What Keeps D&Os Awake at Night? Coverage Concerns Rise

There are numerous emerging liability risks that may be keeping corporate directors and officers awake at night, which is why their D&O insurance protection is rising up their list of concerns.

“The worry of whether or not a D&O policy, or a company indemnification, will be able to respond to claims in all jurisdictions has risen up the agenda,” according to a survey conducted in the U.K. by Willis Towers Watson and the international law firm Allen & Overy.

“With directors and officers facing so much personal exposure – to the extent that it can be difficult for them to keep track of the laws that apply to them – it is not a surprise that D&O policy coverage and related company indemnities are becoming more of a focus of attention…,” stated the survey report, titled “Directors’ liability D&O: The changing face of personal exposure.”

Fifty-nine percent of survey participants ranked these policy worries as a top five concern.

“It was of particular concern to those working in public companies (60 percent) rather than private (41 percent)…,” the survey report stated.

Unsurprisingly, the report added, it was a greater concern for those companies doing the majority of their business outside the U.K. (where 69 percent considered it a significant D&O area, versus 35 percent in businesses operating predominantly in the U.K.).

Respondents identified their most significant policy coverage issues to be “clear and easy-to-follow policy terms,” which suggests that more needs to be done by the insurance industry to deliver this result, the report stated.

Drilling down into types of coverage issues, the survey revealed that respondents are concerned “about coverage for the cost of advice incurred at the early stages of an investigation, prior to any main hearing….”

Insurers generally do not normally cover the early stage of an investigation, “because they regard their coverage as being for claims and formal investigations,” the survey report stated.

“It also can prove tricky to distinguish between the costs of defending the entity and the costs of defending the individual before formal proceedings have been issued…,” the report stated, noting that insurers are not interested in covering company costs under a D&O policy.

However, the report showed, the costs of legal advice for individuals at the start of investigations can be substantial. With regulatory and enforcement so heavily focused on senior management, “this is a growing area of expense, particularly as matters become more and more complex and increasingly international.”

While new policies are now available that cover the early stages of investigations, “the limits of that cover need to be specific and delineated.”

Taking Control

Another major concern found by the survey relates to how claims will be controlled and settled, listed as a top five concern in the last three surveys that have been conducted by Allen & Overy and Willis Towers Watson. (This is the fourth D&O survey, initiated by the two companies in 2011).

“This can be a vital issue in particular for directors or officers who find themselves in a tight spot and want to have as much control over their defense as possible,” the report explained.

If insurers are fully in control, then their motivation and desired outcome for settling a claim may be different from the director and interests may not be aligned, it added.

“The degree to which an insurer can run a case remains an issue, and different policies are drafted in their own unique ways,” the report stated.

More than 125 corporate directors, risk officers and compliance executives in the U.K. participated in the survey.