Insurers face $6bn bill for claims against US financial bosses

Directors' liability payouts are booming across the pond - will premiums have to rise over here?

Last Updated: 31 Aug 2010

Two pieces of new research both point to a sharp rise in claims on the Director’s and Officer’s insurance of US financial firms last year. As disgruntled shareholders turn to litigation to try and recover some of their huge losses, insurance expert Advisen warns that the final bill for insurers is likely to exceed $6bn. It could be as high as $10bn if the cost of compensation for errors and omissions is included. 

Advisen suggests that, while the cost of cover for D&O protection across all sectors of the US economy actually fell by 2-3% last year, premiums in the crisis-hit financial services sector soared by over 30%. Insurers also cut back heavily on high-risk policies, leaving some firms unable to obtain cover at any price.

Meanwhile, a survey of US class action lawsuits produced jointly by Towers Perrin and Cornerstone Research found that 210 securities suits – those involving claims against a firm’s directors – were filed last year, up 19% on 2007. What’s more, almost half of all class action litigation in the States last year involved financial services companies. At least it will give all those corporate lawyers something to do until the M&A market picks up again.

For those of you here in rather less-litigious Blighty who are wondering what all the fuss is about, D&O insurance is essentially the final bulwark between the directors of a company and the poorhouse, should things ever go totally pear-shaped.  If your shareholders, employees or customers ever decide to come after you personally through the courts for making a complete horlicks of running the show, it’s the D&O policy that in theory enables you to fight them without having to flog all your worldly goods and chattels to pay the bill.

Of course companies buy this sort of cover in the fervent hope that they will never have to use it, so attention to the small print may not be quite as close as it could. When things do go horribly wrong, as they have in financial services in the last year, many firms discover to their cost that policies are extremely complex, with more loopholes in them than, as Baldrick might say, a very loopy thing indeed.

Then there’s the small matter that potential litigants may well have shares in more than one struggling institution, and will make the decision on which board to sue on the pragmatic if not entirely even-handed basis of which has the juiciest D&O cover. So there is even an argument that, in times like these when so many firms are in the same boat, you are better off without insurance in the first place.  It’s quite a poser, you must admit.

Still, the burning question for British insurers and their customers must be whether the same thing will happen over here. Resort to the law is – thankfully – still a lot less common over here, but even so, global insurers taking a hit in America are quite likely to hike prices across the board. You have been warned...

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