Elusive D&O coverage forces financial institutions to go bare

Elusive D&O coverage forces financial institutions to go bare

January 27, 2009 By David Dankwa – SNL Financial News


As financial institutions find it exceedingly difficult to obtain adequate levels of liability insurance for their directors and officers, many are increasingly having to choose between operating completely naked — without any insurance protection — or barely clothed at all.

If a bank is fortunate enough to have D&O coverage, chances are it also experienced a sharp increase in premiums, said Karen Kutger of Professional Risk Solutions, a wholesale insurance broker specializing in executive and professional liability insurance products.

“They’re reducing the coverage, [which means] they’re either taking away some enhancements that you had in prior years or they’re reducing the capacity they have on each and every account. It’s almost impossible to find additional capacity,” Kutger told SNL.

The panic in the D&O marketplace is a reflection of the turmoil in the financial markets and widespread concerns that potentially, billions of dollars of insured losses could arise from the credit crisis and its attendant bankruptcies and litigation.

Industry sources estimate that D&O and errors and omissions insurance providers could see combined claims of about $10 billion before the dust settles, Benny Yuen, a senior actuarial adviser with Ernst & Young, told SNL. But as he also stressed, that figure is only a rough guess.

“The current market condition is so fluid it really makes the estimate almost like a moving target,” Yuen said.

According to Yuen, massive D&O claims are expected from the slew of securities class-action lawsuits filed against financial institutions. To a lesser degree, errors and omissions insurers are bracing for claims against parties, such as brokers and lenders, that have had any involvement in mortgage transactions.

“We’re already seeing an increased number of lawsuits against those professionals,” he said.

Recently, a Stanford Law School and Cornerstone Research study showed that the level of federal securities class-action activity during the last year was at its highest since 2004, dominated by actions taken against firms in the financial services sector. As the researchers found, almost half of the litigation activity, 103 securities class-action complaints, involved firms in the financial services sector. The report also noted that maximum dollar losses attributable to 2008 claims jumped to $856 billion, a 27% increase from comparable 2007 data.

The report also makes no mention of another unfolding storm: the Bernie Madoff scandal. The case, involving an alleged Ponzi scheme that allegedly caused investors to lose as much as $50 billion, is casting a large shadow over the D&O marketplace, said Kutger.

“Everybody is reviewing their exposure to Bernie Madoff, [and] at this point, I’m not sure the carriers really have their arms around what kind of exposure they have,” she said. “Not only do they have exposure on the hedge funds and the investment advisors, they also have exposure on all the nonprofits that were invested in the Madoff funds. It’s really going to take a while to filter through the system in terms of each true exposure to the D&O marketplace.”

Claims from financial institutions that have gone belly-up, such as those related to investment banks Bear Stearns Cos. LLC and Lehman Brothers Holdings Inc., are also expected to significantly increase insurers’ overall exposure. Since Lehman filed for bankruptcy, its insurer can no longer expect the company to pay its share of losses, known as a retention, and as such must begin to pay all claims from the first dollar.

“These retentions usually start at $250,000,” Kutger said.

The challenges in the D&O marketplace have created a body of insureds unable to afford coverage and those that simply cannot get the coverage even if they could afford it, said Kutger, who argues that this could further slow down the economy. In fact, for many financial institutions, having D&O insurance has traditionally made a big difference on the caliber of professionals they attract to their board.

“If they can’t get coverage, nobody would want to sit on that board because no one wants to put themselves in that type of situation,” she said.

Leave Yours +

No Comments

Leave a Reply

You must be logged in to post a comment.