Rising Insurance Costs II

There was a comprehensive article on the topic of D&O insurance a few weeks ago in The Journal News (which covers Westchester, Rockland, and Putnam counties in N.Y.). The author finds that both insurers and companies are struggling in the current environment. While insurers have been forced to pay out huge claims over the past few years due to corporate fraud and understandably want to limit their risk, the rise in premiums hits companies just as they are trying to weather the weak economy. Annual premiums of $1 million or more have become commonplace, with large cap companies often paying much more.

Quote of note (1): “Companies in industries that have gained dubious publicity for corporate fraud, such as securities, health care, technology and telecommunications, are getting hit the hardest, says Pam Sedmak, a partner in Sedmak & Co., and executive search firm in Cleveland. Sedmak says executives that her firm recruits for clients now routinely ask for details on the coverage the company’s insurance will offer them if they’re named as defendants in a lawsuit or investigation by the U.S. Securities and Exchange Commission or other agency. ‘They’re putting their personal wealth at stake, not to mention their freedom,’ she says of those who dare serve as a top executive or director of a public company.”

Quote of note (2): “Besides the lawsuits that have already been filed, the uncertainty about how much liability directors and officers will have in future claims is also driving premiums up, says attorney Lance Kimmel, an author of the Foley & Lardner study. That’s because it remains to be seen how courts rule on claims brought against officers and directors who are alleged to have violated the Sarbanes-Oxley law, which Congress passed last year to police corporate conduct.”

Quote of note (3): A insurance broker states that “she has seen companies go from policies that provided $10 million in coverage with a $100,000 deductible to policies that provide $5 million in coverage and carry a $200,000 deductible. Even with the inferior coverage, the new policy costs more, she says.”

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