Between a rock and a hard market: Navigating the turbulent D&O insurance waters in the wake of September 11.

AuthorWeiss, Stephen J.
PositionD&O Insurance Update - Directors' and officers' liability insurance

MONTHS BEFORE last year's terrorist attacks, the market for D&O liability insurance was changing from a buyer's to a seller's market. The attacks and the havoc they wreaked upon insurers fueled a further hardening of this market. But even in today's market, there are steps you can take to increase the odds of getting the D&O coverage you want.

What You Can Do to Soften the Blow of a Hard Market: First, don't panic, even if you get a letter from your D&O insurer a few months before your policy expires stating that it will not renew the policy. A "nonrenewal" letter can be less ominous than its name suggests. In many instances, the insurer is not terminating its relationship with your company; it is simply giving you the advance notice legally required of an insurer that decides not to renew its policy or to materially restrict coverage on renewal. This letter protects the insurer's options. There's no question that you will face higher premiums, which is the bad news. But this is also good news in a way. Surging premium rates have attracted new capital to the insurance markets. This means insurers have underwriting capacity, and they need to put this capital to work.

Second, explore new territory. For example, it might be a good move for a financially solid company to solicit quotes with ultrahigh retentions (deductibles) to reduce a sky-high premium quote. A client recently did exactly this. It purchased a $25 million primary policy with a $25 million retention! This corporation will have to bear the first $25 million of covered losses before the insurer pays out dollar one. In essence, the insured corporation became the primary insurer and the nominal primary insurer became the de facto excess insurer. Because premiums for excess insurance are significantly lower than for primary insurance, the client's insurance tab was significantly reduced.

Third, continue to negotiate policy terms. There is still give and take in the market. However, be sure to allow extra time -- I recommend three months -- for your negotiations. This will allow time for your broker to find other insurers if negotiations with one insurer bog down.

Specific Negotiating Points: Some insurers are seeking to reintroduce co-insurance into their new policies, a provision they dropped doing during the soft markets of the late 1990s. What is co-insurance? It is a way for insurance companies to shift additional risk to you and to get you invested in the effort to curb...

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