D&O: A Brief History
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.