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According to the Tillinghast Towers Perrin 2001 Directors and Officers (D&O) Liability Survey, there has been an alarming increase in the costs of litigation against D&Os. D&O liability insurance premiums increased by 29% in 2001, higher than the 11% increase reported on the 2000 survey. These increases represent a reversal of five years of significant premium decreases, which, when combined with the growing costs of litigation, turned insurer profits into losses. Technology and biotechnology firms with a recent IPO or experiencing financial distress have been hit particularly hard by premium increases.
The premium increases are attributed to an increase in shareholder litigation, widespread concerns about high-profile bankruptcies and the quality of corporate accounting and employment practices liability (EPL). Issues related to financial disclosure are the most common claim by shareholders, accounting for 38.8% of shareholder claims and 9.2% of claims overall. Discrimination in employment is cited as the most frequent D&O claim issue, accounting for 46.1% of employee claims and 26.8% of claims overall. There is a growing concern by risk managers that the enactment of recent statutes, such as The Americans with Disabilities Act of 1990, The Family Medical Leave Act of 1993 and The Civil Rights Act of 1991, will result in more claims and increased costs. The Civil Rights Act of 1991, for example, permits both punitive damages and jury trials in EPL litigation, with the attendant likelihood of huge awards.
According to Jim Swanke, leader of Tillinghast-Towers Perrin’s Strategic Risk Financing Practice, "D&O coverage is viewed as a necessity despite increasingly stringent underwriting by insurers. This requires many companies to build their D&O insurance program by purchasing smaller layers of insurance than they might wish." Mark Larsen, a Tillinghast-Towers Perrin consultant and survey director, recommends that companies "diligently evaluate the amount of their D&O insurance, and take a longer-term approach in their negotiations to seek the best value."
Should you have any questions regarding this matter or any insurance issues, please call or e-mail John P. Davis, III at (412) 261-6400 or jpd@jpcg.com.
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