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D&O consortium strengthens Lloyd's position in US

80 years after Lloyd’s pioneered directors and officers insurance in the US, Lloyd’s syndicates Beazley and Hiscox have joined forces to form a D&O consortium that is designed to enable the provision of higher limits of insurance to US clients faced with litigation risks.

Thu 27 Feb 2014

D&O insurance comes in different forms, protecting individual directors and officers for example in cases where they have been accused of committing a wrongful act and their company is either unwilling or unable to indemnify their litigation costs. D&O insurance cover can also provide balance sheet protection to the corporation in jurisdictions where indemnification is permitted.

Securities related lawsuits and enforcement actions are the most common source of D&O claims in the US, and have been running at a high level since the financial crisis.

Despite the number of new filings falling in 2013 in the US, the average settlement value for all types of lawsuits was the most in five years and nearly four times higher than 2012, according to a report from Advisen (D&O Claims Trends: 2013 Wrap-Up & Possibilities For 2014). The average settlement for all types of suits was $51.5m in 2013, up from $13.2m in 2012, the report said.

24% of new events in 2013 involved companies and their directors and officers in the financial services sector. Information technology was the second most active sector, with 15% of the events, followed by consumer discretionary and industrials both at 13%, the report noted.

Joining forces

By jointly participating on individual D&O policies, Beazley and Hiscox say they can offer alternative D&O structures to brokers and clients. Their capacity can be deployed in one tranche of up to $50m or, more likely, as two individual layers at different points within an insurance programme.

Neal Wilkinson, head of Beazley's Global Management Liability team, said that the consortium agreement strengthens the position of Lloyd's in the D&O marketplace. It also offers more choice to brokers who are looking for key markets to provide larger primary lines or participation on multiple layers within an insurance tower.

Brokers and larger clients are increasingly reviewing the relationships they have with insurers to establish more strategic relationships with fewer carriers.

The consortium arrangement puts Lloyd’s on a level playing field with the biggest D&O insurers in the US and in Bermuda.
Neal Wilkinson, Head of Beazley's Global Management Liability Team

Both Hiscox and Beazley will retain full underwriting discretion. However, where a risk falls within the appetite of both companies, they will jointly be able to write a larger line than each could individually commit to.

Wilkinson said that globalisation means US corporations can have complex exposures across many jurisdictions.

The focus [of claims activity] since the banking crisis has been on financial institutions, but other sectors, such as social media, are pushing the boundaries of regulation, increasing the potential for claims against such businesses and their management.
Neal Wilkinson, Head of Beazley's Global Management Liability Team

Advisen said in its recent report that the US Securities & Exchange Commission (SEC) appears poised to increase investigations thanks to the new whistleblower statutes under Dodd-Frank and through the implementation of new “Robocop” profiles which are designed to look for numerical anomalies and textual indicators of fraud. As a result, all indications point to the SEC being inundated with leads and financial fraud being the dominant topic.

Chris Warrior, D&O underwriter within Hiscox London Market, said the collaboration with Beazley is good news for brokers and their clients:

The agreement improves the choice and flexibility available for large or complex risks and means we can work together when our underwriting judgements align, enhancing our ability to provide solutions to brokers and their clients.
Chris Warrior, D&O Underwriter within Hiscox London Market
Hiscox has deployed a team of four senior underwriters to work alongside Beazley’s D&O team.

It means we have two teams travelling round the US presenting a complementary approach, bringing additional business to London.
Chris Warrior, D&O Underwriter within Hiscox London Market

80 years of D&O insurance

The first ever directors and officers liability insurance policy was written at Lloyd's in 1934 for Federated Department Stores, the retailer now known as Macy's, Inc.

After the stock market crash of 1929 in the US and the introduction of the Securities Act of 1933 plus the Securities and Exchange Act of 1934, company directors in the US realised that they could be exposed to significant personal liability for alleged misconduct.

At that time, corporations were not permitted to indemnify their directors for legal costs, or for judgments and settlements. This led to insurers developing what is now known as "Side A" directors & officers insurance coverage.

Legislation eventually permitted and broadened corporate indemnification in many states, but directors were still left with big gaps in protection that D&O insurance could fill. Growing recognition that corporate indemnification exposure was a potentially significant drain on corporate assets later led to the development of so-called "Side B" D&O policies for businesses - and eventually "Side C" was offered to cover direct corporate liability, especially in securities litigation.

Demand for D&O insurance in the US has grown for public as well as private companies and not-for-profit entities, in line with any increase in legal activity, for example during the 1974 recession. By the mid-Eighties, the introduction of new securities and antitrust laws, plus growth in class actions, greatly increased the personal liability and defence costs for US executives, making many think twice about taking a position in boardrooms.

To continue attracting and retaining competent directors and officers, more businesses began to purchase D&O liability insurance especially to protect their senior management from claims that exceeded the scope of their corporate indemnification or where the corporation was financially unable to indemnify them.

Lloyd's role as an innovative and open market has encouraged links with local new product expertise and new business development in the US.

Lloyd's has from early on also supported emerging US company underwriting markets by way of providing reinsurance and intermediary arrangements.
Bill Brown, Consultant to