worse than the list itself suggests since it would be entirely possible to come up with quite different but equally long and arguably significant wish-lists (and reverse wish-lists) on other contentious issues.
You may feel that my back to basics plea is entirely unrealistic and that what I am condemning as complexity is in many cases sophistication which is both nuanced and necessary. There is of course also the reality that it would be reckless and ill advised to draft polices ignoring the fact that there is a considerable body of court precedent on a number of threshold coverage issues. Having said all that, I question whether, as an industry, we should not be doing more to create products which would render the need for lengthy wish lists redundant. In support of this question, it is perhaps relevant to note that for several years we have run a UK based survey in which we have asked directors and officers what (among other things) were their main concerns when it came to D&O insurance. Their response was that their top priority was for “clear and transparent policy terms”.