ams: While you might not think that the Sarbarnes-Oxley Act should result in increased D&O insurance coverage, you are not an insurance company who is worried about setting rates to cover potentially increased liability, or a class action plaintiffs' lawyer who is looking for any excuse to sue. Here is one of several articles I have read that covers the subject.
Sarbanes-Oxley’s Impact On D&O Insurance
Abstracted from: The Changing State Of D&O Insurance
By: William Cotter Jr., National Union Fire Insurance Co., Pittsburgh, PA
Corporate Governance Advisor - January/February 2003, Pgs. 8-16
Insurance critical as litigation gathers steam. The corporate malfeasance that has slammed the market also impacts innocent corporate executives and directors, according to William Cotter Jr. Their personal assets have been put at risk by the rising tide of securities litigation. The number of cases charging securities fraud, particularly claims arising from accounting problems, multiplied in the mid-1990s. In this climate, protecting managers’ personal assets with D&O liability insurance is critical for any company hoping to attract qualified persons to serve on the board.
Reform and reality. The Private Securities Litigation Reform Act of 1995 seemed an antidote for a tort system run amok with securities litigation. Corporate America and the D&O insurers assumed that the law would benefit everyone, but, the author asserts, they could not have been more wrong. Securities litigation exploded in the late Nineties following a record rise in the earnings restatements. Once-reasonable premiums for the insurance skyrocketed, as settlements exploded. From 1996 to 2001, the value of settlements increased nearly 150%, some reaching billions. The D&O insurance sector fractured, some carriers becoming insolvent while others suffered credit-rating downgrades. Reinsures were subsidizing the policies for new entrants into the industry, and specialty items such as entity coverage proved underpriced, leaving directors and officers vulnerable.
Sarbanes-Oxley affects the industry. As accounting and disclosure requirements became more complex, the SEC stepped up its rulemaking and enforcement activities. Enter the Sarbanes-Oxley Act of 2002. While some of its mandates, such as extending the statue of limitations for securities litigation to five years, will increase the potential for liability, others clearly outline the duties and limitations of directors and officers, providing guidelines for avoiding misbehavior. With all of these factors at work, suggests the author, reform is needed within the insurance industry to make certain that D&O policies offer adequate protection to corporate directors. Returning stability to the industry will require regulating entity coverage in D&O contracts and pricing policies in line with the potential risks assumed. The latter, though realistic, will result in a dramatic increase in rates.
Look for sound finances. Not all insurers are created equal, and corporations should be aware of the carrier’s financial resources. Those with shaky finances may be unable to pay future claims. Deep financial soundness is especially important because most claims involving directors and officers take three to four years to resolve. The article outlines several solutions, among which is risk-sharing among companies. Adding excess coverage in addition to traditional D&O insurance would add a further layer of protection. Presenting a united front of insurer, insured, corporate law firm, and insurance broker to the plaintiffs’ bar would strengthen the at-risk corporation’s settlement strategy and lessen the likelihood of costly litigation.
Abstracted from Corporate Governance Advisor, published by Aspen Publishers, 1185 Avenue of the Americas, New York, NY 10036. For information, call Customer Care at (800) 234-1660; or visit www.aspenpublishers.com.
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