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D&O and E&O - Is There Any Good News?. John Lewandowski, FCAS, MAAA CNA Insurance Company 2004 Casualty Loss Reserve Seminar Las Vegas - September 13, 2004. D&O POLICY CHARACTERISTICS. Coverage/Profile - What is D&O and E&O?.

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d o and e o is there any good news

D&O and E&O - Is There Any Good News?

John Lewandowski, FCAS, MAAACNA Insurance Company

2004 Casualty Loss Reserve SeminarLas Vegas - September 13, 2004

coverage profile what is d o and e o
Coverage/Profile - What is D&O and E&O?

Directors & Officers Liability Policy – provides coverage for claims arising from the “wrongful acts” – i.e., any act, error or omission -- of insured persons while serving in their capacity as directors or officers. Expanded to included Entity coverage for “securities claims.” D&O coverage is simply a specialized type of Errors & Omissions coverage.

D&O’s have liability for misrepresentations and omissions

  • in a public offering registration statement filed with the SEC
  • in connection with any purchase or sale of securities

Errors & Omissions Professional Liability Policy – provides coverage for claims involving alleged “errors and omissions” arising out of professional services rendered by the insured, e.g. banks, investment advisors, insurance companies, mutual funds…

D&O coverage often includes Employment Practices Liability.

public cos represent the largest share of the market

Make-up of D&O Market

Public cos. represent the largest share of the market

Distribution of Insureds by Segment

By Ownership Type

For Profit by Account Size

Small: Assets < $100M

Mid: $100M < Assets < $1B

Large: $1B < Assets < $10B

Very Large: Assets >10B

typical large public co d o program structure
Typical (Large Public Co.) D&O Program Structure
  • Program size typically excess of $50 million, up to $200 million+
  • Limits offered range from $5 million to $25 million per carrier, many carriers on any one program
  • Retentions range from $100K and up!
  • Pricing varies widely from account to account, typically based upon :
    • Sector/industry group
    • Size –Market Capitalization, Assets
    • Recent activities – IPO, M&A
    • Financial Condition – consistent performance
    • Financial Rating
    • Corporate Governance – management quality, board independence
some past drivers of d o results 1997 2002
Some Past Drivers of D&O results (1997-2002)

Increasing Coverage/Reducing Premium

Expanded capacity/larger limits offered

Expanded coverage, entity coverage eliminated pre-set allocation

Free/automatic Reinstatements

Multi-Year contracts, with significant discounts and no re-underwriting

Increasing Claim Costs – Frequency and Severity

2001 – IPO Allocation filings

2002 – Filings against Analyst and Investment Banks; Wave of Corporate Meltdowns Begins – Enron, MCI Worldcom, Tyco, Global Crossing

2003 - Mutual Funds – Late Trading/Market timing

M&A Activity – Banking, Insurance

Deteriorating Investment Market

current state of the d o market
Current State of the D&O market
  • Through Year-End 2003
  • Market saw reduced capacity (limits), increased retentions
  • More players on each program, pricing less competitive
  • Large rate increases - more than 150% were common
  • Coverage restrictions – eliminate investment banking, entity coverage
  • Elimination of multi-year deals
  • 2003/2002 Securities Class Action Lawsuits Decline by 22%
  • 2003/2002 Market Capitalization Losses Decline by 72%
  • And Beyond…..
  • Once again, swift changes in the market in 2004……….
historical legislation impacting d o suits
Historical Legislation Impacting D&O Suits

1933/34 Securities Acts

D&O Liability for misrepresentations, omissions in public offerings, statements

1995 PSLRA

Intended to prevent abuses of securities class action lawsuits.

Heightened Pleading Standard

2002 Sarbanes-Oxley Act

Blackout trading barred

CEO and CFO certifications.

Faster insider trading disclosure

Increased Audit Committee duties.

Increased SEC review

More criminal penalties and fines

d o claims characteristics
D&O Claims Characteristics

Some interesting Public Company D&O statistics*….

  • Half of all suits against D&O’s are filed by Shareholders
  • 24% of claims brought by employees
  • 36% of all claims are class actions
  • Low Frequency - average of 225 securities suits per year (excl IPO)
  • High Severity – average settlement of $20 million
  • Most active District Court is S.D. New York
  • Most frequently sued Sector is Technology
  • Most frequently sued Industry is Biotechnology & Drugs
  • Most resolutions achieved through settlement, not judgment

*Source : Tillinghast D&O Report and Stanford Research

major factors for d o claims
Major Factors For D&O Claims
  • Scope of Policy – is it a claim, a wrongful act?
  • Ground-up Nature of the Claim
  • Possible Defenses – exclusions, warrants, application.
  • Policy structure, coverage and wording
criteria used to establish d o claim potential
Criteria Used to Establish D&O Claim Potential
  • Alleged Damages - “Plaintiff-style” damages
  • Length of Class Period – number of shareholders
  • Insider Holdings
  • Historical Stock Performance
  • Underlying carriers – who is lead on Claim?
  • Venue – circuit, pleading standards, judge
  • Attorney firms – both Plaintiff and Defendant
  • Industry – Telecomm., Pharm., Energy – any trends?
  • Procedural steps – Consolidated complaint, motion to dismiss
  • Lead Plaintiff - Institutional Investor
  • Insured’s stamina/motivation
key takeaways
Key Takeaways
  • Principal exposure is from Shareholders Class actions against Public Companies, Private Company litigation less common.
  • Pricing for D&O must recognize Size and Sectors as important factors, but not sole factors – all are not equal.
  • Last few years witnessed emergence of non-traditional claims (mega-torts) in addition to traditional issuer fraud cases.
  • Settlements are not keeping pace with filings, there is a large backlog of cases.
is there any good news
Is There Any Good News?
  • Lessons Learned from the past……..
  • Keeping pace with the next possible mega-tort by identifying industries/markets in distress is critical.
  • Reserving for D&O is multi-faceted and requires a continuous evaluation during the lifetime of the claim.
  • Strong working relationship between Claims, Underwriting and Actuarial is important since traditional actuarial reserving methods do not work.