D&O insurance: a pressure check: as companies caught 'financial flu,' liability risk rose. A few educated guesses about what's ahead.

• Author: Rosenberg, Evan
• Position: D&O INSURANCE

IF YOU, AS A BOARD DIRECTOR, had been stranded on a desert island for the past year, and you were rescued today, you might not recognize the financial world to which you returned. For one thing, your chances of being hit with a directors and officers (D&O) liability lawsuit have probably increased.

What happened? Well, while you were gone ...

* A credit crisis hit the U.S. financial markets. A sudden rise in subprime mortgage foreclosures exposed flaws in aggressive mortgage financing practices and negatively impacted the banking, real estate, and homebuilding sectors.

* The credit crisis spread to additional sectors. The U.S. economy caught a "financial flu" as the subprime mortgage virus spread through dozens of business sectors.

* The crisis went global. Repercussions spread far outside the U.S. as foreign financial institutions the world over caught the financial flu. Effective treatments (let alone a cure) proved elusive as the crisis grew in complexity.

* Global stock markets responded with volatility. As the financial flu spread and the U.S. economy faltered, stock prices fell. At a time when corporations had been repairing their reputations with improved financial disclosure and controls, many seemed to be blindsided by the economic crisis.

* Securities lawsuits, which had seemingly stabilized, abruptly rose to 'normal' levels. Cornerstone Research reported 100 securities class action filings in the second half of 2007, reversing a trend of eight consecutive quarters with below-average litigation activity. Driven by stock market volatility, the increase in D&O liability lawsuits extended well beyond the financial sector.

* Meanwhile, many countries enacted securities legislation and promulgated new rules and regulations, potentially broadening D&O liability exposures for multinational corporations. D&O liability insurance policies offering worldwide coverage are now being constructed in conjunction with locally admitted D&O policies outside the home country. This furthers the scope of coverage...