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30th October 2008
CURRENT D&O MARKET
CONDITIONS AND
RENEWAL
EXPECTATIONS FOR
2009
David Purdy
Topics to be discussed
 D&O Insurance Market Conditions
 US Claim Statistics
 International Regulatory Cooperation
 Emerging Trends
 What to Expect at Renewal
 Concluding Comments
Willis Amsterdam Seminar
30th October 2008
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D&O Insurance Market Conditions
D&O Insurance Market
Conditions
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30th October 2008
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Introduction
 The fast pace of globalisation in the corporate world inevitably brings
challenges and risks to the directors and officers of international companies
– Gerard has presented an Underwriter’s overview of where he believes the D&O
market is heading
– Michiel has told us about the Ahold experience and the issues that they faced
when claiming under their D&O policy.
– Hans has shown the growing trends and developments of D&O exposures in
Europe
Should directors & officers be worried?
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Current Market Conditions
 Distinguish between Financial Institution D&O purchasers and Commercial
Company D&O purchasers
 Is it a Buyer’s Market?
 Rates are down – For the moment!
 D&O wordings are as broad as they have ever been
 Capacity is at an all time high but not at any price
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The “Cyclical” Nature of the Directors &
Officers Liability Market
• Rates increase sharply 2003 / 2004
• Reinsurance Capacity reduces
• Coverage restricted
2002
2001
Time
• Cheap reinsurance
• Increased capacity
• Cheaper premiums
1996
2004 / 2005 • Profits emerge
• Reinsurance capacity returns
• Rates begin to reduce
2005 / 2006
• Increased capacity
• Increased competition
2006 / 2007
• Fewer claims
2007 / 2008
• Continued
competition
• higher claims
frequency
1998
2008/9
Soft Market
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30th October 2008
• Increased number of
claims filed
• Premium increases
for FI D&O renewals
• Commercial rates
remain competitive
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D&O Insurance Market Conditions
Worldwide
Still dominated by three or four
major insurers
Significant global insurance
capacity available – USD 1.5bn?
Policy wordings now offer seriously
enhanced coverage
The need for D&O coverage
continues to be of importance
The number of US claims against
directors in 2008 is on the increase
Commercial D&O rates are continuing
to fall but for how much longer?
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D&O Insurance Market Conditions (cont)
 Against this backdrop of good news for the directors of
international companies, there lies most of the
ingredients for the perfect D&O storm
– Increased number of Securities Class Actions
– Stock market volatility and economic uncertainty/
recession
– Increased regulatory activity
– Premiums falling and policy coverage broadening
– Catastrophe Losses (the only thing missing at the
moment!)
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US Claims Statistics
Federal Filings for 2007
increased by 58% over
the previous year and
this trend has continued
for 2008
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US Claims Statistics (cont)
Federal Filings 2000 to 3rd July 2008
500
Number of Federal Filings
400
315
300
47
2
1
2
200
27
12
12
12
139
3
39
9
5
9
241
234
201
100
211
22
24
6
236
185
49
147
3
107
65
0
2000
Standard Filings
2001
SEC Cases
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Source: Nera Economic Consulting, July 2008
2002
2003
Options Backdating Cases
2004
Other Cases
2005
2006
Subprime Cases
30th October 2008
2007
2008
Auction Rate Securities
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Projected
US Claims Statistics (cont)
Increased cost of
defending actions with
average settlement
values continuing to rise
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Average Settlement Value ($m)
1st January 1996 – July 2008
Average Settlement Value ($m) All Cases
$90
$80
$82
$76
$70
$60
Average $45.4
$50
$45
$40
$32
$30
$31
Average $17.1
$20
$22
$24
$21
$17
$10
$9
$9
1996
1997
$12
$12
1998
1999
$0
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Source: Nera Economic Consulting, July 2008
2000
2001
2002
2003
2004
30th October 2008
2005
2006
2007
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2008
International Regulatory Cooperation
Much tougher stance
taken by the Regulators
with increased
cooperation between
them
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International Regulatory Cooperation (cont)
 Cooperation
between US
and Foreign
securities
regulators is
now expected
and even
budgeted for
Number of Requests to and by Foreign Regulators for Enforcement Assistance
1200
1000
800
600
400
200
0
2002
2003
2004
2005
Requests to Foreign Regulators
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Source: SEC Performance and Accountability Report 2007
30th October 2008
2006
2007 (Plan)
Requests from Foreign Regulators
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2007 (Actual)
SEC Enforcement
 SEC can compel testimony and documents on behalf of foreign securities
enforcement authorities regardless whether the facts suggest a violation of
US law
 SEC may provide foreign securities regulators with access to its non-public
investigative files
 Bilateral MOU’s with more than 30 countries
 SEC makes approximately 500 requests for foreign assistance each year
and responds to as many from foreign regulators
 SEC has recently stated global enforcement efforts will increase together
with agreements to facilitate sharing of information between regulators
across borders
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Emerging D&O Issues
 Subprime
 Foreign Corrupt Practices Act
 Litigation Funding
 Environmental/ Climate Change
 Enhanced protection for Directors & Officers
– Credit wrap
– A Side DIC cover
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What to Expect at Renewal?
 Selected rate reductions on specific accounts with preferred risk profile
 Policy Wordings will continue to reflect the broad cover that is generally
available
 Insurers will request confirmation about exposure to Sub-prime and other
related issues
 Consider whether or not local policies are required and review what insurers
are offering
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Renewal Checklist
 Start process early: work with broker to prepare optimal risk profile to
present to markets
 Check insurers on programme meet your security requirements
 Investigate insurer downgrade options during the policy year
 Meet insurers at least 2-3 months before renewal
 Check cover applies to your needs (claims language, mid term reporting
requirements, excess form language)
 Review limit adequacy for your D&O’s and Balance Sheet
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Concluding Comments
 Directors of international companies are operating in an ever more
regulated and potentially litigious environment
 D&O policies of the future will need to respond to several different legal
environments
 Directors of companies will also need to consider the increasing
international cooperation between regulators
 Whilst there has been an increase in claims activity and stock exchange
volatility, it is expected that the soft market will continue into 2009/ 2010
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QUESTIONS?
David Purdy
FINEX
Tel +44 (0)20 3124 6328
[email protected]
Willis Limited, The Willis Building
51 Lime Street, London EC3M 7DQ
www.willis.com
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APPENDIX 1:
Litigation Funding
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Litigation Funding
 Litigation Funding companies are commercial entities that contract with one or more
potential litigants – The company pays the costs of the litigation and accepts the risk
of paying the other party’s costs if the case fails. In return , if the case succeeds the
company is paid a share of the proceeds anywhere from 25% - 50% ( according to IM
Litigation Funding)
 Whilst Litigation funding is not new, the involvement of hedge funds and professional
litigation funders has raised concerns that this could fuel a boom in class actions.
 Specialist firms acting as “brokers” are on the increase and seem to have no problem
in sourcing the funds necessary to mount litigation
 MKM Longboat, a hedge fund has diversified and created a pool to invest in litigation
 In June 2007 there was a report by the Civil Justice Council welcoming the concept of
funding so long as it is properly regulated . The key concerns being compulsory
disclosure of funding details and lawyers independence from the funders – the debate
on transparency and the need for controls continues
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APPENDIX 2:
Environmental/ Climate
Change
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Environmental/ Climate Change:
Potential D&O Exposures
 Global warming is an increasingly important topic for public debate
 Directors seem to have evaded being in the sights of plaintiff lawyers,
regulators and environmental activists on global warming issues
 Public companies should all be evaluating whether climate change is
reasonably likely to have a material impact on future earnings
 Whilst it is highly unlikely that third party claims, relating to climate change,
against directors will succeed. There have however, been several significant
third party claims against companies e.g. American Electric Power ( USD
4.6bn)
 Shareholders of companies, who have suffered losses, are a more likely
source of claims in the form of derivative claims against directors for breach
of fiduciary duty to the company with respect to climate issues
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Environmental / Climate Change:
Potential D & O Exposures

Regulators could also be a source of potential claims against directors. In Sept 2007 a petition was filed
with the SEC for “Interpretive Guidance on Climate Risk Disclosure”

In the same month the New York Attorney General sent subpoenas to five electricity utility companies
stating they had not adequately disclosed to their shareholders the financial risks relating to their
greenhouse emissions

Directors per se have not been targeted but the regulators have focused on a classic D&O exposure that of
material information to investors

Current D&O polices are not likely to afford much comfort to D&O’s. The Pollution Exclusion would apply to
any discharge or release of air emissions or contaminants. There are however, carve outs to the exclusion
where directors may not be indemnified by the company. There are also carve outs for security claims

D&O policies also have Bodily/ Injury and Property Damage Exclusions. So other Climate change claims
will have possible coverage issues – depending on the language of the exclusion there may however be
protection for shareholder derivative actions or securities class actions

A way around the Pollution/ Bodily Injury exclusion is for directors to purchase a Side A DIC cover with no
pollution exclusion and with the Bodily Injury exclusion not applying to a pollution claim .
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APPENDIX 3:
A selection of Cases
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CASE STUDY 1:
Advancement of Defence
Costs
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Advancement of Defence Costs
 D&O policies generally indemnify directors for their legal
liability and defence costs
 However, the fact that a policy will eventually pay
defence costs is of little comfort to those directors who
need the money up front
 Most policies contain an advancement of costs clause.
Policies also contain exclusions for fraud and dishonesty
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Advancement of Defence Costs
Wilkie v Gordian Runoff, Australia
 The High Court held that the insurer should pay a director’s costs until such
time if at all that he is found guilty of the sort of fraudulent conduct that
would disentitle him to the cover. In short, the insurer could not rely on the
exclusion unless or until the accused admitted guilt or a court reached a
guilty finding. Then the insurer could claw back the monies paid.
Rich v CGU Insurance Limited, Australia
 The majority of the High Court rescinded leave to reconsider the NSW Court
of Appeal finding that the D&O policy gave the insurer discretion not to
indemnify an insured suspected of fraud or other inappropriate behaviour.
In doing so the court basically left as valid a Court of Appeal decision that
produced the opposite result of the High Court’s ruling in Wilkie. However,
in Rich the policy provided that the advancement of defence costs was
discretionary and therefore, because of the particular wording, an allegation
of fraud was enough to allow the insurer to refuse to advance defence
costs.
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Advancement of Defence Costs (cont)
 The key message from these two decisions is:
– If a policy provides that an insurer cannot rely on the fraud and dishonesty
exclusion until there is an admission or finding of guilt AND the policy also
provides that the defence costs must be advanced, insurers will almost certainly
have no choice but to pay up-front.
– However, if the policy contains a discretion about whether or not to advance
these costs, up-front payments may not be obligatory
(Thanks to Peter Mann Partner of Clayton Utz Sydney)
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Advancement of Defence Costs (cont)
Refco case in Southern District New York
 An appeal hearing from a bankruptcy court ruling addressed the question
whether an Excess Insurer could withhold advancement of defence costs
based on its determination that an exclusion in its policy precluded
coverage
 The primary wording upon which the excess carrier followed stated that “the
Insurer will pay covered Defence Costs on an as-incurred basis. If it is
finally determined that any Defence Costs paid by the Insurer are not
covered by this Policy the Insured’s agree to repay such non covered
Defence Costs to the Insurer”
 The excess carrier contended it did not have to advance defence costs,
relying upon the word “covered” in the advancement provision of the
primary wording, thus qualifying the type of defence costs it would agree to
pay on an incurred basis – the excess carrier’s contention was that its
policy’s Conduct Exclusion unlike the primary wording, does not have an
adjudication requirement
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Advancement of Defence Costs (cont)
 The insurer argued that because the conduct exclusions in its policy have
no adjudication requirement, “prior to a court determination, the insurer, has
the unilateral right to determine whether defence costs are covered” –
insurer determined that the insured’s claims were precluded under its policy
 The judge noted that the insurers position placed undue emphasis on the
word “covered” and that the word’s inclusion in the advancement provisions
can “hardly be said to make an unambiguous change in the provision’s
literal meaning and seems, at best, an unusual way to effectuate a
fundamental change in the parties’ expectations”
 The court found the wording to be ambiguous and interpreted the provision
in favour of the insureds
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Advancement of Defence Costs (cont)
 This case highlights the importance of including an adjudication provision
in the conduct exclusion because in its absence the insurer might contend
that it has the unilateral right to determine coverage and withhold policy
benefits
 (Extracts taken from the D&O Diary 16th July 2008 published by Kevin M.
LaCroix)
 The other key point is where excess insurers contain terms and conditions
(especially exclusions) not contained in the underlying, this causes all sorts
of problems.
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CASE STUDY 2:
Adequate Limits of
Indemnity
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Average Settlement Value ($m)
1st January 1996 – July 2008
Average Settlement Value ($m) All Cases
$90
$80
$82
$76
$70
$60
Average $45.4
$50
$45
$40
$32
$30
$31
Average $17.1
$20
$22
$24
$21
$17
$10
$9
$9
1996
1997
$12
$12
1998
1999
$0
Willis Amsterdam Seminar
Source: Nera Economic Consulting, July 2008
2000
2001
2002
2003
2004
30th October 2008
2005
2006
2007
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2008
Adequate Limits of Indemnity
Just For Feet case
 The Limit was exhausted by shareholder class action litigation – Court
filings show only USD 100,000 of insurance was left for the outside directors
after the preceding shareholders’ securities actions settled for USD 24.5m
– What is also interesting is that the outside directors paid out of pocket payments
totalling some USD 40m the settle the trustees case against them
US v Stockman
 17 months after the indictment there is still no trial date – the D&O policy
has been exhausted – there were some 12.5 million documents and 30
lawyers reviewing them. Thus far they have only completed examining a
third of the total
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Adequate Limits of Indemnity (cont)
What is important about these cases?
 Defence costs are expensive and it is not just in the USA. The more
complex the case the more expensive it will be
 The definition of Insured Person has broadened considerably, many more
“insureds” now have access to the policy
 The D&O market has gone through and continues to remain in one of the
“softest” cycles ever. Broad cover and competitive premiums mean
companies and their Boards have no excuse for not seriously thinking about
purchasing additional coverage
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Adequate Limits of Indemnity (cont)
 Broader cover means there is also the potential for more claims (and more
complex claims) which are likely to be covered than in the past. Hence the
need for buyers of D&O cover to be thinking about purchasing higher.
Stockman is an example of the complexities and problems that can arise
 Has Excess Side A DIC coverage been contemplated and purchased? The
Just For Feet case shows how much directors may have to pay out of their
own pockets in order to settle
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CASE STUDY 3:
Policy Interpretation –
Conduct Exclusion
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Policy Interpretation – Conduct Exclusion
AT & T v Clarendon America Ins. Co.
 Coverage dispute arose out of stockholder litigation brought against several
AT &T directors alleging false and misleading statements. The action settled
during trial with AT & T agreeing to pay USD 100m to the plaintiffs. National
Union AT & T’s excess carrier denied coverage
 The issue before the Delaware Superior Court was whether National Union
could deny coverage based on the policy’s fraud exclusion. AT & T argued
that the fraud exclusion requires an adjudication and does not apply to
settlements
 National Union’s fraud exclusion stated they were not obligated to pay any
claim “brought about or contributed to in fact by any deliberate dishonest,
fraudulent or criminal act or omission or any personal profit or advantage
gained by any of the directors and officers to which they were not legally
entitled and providing any such finding is material to the cause of action so
adjudicated”
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Policy Interpretation - Conduct Exclusion (cont)
 The Superior Court found:
– New York law applied to the D&O policy and held that the fraud exclusion did not
bar coverage for dishonest, fraudulent or criminal acts or omissions unless there
was a finding that such acts occurred and such finding was material to the cause
of action being adjudicated
– Since the litigation settled there was no finding and a settlement is a settlement
not an adjudication
– National Union could not rely on the exclusion
 The importance of this case is that special attention needs to be paid to the
language of the policy during negotiations
 There seems to be a tendency in large claims, that insurers would prefer to
seek the Court’s opinion in instances where there are potential coverage
issues rather than find an early resolution
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CASE STUDY 4:
Policy Interpretation –
Non-Disclosure
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Policy Interpretation - Non Disclosure
 Known circumstance exclusions are typically found in
professional indemnity and directors and officers
insurance policies which are claims made policies
 They exclude cover for claims where the insured knew of
circumstances, before the inception of the policy, that
either the insured knew or a reasonable person in the
insured’s position should have known, had the potential
to lead to a claim
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Policy Interpretation - Non Disclosure (cont)
CGU Insurance Ltd v Porthouse, Australia
 Section 21 of the Insurance Contracts Act 1984 effectively provides that the insured
has a duty to disclose to the insurer, before entering into an insurance contract, every
matter that the insured knows or a reasonable person in the circumstances of the
insured could be expected to know , to be a matter relevant to the decision of the
insurer as to whether to accept the risk and if so, on what terms
 Exclusion 6.1 of the CGU policy effectively excluded cover for claims directly or
indirectly based upon known claims and known circumstances
 The High Court of Australia unanimously allowed CGU’s appeal and held they were
entitled to rely upon Exclusion 6.1 to deny indemnity to Porthouse
 The decision provides clarity on the interpretation of known circumstances exclusions
for underwriters of P I and D&O policies in the Australian Market – whilst the
wordings may differ they will be interpreted by reference to an objective standard and
determined as a question of fact independently of an insured’s idiosyncrasies or state
of mind. Further, the Court will apply where the hypothetical reasonable person with
insured’s knowledge would conclude that an allegation or a claim was a real
possibility
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Policy Interpretation - Non Disclosure (cont)
Martin John Green in his capacity as Liquidator of Arimco Mining Pty Ltd (in
Liquidation) v CGU insurance Limited & Ors
 Another non disclosure decision just after Porthouse decision demonstrates the
need for companies to disclose matters relevant to the risk of insolvency
 Court reduced CGU’s liability to nil as a result of Arimco’s non disclosure
 The claim against the directors was resolved however, the liquidators pursued the
claim against CGU in respect of debts totalling more than A$ 21m incurred between
1st February and 14th March 1999
 In defence to the claim CGU asserted that the directors failed to disclose a range of
matters regarding the financial position of Arimco
 CGU called evidence that it would have included an Insolvency Exclusion if it had
been fully appraised of the true financial position of the ARL Group
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Policy Interpretation - Non Disclosure (cont)
 This case is useful because the judge, His Honour Justice Einstein referred
to director’s obligations of disclosure under section 21 of the Insurance
Contracts Act
– Did the Director know of the matter?
– If so, did the directors know that the issue was a matter relevant to the decision
of the insurer whether to accept the risk and if so on what terms?
– If they did not, would a reasonable person in these circumstances be expected to
know the issue was so relevant?
– Even if the matters ought to have been disclosed or there had been a
misrepresentation, would the insurer have issued the policy in the way that it did
in any event?
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Policy Interpretation - Non Disclosure (cont)
 His Honour found that the Annual Report did not reflect the company’s
position in December 1998, despite the insured’s representations to CGU to
the contrary as there had been significant adverse changes to operations of
the company
 This case is important because:
– It highlights the danger of not fully and truthfully disclosing information to insurers
– It highlights the need for the insured to notify the insurer of any material changes
to its financial position up to the inception of the policy and not to simply rely
upon Annual Reports
 The case also involved extensive evidence from CGU as to what would
have transpired had it been made aware of Arimco’s financial position and
the need for insurers to be able support their assertions that they would
have insisted upon an insolvency exclusion if full disclosure had been made
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What does this selection of recent cases tell
us?
 Despite the new and significantly enhanced wordings many of the same
issues keep re-appearing
 Insureds and Insurers are far more ready to go to court to sort contentious
issues out
 The cost of going to court is seriously expensive
 Still have situations where insureds have inadequate limits of indemnity
 There is a need to check the policies during renewal negotiations
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