Administration August 6, 2003

Shareholder, Employment Suits Push D&O Premiums Higher

June 20, 2002 (PLANSPONSOR.com) - Employers are struggling with yet another rising cost of litigation - a 29% increase in directors and officers liability (D&O) premiums last year, according to a new survey - with employee suits on the rise.

Reported by

Nevin E. Adams

That increase stands in sharp contrast to the 11% average increase reported for 2000 by Tillinghast – Towers Perrin’s Directors and Officers Liability Survey – and marked a reversal of five years of significant premium decreases, according to the study.

Nearly one in five US survey respondents reported one or more claims against their directors or officers over the past decade. And the survey also noted a continuing increase in the claims filed by employees.

Discrimination in employment was again cited as the most frequent D&O claim issue, accounting for 46.1% of employee claims and 26.8% of claims overall.

Disclosure Closures

The 2001 survey noted that shareholder litigation, coupled with growing concerns about high-profile bankruptcies and the quality of corporate accounting and financial reporting, have generated the dramatic increase in D&O liability insurance premiums. As a result, technology and biotechnology sectors, firms with a recent IPO and those experiencing financial distress were hit especially hard by premium increases.

In fact, D&O claims were more than twice as likely against companies with a history of merger and acquisition activity, and publicly traded companies were more than twice as likely to experience a claim as their private counterparts.

The average indemnity paid to shareholder claimants was at an all-time high of $17.18 million, nearly double the $9.62 million average from the prior year. Shareholder suits were most commonly related to financial disclosure issues, representing 38.8% of shareholder claims and 9.2% of claims overall.

Covered up

Some 97% all of the American survey respondents carried some form of D&O coverage, with the average amount of coverage $20.1 million. Policy limits also increased for the seventh straight year, with 15% of US participants obtaining greater limits and less than 5% lowering limits.

The average indemnity payment among closed employee claims was $0.25 million, up slightly from $0.24 million last year. However, defense costs for closed claims overall increased to $0.54 million from $0.49 million in the 2000 survey – an increase that may well be related to the fact that nearly a third of all claims filed against US firms are class actions, which are typically expensive to defend and often result in very large payments, according to the study’s authors.

The survey, which included 2,130 North American participants, is the 24th in a series of studies on D&O liability claims and insurance purchasing patterns. The median asset size of the US respondents was $50 million and that of the Canadians, $500 million. Seventeen percent of the American respondents and 12% of the Canadians were nonprofits and governmental organizations; 55% of the American companies were publicly traded corporations versus 82% of the Canadian participants.

Forty-three percent of American respondents experienced a merger, acquisition or divestiture within the past five years while 63% of the Canadian companies experienced such restructuring.