That has sent brokers scrambling to still other insurance companies for bits of coverage to keep their clients’ primary insurance programs intact, according to Layton. The process tends to add transactional costs into corporate insurance bills and anxiety to risk managers’ psyches. A big worry is that uninsured gaps will turn up in a company’s insurance program — one reason Jeff Pettegrew, Westaff’s vice president of insurance and risk management, characterizes the current D&O coverage as “a basket with leaky holes.”
Keeping coverage intact for extended periods is another struggle. Like most other companies, Westaff has a “claims-made” D&O policy. That means that coverage is triggered only when a claim against the insured is filed — rather than, say, when the accounting problem that spawned the claim occurred. If a claim is filed after the policy year, the company could end up with no coverage. For that reason, extending the life of the policy for at least a year is essential, says the risk manager.
But such “extended-tail” coverage comes with a price: for a one-year extension of its claims-reporting period, Westaff paid the same premium as it did for its basic coverage to its carrier. In past years, insurers commonly provided extended-tail coverage at a discount, typically 75 percent of the base premium, says Pettegrew.
Costly as D&O insurance is, most companies are able to buy some form of it. Still, CFOs need to be alert to a substantial narrowing in the scope of that coverage. “The D&O policy gives very broadly and takes away very specifically,” observes David Mair, a vice president of the Risk and Insurance Management Society. After a sweeping statement that coverage is triggered by a “wrongful act,” the standard policy excludes coverage if the act is intentional (although the intent must be adjudicated, which rarely happens in practice), and sets out a laundry list of other exclusions. For example, the policies generally exclude coverage for “unentitled personal profit,” such as certain bonuses executives at Enron were alleged to have received.
Some alarming takeaways may be on the horizon. For instance, some D&O carriers have been talking about excluding claims involving an earnings restatement, says Joseph Monteleone, vice president and claims counsel for Hartford Financial Products. Relatively unheard of in the United States, restatement exclusions are more common in the policies of European-based multinationals with U.S. exposures, he says.
There are also rumblings that carriers might stop offering coverage for the corporate entity itself. An add-on to D&O policies, such “entity” coverage is much in demand because most lawsuits filed against directors and officers also name the corporation. More than 90 percent of U.S. insureds bought entity coverage last year, according to the TillinghastTowers Perrin survey.
But both insurers and insureds increasingly see this type of coverage as a magnet for plaintiffs’ lawyers. “It creates a large target,” says Robert Hartwig, chief economist of the Insurance Information Institute. “Suing the entire corporation is potentially more lucrative for the plaintiffs’ bar and plaintiffs than simply going after directors and officers, where the assets are limited.”