Directors and Officers Liability Insurance
CANE Spring Meeting
April 2012
Bernie Horovitz
CEO XL Global Professional Insurance
© 2011, XL Group plc companies. All rights reserved.
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Directors and Officers Liability Insurance
Summary of Presentation
• Primer on Directors and Officers Liability Insurance
• Discussion of recent D&O trends
© 2011, XL Group plc companies. All rights reserved.
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Directors and Officers Liability Insurance
Purpose of D&O Insurance
• Indemnity provided under D&O
insurance allows companies
(entities) to attract qualified
directors and officers (insureds)
who will otherwise be reluctant to
work for the company because of
the risk of being sued for alleged
wrongful acts committed in their
capacity as directors and officers.
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Directors and Officers Liability Insurance
D&O Exposure for Publicly
Traded Companies
• Shareholders are main claimants.
• Most common drivers are:
• Misleading/Inadequate/erroneous/fraudulent
disclosure and financial reporting
• Earnings restatements, write offs
• Stock or Public offering of securities
• Bankruptcy
• Mergers, acquisitions and restructurings
• Regulatory Investigations
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Directors and Officers Liability Insurance
D&O Exposure for Private and Not for
Profit Companies
• Employment practices liability is the
main exposure for claim frequency
• Wrongful termination, discrimination,
harassment, breach of contract
• D&O claims drive severity
• Common D&O allegation are:
• Self-dealing and misuse of funds
• Restraint of trade and other anti-trust
related complaints
• Failure to fulfill fiduciary obligations
• Patent, copyrights, trademarks and other
intellectually property related disputes
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Directors and Officers Liability Insurance
Insuring Agreements in a typical D&O policy
• Side A, Direct Coverage
• Side B, Corporate Reimbursement Coverage
• Side C, Entity Coverage
• Recent Coverage Enhancements
 Investigative Costs Coverage
 Crisis Coverage
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Directors and Officers Liability Insurance
D&O Policy Exclusions
• Fraud and deliberate dishonesty
• Fines and Penalties
• Disgorgement
• Insured versus Insured
• Prior and Pending Litigation (burning
building exclusion)
• Pollution, bodily injury, property damage,
defamation and other claims not
considered D&O claims (eg assault and
battery)
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Directors and Officers Liability Insurance
• Fraud and Dishonesty Exclusion
• Stanford case is a good example of
exclusion
• Ponzi scheme with estimated investor
losses of $7 billion
• Stanford sued insurers to provide
coverage under D&O policy
• Convicted on 13 out of 14 charges of
fraudulent behavior at Stanford Financial
• Upon Stanford’s conviction, Insurers
denied coverage under D&O policy
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D&O Summary of Current Trends
• Frequency and Mix of SCA Filings
• Severity of SCA Filings
• Pricing
• Hot Topics:
 Dodd Frank Act
 Foreign Corrupt Practices Act (FCPA)
 Private D&O
 European Sovereign Debt
 Mergers and Acquisitions
 Chinese Companies
 Regulatory Investigations
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Public D&O Current Trends
Frequency of Federal SCA Litigation is flat
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Public D&O Current Trends
Type of SCA Claim Mix has changed significantly
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Public D&O Current Trends
Type of SCA Claim Mix has changed significantly
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Public D&O Current Trends
Average and Median size of SCA settlement decreased in 2011
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D&O Current Trends
Price Trends (Quarterly Index of D&O Pricing)
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D&O Current Trends
Subprime and Credit Crisis
• 40 Settlements in total as at early 2012
• Aggregate settlements: $4.4billion (Wachovia Bondholders $627m, Countrywide
Shareholders $625m, Merrill Lynch $475m, Lehman Brothers $417m)
• Average settlement: $110m1
• FDIC Failed Bank Lawsuits2
• 49 suits authorized against financial institutions with 23 filed so far
• Aggregate damage claims of at least $7.8 billion
• Bulk of lawsuits expected to be filed by year-end due to 3 year statute of limitation
1. Significant portion of settlements not covered by D&O
2. Statistics pulled from Kevin LaCroix D&O Diary
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Current Trends
Dodd-Frank Act (Enacted July 2010)
• Expected to increase D&O loss exposure
because:
• Act doubles the SEC’s budget
• Bounty provisions for whistleblowers
• Allows whistleblowers to be annonymous
• Requires “clawback” of incentive compensation to
D’s and O’s in the event of a restatement of financial
statements
• Allows SEC to seek penalties in administrative
proceedings
• Lowers standard of proof for “aiding and abetting”
securities fraud from “actual knowledge” to
“recklessness”
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Current Trends
Foreign Corrupt Practices Act (FCPA)
• SEC created a specialized unit in 2010 to
enhance enforcement of act.
• Enforcement actions and related follow-on
suits are expected to increase
significantly.
• 21 total cases from 1978 to 2004. 15
cases each for 2010 and 2011.
• Largest SEC settlements under FCPA
have all happened in recent years
 KBR/Halliburton
(2009)
$579m
 BAE (UK)
(2010)
$400m
 Snamprogetti
(2010)
$365m
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Current Trends
Private D&O
• EPL and Shareholder suits remain the 2 largest source of claims.
• EPL and Shareholder suits can be emotional and protracted.
• Claim frequency has increased in recent years due to economic conditions.
• EPL suits increase with increasing layoffs.
• Shareholder/Investor suits increase with company bankruptcies
• FCPA, employee piracy and shareholder related suits are increasing
• Financial results have been weak driven by low rates on line, expanding terms of
coverage and deteriorating loss trends
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Current Trends
European Sovereign Debt
• Has the potential to be a clash event in
the D&O arena.
• Exposure is not limited to only European
financial institutions because of counter
party risk faced by American financial
institutions.
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Predictions and Questions
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