Class Report: Directors’ and Officers’ liability insurance

Directors' and Officers' (D&O) liability insurance is an important cover for corporations, protecting directors for their liabilities as a result of wrongful acts or wrongful trading. It reimburses the company for any money used to indemnify a director or officer, but also provides individual indemnification of directors where the company fails to do so. For a long time, D&O liability was one of the most common classes to be insured on a non-admitted basis. The argument for this was that it was often not available in local markets, or not at the level required, or simply that the group required all directors and officers in the group to have the same level of protection, regardless of where they were in the world. But this has changed in recent years and so compliance is now a major issue for D&O.hideThe typical D&O programme has a broad master policy and 'underlyers' in countries in which companies have local boards of directors, according to Brian E. Botkin, Head of Multinational, Global Financial Lines, AIG Property Casualty. "Since the fiduciary obligations vary from country to country, and the availability of corporate indemnification varies from country to country, there is less of a reliance on 'silver bullet' solutions. Clients that purchase Freedom of Service policies on other lines of business, are increasingly purchasing underlyers in EU countries to make sure the coverage they have is appropriate at the local level," he said. He added that a D&O programme may also include one or two 'standalone' policies that provide additional limits in countries where the sharing of limits may not be allowed, or the company feels that they need more a more customised policy. And he pointed that there is a trend for D&O programmes to expand over time. "Most programmes will start off small, with maybe a handful of underlyers in strategically important countries, but after three years we see that the average programme has grown," he said. Leslie Kurshan, Head of Product Development, FINPRO UK, Marsh, explained that there are different types of cover that can be included in this programme depending on the company's risk profile and appetite. Those covers are personal asset protection for individuals (Side A), balance sheet protection for the company to the extent that it advances costs to or indemnifies individuals (Side B), and securities entity cover (Side C), which covers the company's loss for securities claims brought by a shareholder of the group. A large public company is likely to buy several layers that have a combined Side A, B & C cover, plus some Side A difference in conditions (DIC) cover. In terms of trends, Ms Kurshan said that more clients are buying local policies and in more countries. The countries where Marsh's large clients most frequently purchase local policies are China, Brazil, India, Switzerland and Japan. Adequate capacity for high limits There is plenty of D&O capacity available, more than enough for most companies' needs. Companies that have more exposed risk profiles sometimes buy upwards of £400m in the London insurance market and it is possible to purchase more. According to Marsh, local policy limits purchased by large clients are typically £5m-15m per country. It is important to select the limit of liability that reflects the exposure of the country in question, up to the full limit. As AIG's Brian E. Botkin explained: "Difference in Limits (DIL) is dangerous to rely upon when personal assets are at risk. An individual tends to care more about which country a claim will be paid in, than do companies with large multinational footprints," he explained. In general, companies tend to purchase full limits in the country where the company is domiciled and have local policies with smaller limits in other territories where they have subsidiaries, their global D&O insurers are not licensed, and non-admitted insurance is prohibited. "It's difficult to generalise, but many companies perceive the majority of the D&O risk as residing in the jurisdiction where the board of the parent company makes its management decisions and are comfortable with lower limits elsewhere," said Marsh's Leslie Kurshan. "Of course, if there are territories where the company feels there are specific risk issues they may buy larger local limits in those territories." Some companies do still look for DIC/DIL cover where it is permitted, or possibly use 'financial interest' clauses, but this is of little use where payment needs to be made directly to the individual insured person in the country where the subsidiary resides, as is often the case. Common problems Inconsistent terms and conditions are a common problem, according to Ms Kurshan. In many countries the concept of management liability is not that developed, she said, and as a result, "the standard local terms and conditions often not on par with those that we would negotiate for the parent company's policy. While most insurers offer some type of Difference in Conditions (DIC), the margin of broader cover under the master policy generally has to be claimed under that policy - which was the situation that we were trying to remedy by placing the local policy. "For the same reason, the local underwriter may not have as in depth an understanding of D&O risk and apply inappropriate additional restrictions to the policy. It can be frustratingly difficult to get those removed via the insurers' international network." Ms Kurshan also pointed to a host of administrative problems - inconsistent information requirements, delays in issuing local premium invoices and documentation, local subsidiaries of policyholders not being aligned with the purchase (sometimes resulting in delays in completing of locally required documentation and payment of premiums), and errors in the documentation issued. And in some countries, it can be difficult to find a local insurer to issue a policy. AIG's Brian E. Botkin said that because of the variability in the Companies Acts from country to country, and the fiduciary duties that these laws impose, indigenous D&O policies have been developed to address the unique exposures in each country. "These policies don't always fit nicely together. This makes it difficult to apply 'one size fits all solutions' to D&O programmes. Every client is unique and no two have the same footprint and exposure. This makes the D&O programme different than those a company may have on their other lines," he explained. "The commonest problems we have encountered are when we try to paint this structure with too broad a brush. Thought must be given as to how and where the company wants their programme to respond. If a company wants broad local wording, local claims handling and local payment, then a traditional underlyer is in order. If they only want this for their individual clients, then a Side A underlyer is in order. This is why programmes evolve over time. The first year is usually driven by compliance, years two and beyond are driven by solid risk management principles," said Mr Botkin.

Class Report: Directors’ and Officers’ liability insurance

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