D&O insurance: not buyer friendly.

• Author: Wollner, Kenneth S.
• Position: Directors and Officers - Chairman's Agenda: Balancing Shareholder Interests - Column

D&O Insurance: Not Buyer Friendly

Corporate executives face increasing exposure to costly litigation about the quality of their performance. Corporations must protect their key managers from unwarranted personal liability threats. Directors and officers must take note of their exposure and move to cover their flanks.

Since the early 1970s, directors and officers liability coverage has been a fixture in the insurance portfolio of most large corporations. But, while the demand for such insurance has been consistent, the supply of insurance has not been stable. The most severe insurance market contraction occurred between 1984 and 1987.

Another shift in insurance market conditions has taken hold - again, a shift away from a buyer-friendly market. Throughout 1990, increases in premium have been the rule. Trends clearly point to more difficulty for insurance consumers.

How will the insurance market changes impact your company? And what steps can be taken to counteract adverse insurance market movements? These questions will be addressed in the following advisory.

Your Exposure Profile

As is true of any business, the prices charged by insurance companies will ultimately be driven by costs. Analysis of the 852 lawsuits brought against directors and officers of the 1,442 organizations participating in the 1990 Wyatt Directors and Officers Liability Survey shows that the overall frequency of claims is increasing at a compounded annual rate of 10%. Many claims that were of minimal concern in yesterday's benign economic period have, or will, become serious as the business environment deteriorates. Underwriters will continue to adjust by increasing premiums, restricting coverage, and eliminating unprofitable business.

The impact of the insurance market shift will be selective because loss trends vary appreciably by characteristics of the company. For example, while growth in claims has been severe for banks and other highly regulated companies, there has been a leveling off of claims against directors and officers of small and private corporations.

Significant changes have occurred in the types of claims being asserted. The 1987, 1988, and 1989 Wyatt survey participants reported that about one-third of the claims brought by shareholders involved tender offer, merger, or acquisition activity. A reduction in the incidence of merger and acquisition claims was recorded in the 1990 Wyatt survey.

But the decrease has been more than offset by challenges to...