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Directors' and officers' insurance - The fear factor.(Post Magazine Via Thomson Dialog NewsEdge) In today's commercial environment, ignorance is no longer an excuse. Any firm hoping to compete effectively must not only understand its own liabilities, but also how to manage them effectively. This is especially true for the directors and officers at the helm of such companies, who have been forced to accept increasing levels of personal responsibility for the corporate decisions they are taking on a daily basis. In turn they have become increasingly anxious about the insurance in place to protect them, and have shown a growing appetite to understand the policies available and the security they provide should things go wrong. Directors' and officers' policies have traditionally been based around all-risk cover, with the wording concentrating on exclusions rather than inclusions. However, in recent months this has led to some nervous conversations between insureds, brokers and carriers, as high-profile D&O cases have hit the headlines and company directors have started to wonder if their own policies would protect them in similar circumstances. The most prominent of these cases was perhaps that of the so-called 'Natwest Three', and while extradition is not something the majority of company officers are likely to face, the case's profile has made it a major concern in the market. If the D&O policy in place would not provide cover for an extradition then questions have been raised over other areas where there might be holes in the cover. Insurance has always been about peace of mind and there has been a growing trend among commercial clients to see the scope of their insurance spelt out in black and white. Nigel Pearson, UK and Ireland executive protection underwriting manager at Chubb, comments: "These are the type of things that get brought up from time to time and are reflected in policies as they are updated. It has been a fashion over the last few years that people want things to be specifically stated, even though the legal position may be clear that an issue would be covered." Indeed, Chubb has taken the opportunity to write extradition cover into the wording of its new D&O policy, despite the insurer always clearly stating that it was already included. As Mr Pearson states: "It is more a point of clarification." Extending cover Not only have many insurers used the attention being given to extradition as a springboard to review the wording in place for such a risk and improve the clarity of the cover they offer, some have also used it as an opportunity to extend the cover they provide. In assessing extradition as a potential risk, AIG felt there were issues over and above the basic defence costs and so has adjusted its insurance accordingly. John Hopper, who is responsible for AIG's London D&O team, says it may not just be a lawyer who is engaged in defending an extradition case and there may be a need for things like public relations initiatives, which can also be expensive. He comments: "Most queries were around defence costs, but we looked at that and felt that perhaps cover was needed over and above defence costs, and so we extended our cover to bring in PR costs." Increasingly, underwriters are also being forced into extending the cover on offer and have broadened wordings to include extensions for automatic initial public offering cover and limited insurance for retired directors. According to Patrick White, underwriter at Markel International, these are all issues that have come to the fore in the last year or so as the market has softened. Lee Lindsay, technical director of legal at Aon, would certainly seem to agree. She comments: "We are out negotiating language every day and the carriers are prepared to give other wordings, which they have not been willing to do in the past." Mr Hopper says AIG has also revised its wording recently in relation to pollution coverage in an attempt to make the policy more user-friendly and incorporate the level of insurance that clients need. There have also been moves on the acquisition thresholds in place in an effort to ensure clients do not have to continually renegotiate their insurance every time they conclude an acquisition. These changes all reflect the evolving commercial climate and the particular issues that are growing in priority. However, there are also a number of changes that have been brought to bear as a direct result of changes to the legislation in place. One such issue has arisen out of the recently introduced Civil Partnership Act, according to Mr Pearson: "The Civil Partnership Act recognised civil partnerships between gay couples and we had a question last year over our spousal liability extension as to whether or not we would cover a civil liability partner. It is our intention to do so, and in the new policy we have taken the opportunity to write this in and make it clear." The danger of over-clarification Perhaps the most prominent piece of legislation to concern the D&O market has been the Companies Act 2006, which received Royal Assent on 8 November. It is expected that the majority of its proposals will not actually come into effect until 2008 and the market is keeping a close eye on its ongoing implementation. However, while there have been a number of notable points of interest, many believe that the new legislation will not really create too much of a stir. Nick Foord-Kelcey, European practice leader for D&O at Marsh, is looking on with interest, but is not overly concerned about the implications of the new legislation. He says: "The new Act has made derivative actions a little easier, but they are still pretty tightly controlled. There has been some focus on that, but D&O have long covered those and so there is little need to change the wording. But there is a need to recognise that the risk might have slightly changed. I think people are waiting to see what might happen." The problem with new legislation for insurers is trying to strike a balance between what they spell out in their wordings and what they cover without needing to make particular mention of. There has been a drive for clarity in the wording of D&O cover and insureds want to see exactly where the boundaries of their cover lie, but they also have to be careful that in demanding greater depth of wording, they do not also bring about unintended exclusions. Looking back at the changes that have been introduced to policies in regards of extradition cover, some insurers have sought to include a definition of what extradition actually means. At first glance this may appear a sensible course of action, but there is a genuine risk that by doing so, any such policy would not come into force if an extradition ruling does not match the specified description. Mr Pearson explains: "Some insurers have tried to define what an extradition is, but what happens when you get down to different countries, which have different policies? You may end up creating problems because of that." This is not the intention, but by being too specific about what is covered, he says policies then begin to become specific about what is not covered by dint of their particular wordings. The other side of the story However, on the flip side of the coin, insurers are increasingly giving up their own rights when it comes to avoiding policies, particularly in relation to issues of non-disclosure. The ability for insurers to cancel D&O policies, potentially covering hundreds - and in some cases thousands - of individuals, is clearly a matter of great concern. The Banesto Bank case, in which Allianz Legal rescinded a policy on the back of misrepresentation of the company's annual accounts, has caused a great deal of concern, and other companies are keen to avoid such problems. Chris Hewitt, executive director at broker Lockton, states simply: "We would expect to place non-rescindable policies for our clients," while other insurers are working hard towards solutions that provide appropriate cover for both themselves and their clients. AIG has waived its right to policy avoidance in some circumstances, as Mr Hopper states: "We will waive our right to avoidance in certain circumstances such as innocent non disclosure." Explaining the new level of cover offered by Chubb, Mr Pearson says: "If there is a misrepresentation or a non disclosure then we won't rescind the policy whether it is innocent, negligent or even fraudulent. The second limb is that the individual who undertook the fraud will not have cover although cover will remain in place for everyone else." Indeed, Chubb says it will only rescind the cover if the misrepresentation is pertinent to the claim. If it is not then even the individual responsible will not lose their cover. This move from the insurance market is a clear step to addressing the problem of rescission and it is one that has been welcomed by brokers and their clients alike. The local taxman bites However, looking further afield there are other problems facing insureds when it comes to their policy providing the kind of cover they need and think they have bought. In the past there have been no problems in writing a global policy that covered the activities of a firm wherever it acted. Certain exclusions may have applied but in the main the issue was not problematic. However, increasingly there has been a drive from certain countries to insist that for any policy to be effective it must have been written locally. Explaining the situation more fully, Paul Schiavone, chief underwriting officer for D&O at Zurich Global Corporate, says: "There are certain jurisdictions where local policies are required by law to cover the insureds' local exposures such as Brazil, Mexico, India, Japan, China and Russia. This requirement is prompting the necessity of a master D&O policy for the parent and certain subsidiaries not located in these jurisdictions, in addition to issuing local D&O policies, within those jurisdictions where master D&O coverage is not permitted by law." The issue seems to be driven largely by the desire to generate insurance premium tax on the policies; insisting that the cover is written locally is one way of achieving this. However, the issue is not one that should create problems for multi-national firms, but is something they and their brokers should be alert to when arranging cover. There is a huge scope of issues for companies to consider when looking at their D&O exposure and the cover available. The softening market may mean that the breadth and cost of cover has never been so good, but firms need to push their brokers and be sure they are getting the best possible cover available. Carriers will continue to evolve their policies with the changing commercial and legislative climate, but as the cycle turns in the coming years, insureds are likely to look back on present rates and wordings with real fondness. A WHISTLE STOP TOUR OF INCREASED EXPOSURE FACED BY DIRECTORS Recent developments that have increased director exposure include: the introduction of the European Union transparency directive, the broadening reach of Sarbanes-Oxley, the willingness of the US courts to accept extra-territorial jurisdiction, the US plaintiff bar's targeting of non-US quoted companies, the rise of group litigation in the EU and other countries, the emergence of easier ways of funding such actions, and increased activity by both regulators and institutional investors. Meanwhile, the UK Companies Act 2006, which is to be implemented over the next couple of years, codifies and extends the duties incumbent upon directors. Furthermore, by changing the rules as to who may bring derivative actions, the Act makes for easier proceedings against directors. Source: Lawrence Graham. Copyright 2007 Timothy Benn Publishing Ltd. Source : Financial Times Information Limited. |