Risk Insider: Peter Taffae

D&O: A Brief History

By: | August 15, 2014 • 2 min read
Peter R. Taffae, is managing director of ExecutivePerils, a national wholesale broker. He can be reached at [email protected]

A lot has changed in D&O insurance in the 30-plus years I have been brokering, underwriting and settling claims.

For my first R&I post, I thought a look back would be a good base for future updates on this fascinating and ever-changing insurance coverage.

Prior to the 1980’s, the insurance industry issued two policies for each insured. One was personal coverage, later to become known as Side A, and the second was corporate reimbursement. That coverage later became known as Side B.

Many of the exclusions (but not all), reporting provisions, terms, etc. were on both policies and with rare exceptions shared the same limit of liability. Private companies rarely acquired the coverages but that was because, in my opinion, the litigation landscape then was far less active and costly.

The policies, compared to today’s world, were amazingly broad with few exclusions. This was due to a general lack of litigation frequency and severity.

The intent then, and arguably today among experts, is to protect senior management and the insured’s board against litigation arising from their capacity as a director and/or officer, from third parties. Today’s policies can include Entity Coverage (see below) also known as “Side C,” which is employment practices, etc.

Most of the D&O policy evolution can be attributed to claims experience and an aggressive zeal to compete with broadening “coverage.”  By trying to be “state of the art” (or as some say: throwing in the kitchen sink) fashioning of the coverage has had the opposite effect — reduced coverage.

Let me explain. In 1992, Nordstrom brought litigation against Chubb, alleging that the D&O policy should cover securities litigation brought against the directors and officers and Nordstrom the legal entity.

Nordstrom won the case, and within months the insurance industry began offering, for additional premium, a predetermined “allocation” when a similar scenario such as Nordstrom’s occurred.

It was not long after this that the industry waived any additional premium and any allocation (initially 50/50 or 80/20). This was the most significant change in D&O history.

By trying to be “state of the art” (or as some say: throwing in the kitchen sink) fashioning of the coverage has had the opposite effect — reduced coverage.

By adding SEC entity (Side C) the value of D&O insurance claims experience more than quadrupled. However, the buying community and its advisors neglected to recognize the deficiency it caused: dilution of limit.

Remember, the primary reason to secure D&O insurance is to protect directors and officers when they cannot rely on corporate indemnification.

Policies are written with aggregate limits of liability with the addition of Side C, the most critical protection (Side A) was diluted. An easy fix—  I am sure many are thinking— is the purchase of more limits; this did not occur in all but rare circumstances and, I believe even today, most have lost sight of this.

The next article will address ways one can “fix” this weakness and other significant changes that have occurred that shape today’s D&O environment.

More from Risk & Insurance

More from Risk & Insurance

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]