D&O Insurance: Maximizing Coverage, Minimizing Costs

Following several years of announcements involving various-sized settlements against directors and officers of midsized and larger organizations, management is finally paying attention—sparking renewed interest in D&O liability insurance.

This coverage is no longer a luxury for high net-worth clients; now, even small entities are asking for D&O insurance, and they’re shopping among a long list of potentially interested underwriters.

Insurance market capacity has hit record levels. And although entities with publicly traded stock still have the greatest D&O concern, private companies—and even family businesses—are now aware that hindsight is 20/20 in a litigious society where financially damaged parties are looking for someone to blame.

As a result, D&O insurers are placing lofty new business goals on underwriters, while trying to emphasize the importance of maintaining existing accounts. The result is flexible pricing for many types of businesses, with those showing the most impressive financials and cleanest long-term loss records scoring the best annual premium amounts.

Want to help your D&O clients get the most bang for their coverage buck? Here are some emerging coverage issues many D&O underwriters are willing to negotiate:

  • A policy sublimit for “investigatory expenses.” In many cases, this coverage is limited to claim situations involving shareholder derivative suits or securities claim situations, but some insurers are now more flexible with policy language. Some coverage even responds in forensic situations, or with respect to funds allowable to insured organizations to investigate or evaluate certain claim situations. Of course, the insurer’s willingness in this regard is in relation to the size of the annual premium and per-claim retention amount, among other factors.
  • Making as many exclusions as possible subject to “final adjudication.” This is valuable because coverage affords individuals defense for a longer period of time.
  • Broadening the “severability” of policy exclusions. “Severability” refers to protection for innocent insured persons, with the understanding that deliberate actions that trigger policy exclusions will be held against the individual wrongdoer, likely negating the coverage. Generally, you’ll find the extent of severability of D&O policy exclusions within a statement appearing at the end of the exclusions section of the coverage form (see “NOTE”). The more severable coverage is, the better the protection for innocent insured persons.
  • Negotiating for coverage to be non-rescindable by the insurer, to the greatest extent possible. Many insures are willing to make Insuring Agreement A non-rescindable almost upon request. This is important because it is the insuring agreement that protects insured persons for situations which are not indemnifiable under corporate bylaws. A completely non-rescindable D&O policy would be terrific, but a partially non-rescindable policy is better than nothing. No additional premium should apply to this coverage improvement.

With respect to minimizing costs, those with the best negotiation techniques usually receive the best combinations of coverage and annual premium costs. When it comes to planning for policy renewal dates, if you can satisfy underwriters’ renewal information requirements well in advance of the renewal date, then renewal pricing is more attractive.

Ask the D&O underwriter for an early indication of renewal pricing a few weeks prior to the actual renewal date; this can enable both parties to work toward making the renewal situation as desirable as possible. If an underwriter receives a completed application shortly before the renewal date, the insured organization potentially loses significant negotiation leverage with the underwriter.

Current D&O market conditions suggest that significant increases to the expiring premium are not the order of the day. Market limits capacity and hunger for new business is excellent among most D&O underwriters for many types of risks. Nevertheless, the underwriter’s first renewal pricing offer is often not the best possible option. Keeping track of time before the renewal date, as well as negotiating with the underwriter, are important when controlling D&O premium costs.

D&O insurance in its best state is complicated, with many moving parts and potential coverage issues depending upon the exact nature of plaintiff attorney allegations. Responsive coverage at the beginning of the policy period is obviously the best scenario for all involved. Certainly, the annual premium is very important, but so is coverage quality following a claim situation.

For a full-length feature story on selling D&O to private companies, look forward to the May issue of IA magazine.

Dick Clarke, senior vice president at J. Smith Lanier & Co., is a veteran of the property/liability insurance industry, having worked as underwriter, consultant and broker through hard and soft market cycles.