How executives should approach directors and officers insurance

As the economy begins to improve, with increasing sales and corporate profits gaining some momentum, now is a good time for companies to consider directors and officers liability insurance to help secure their growth.

Smart Business spoke with Philip K. Glick, senior vice president at ECBM and a registered professional liability underwriter, about some issues companies should be addressing in this area.

Are you seeing a growth in claims?

Mergers and acquisitions and other business combinations have begun to increase. This activity has resulted in more directors and officers liability claims brought by disgruntled shareholder groups that question their buyout’s valuation. Also, if a merger or acquisition falls through, one or both parties may file a claim against the other for breakup fees or other damages.

In addition, the number of wage and hour claims filed by current and former employees continues to increase. These claims involve a range of allegations, including failure to pay overtime; failure to pay for break periods; failure to pay for the time involved in getting in and out of uniforms; and failure to reimburse employees for the cost of uniforms and other job-related expenses.

With more litigation, are there changes in the directors and officers liability market?  

As a result of litigation trends and the overall tightening of the property and liability insurance marketplace, renewal premiums are increasing by 8 to 10 percent for directors and officers liability, including employment practices liability. Companies with recent claims face larger increases.

Insurance companies also are restricting coverage terms and conditions offered. With respect to employment practices liability, often written as a part of directors and officers liability coverage, many insurers are eliminating coverage for wage and hour claims — even for legal defense costs routinely covered in prior years. Some insurers may be willing to provide a sub-limit for these costs.

Carriers are eliminating coverage for claims brought by former directors or officers against the company, even if they haven’t been with the company for years. Examples include failure to pay post-termination benefits or cheating a former shareholder out of the real value of prior stock holdings upon the company’s sale to a third-party buyer today. These restrictions might be changed with a carve back only excluding claims if a former officer/director has been gone less than two or three years.

Are coverage extensions or improvements available to broaden your coverage?

Even with market tightening, the directors and officers liability marketplace remains competitive with many coverage enhancements available, if specifically requested. For example, the cost of legal defense is often included in the policy limits, but many insurers are willing to provide an extra limit of coverage for defense of claims, if the overall policy limit has been used up by the payment of awards.

Some insurance companies also provide an ‘excess side A’ limit of protection, giving additional coverage to individual directors and officers in the event claims against the company have used up policy limits. It’s an extra level of protection to insulate personal assets from third-party claims.

Another expanded coverage involves the selection of defense counsel. Traditionally, smaller private companies’ coverage was written on a ‘duty to defend’ basis where the insurance company appointed defense counsel for claims. Today, carriers may allow the insured to get approval for their own counsel choice, or to select counsel from a preapproved list.  

Many insurers are offering directors and officers liability in combination with other specialty coverages, such as employment related practices, fiduciary liability and crime insurance, under an overall blanket professional liability menu of coverages. This can be subject to an overall shared aggregate limit for all claims or separate limits of protection for each part. Blanket coverage costs less and has broader terms and conditions than separate policies.

Insurance companies also are willing to provide coverage for potential whistle-blower claims in which current or former employees allege the company violated laws involving government-funded contracts.

Philip K. Glick is a senior vice president and registered professional liability underwriter at ECBM. Reach him at (610) 668-7100, ext. 1310, or [email protected].

For more information about risk management, visit ECBM’s blog.

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