Cover Me

Anyone searching for directors' and officers' liability coverage will find it more expensive and less inclusive than ever before.

As restatements go these days, it seemed a pittance. What’s more, the change reported by Westaff, a temporary-staffing company, looked like a positive one. Partly because of tax-law changes in the federal economic stimulus bill enacted in March, the Walnut Creek, California-based company should have recorded a $3.1 million tax benefit in the second quarter. The company made the change at the start of September, restating a $1.7 million net income loss to a $1.4 million gain in the process. The move was apparently too arcane to even merit a press release. Still, it was a restatement, and anytime a company issues a restatement these days — positive or negative — there is understandable concern about possible shareholder suits. After all, many CEOs and finance chiefs, including Westaff CFO Dirk Sodestrom, have begun certifying corporate financial statements under the mandates of the Sarbanes-Oxley Act of 2002.

“The piece of paper that starts out 81/2 by 11 inches becomes three feet by five feet in a court of law,” says Doug Hagerman, a corporate lawyer with Foley & Lardner in Chicago.

Little wonder that CEOs and CFOs — as well as board audit-committee members, who are also endowed with new individual responsibilities thanks to Sarbanes-Oxley — are keen on maintaining solid corporate directors’ and officers’ liability insurance coverage. In the current economic climate, however, that coverage is becoming increasingly costlier and skimpier.

In fact, Fortune 500 companies have seen their premiums soar 200 to 400 percent on their most recent policy renewals, according to Lou Ann Layton, a Marsh insurance broker. In a recent CFO.com online poll, 27 percent of respondents said their companies either doubled or tripled their D&O premium payouts when they last bought coverage. And while companies in high-risk industries like telecommunications or biotechnology have the most to worry about, Layton says “this is the worst D&O market in the 21 years I’ve been in the business.”

Bumping Up Deductibles

The current D&O crunch follows more than a year of more gradual market hardening. In 2001, for example, premiums for the line rose about 29 percent, according to a survey of 2,130 organizations released by Tillinghast­Towers Perrin in June. The increases picked up steam late that year as a result of losses to other property/casualty insurance lines stemming from the terrorist attacks. (“I personally think that 9/11 enabled D&O underwriters to jump on the bandwagon” of rate increases, says Layton.) And early last summer, D&O insurers really began to turn up the heat — intensifying their scrutiny of insureds and stepping up price hikes.

But that was only the start. Corporations are now being asked to retain a lot more risk. For instance, a Fortune 500 company with a $1 million deductible is typically being asked to bump that up to $5 million to $10 million, says Layton. Bigger corporations that once retained $5 million have seen their deductibles soar to $15 million to $25 million.

Coverage packages have also become much trickier to assemble, according to the Marsh broker. Wary of assuming too much risk in these scandal-plagued times, an underwriter that previously would insure $25 million of the $100 million of the basic D&O coverage typically bought by a large corporation might pick up only $10 million or $15 million. To sweeten the deal, the carriers may offer to provide the balance of the $25 million in less-risky excess coverage. But excess insurance provides coverage only once the costs hit a certain (high) level.

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