Directors & Officers Liability Insurance: Part Two
Events that Shaped the Evolution of D&O policy and the Insured v. Insured Exclusion
♦1930s - Securities Acts of 1933 & 1934
The Great Depression spurred the creation of new laws to protect investors. Directors and officers were held to a higher fiduciary standard. D&O insurance was first offered by Lloyd's of London with little market interest.
♦1940s and 1950s
State legislatures began enacting laws to allow corporations to indemnify directors and officers.
♦ 1960s and 1970s
Withmany states now allowing corporate indemnification, market demand grew for Public Company D&O insurance. In an era of "cash flow underwriting", markets other than Lloyd's begin offering D&O coverage with broad policy terms and inaddequate pricing, in order to gain market share.
♦1980s (Hard Market)
The convergence of: a majority of public companies carrying D&O insurance, an increase in claims activity, pricing inadequacy, the 1987 "Black Monday" Stock Market crash, oil company and bank failures (Saving and Loan Crisis) and reinsurance capiacity issues all results in a crisis in the insurance industry and a serious hardening of the market. At the time, 1984 was the worst year in the 296 year history of Lloyd's-- with North American casualty being the worst business segment and Professional Liability and D&O being the worst line of business. The industry response was that rates and deductibles/retensions were increased while available limits decreased dramatically. Litigation also emerged in the Privat Company sector.
♦1990s (Softening Market)
- Alankmark US Court of Appeals case held that insurers could not deem a corporation to be a co-defendant with the directors and officers in an attempt to allocate some of the defense and sttlement costs to the corporation rather than the insurer [Nrdstrom, inc v.. Chubb & Son, 1995]. In response, carriers develop Entity Coverage (Side C).
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Also, significant in 1995, the Private Securities Litigation Reform Act (PSLRA) was enacted and viewed by the industry as a tort reform measure to stop the proliferation of frivolous securities litigation. D&O policy forms now evolved rapidly to include Side C coverage and market capacity increased dramatically, leading to broader policy terms and more competitive rates. This environment also encourages non-profits to begin carrying D&O insurance as a standard part of their insurance portfolio.
♦2001 - 2003 (Hardening Market Develops) -
Significant increase in securities fraud litigation results in carriers being hit with huge losses due to broad entity coverage and inadequate pricing of the 1990s.
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The Enron Scandal and bursting of the technology/IPO bubble reduced D&O capacity.
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There is widespread acceptance of the need to carry D&O insurance, with an estimated 75-80% of private companies now carrying D&O coverage. Virtually all pubic companies purchase D&O insurance.
♦2001 - September 11, 2001
Terrorist attacks affects capacity due to "aggregation"
♦2002 - Sarbanes Oxley Act
(SOX) enacted, changing corporate governance and created new standards that hold directors and officers accountable for financial conditions, operational controls and company reporting. D&O policy language evolved to address the new exposures board members face as a result of the heightened level of accountability from SOX Regulations.
♦2007 - U.S. Sub-Prime Mortgage-Backed Securities/Real Estate Bubble BurstsCreated a financial crisis and recession and consumer backlash against corporate America. D&O carriers were highly exposed to the crisis.
♦2010 - Dodd-Frank Wall Street Reform and Consumer Protection ActEnacted to prevent corporations from being "too big to fail". Dodd-Frank created numerous regulations for which D&O policies evolved to be responsive to changing exposures.
♦Today
There is widespread acceptance of the need to carry D&O insurance, with an estimated 75-80% of private companies now carrying D&O coverage. Virtually all pubic companies purchase D&O insurance.