| Directors and Officers Liability (Part 1) | |||||||||||||||||||||||||||||||||
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Who's suing whom and why? Tillinghast -Towers Perrin Survey (2001) A 2001 survey of 2037 companies found that directors and officers of 19% of these companies were sued over the last ten years. This is an increase of 3%. Average indemnity (excluding those cases closed with no payment) was $5.65 million, which is up more than 75%. The shareholders claimant average indemnity was $17.18 million, an all-time high. Concerning the companies surveyed, 55% were publicly traded and 17% were non-profit and governmental, with the remainder as privately held companies. The median asset size was $50 million and 330 companies held over $1 billion in assets. Most companies (around 62%) reported an after-tax loss in one or more of the past 5 years. Additionally, 43% of the companies had merger, acquisition or divestiture in past 5 years. Nearly all segments experienced sharp increases in premiums as well as stringent underwriting. D&O Insurance purchasers faced the largest premium increases--an average increase of 29%-- since the hard D&O market of the mid 80's. Approximately 97% of the surveyed companies have Directors & Officers Liability Insurance. The general tendency was that the larger the amount of assets held by a company, the more likely it would have D&O Liability Insurance. There was also variance by business type, with 98% of banks and utilities having this kind of insurance while construction and real estate were at 79%. Importantly, more than 80% of the companies now have entity coverage, which is up dramatically from just a few years ago. Another variance was by number of owners. Around 95% of companies with more than 500 stockholders had D&O Liability Insurance, as opposed to only 63% of companies with under 500 stockholders. The range of D&O Liaibility limits ran from $250,000 to $210 million. Cyclical market conditions suggest purchasers a longer-term view in their D&O policy renewal negotiations. Multi-year policies, when available, merit consideration for many companies, particularly those comfortable with their insurer. The objectives of the survey were to help organizations assess probable exposures to claims against directors and officers and construct appropriate financial protection programs. Who sued whom in 2001 The following 2001 statistics provide a revealing look into D&O Liability litigation: The landscape of litigation by stockholders against directors and officers has changed dramatically from a decade before. Whereas in 1990 around 40% of suits concerned mergers, acquisitions, and divestitures, that figure dropped to 18% by 2001. However, companies with a history of merger and acquisition are more than twice as likely to experience a claim. The new #1 reason for suits is financial disclosure, representing approximately 39% of claims, though in 1991 it stood at around 20%. Other key areas of claims are IPO "laddering" lawsuits and 401K employee-stockholders alleging bait and switch by corporate directors and officers. Of particular interest are cases in which the issuing underwriter of an offering allocated stock to best customers and buddies--and negotiated additional commission--in return for an agreement that they would buy more in the aftermarket at progressively higher prices making the stock go up. You could say that D&O litigation increased exponentially to the extent that it is a new kind of insurance catastrophe. Let's consider some recent major catastrophes. Hurricane Andrew (1992) amounted to around $18.6 billion in damages; the Northridge Earthquake (1994) came to about $13.8 billion; and the World Trade Center (2001) stung the insurance industry with $40-70 billion in claims. By comparison, Standard & Poor estimated that suits against directors, officers, and other professionals in 2001-2002 amounted to approximately $6.5 billion, on a par with claims for catastrophic events. Concerning class actions, there are over 2000 class action lawsuits pending since 1995, from pre-Enron/Worldcom fiasco. There were more D&O Liability settlements in the three years between 1999-2001--in excess of $10 million--than in the previous ten years. Market share According the Tillinghast-Towers Perrin 2001 Survey, the following is the breakdown of Director and Officers Liability Insurance market share, by count and premium, of the major insurance companies.
Who can be sued In a lawsuit aimed at the individual decision makers in a company, the suit can be brought against the following: |
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| Not only are policy forms, clauses, rules and court decisions constantly changing, but forms vary from company to company and state to state. This material is intended as a general guideline and might not apply to a specific situation. The authors, LunchTimeCE, Inc., CEfreedom, and Insurance Skills Center, and any organization for whom this course is administered will have neither liability nor responsibility to any person or entity with respect to any loss or damage alleged to be caused directly or indirectly as a result of information contained in this course. |
