Is Now a Subprime Time To Be in D&O?

Execs ponder Stoneridge, plaintiffs bar shakeups and market volatility at PLUS Symposium

Despite the calm, cool manner of the 1,300 well-coiffed underwriters and brokers in attendance, volatility was on the minds of most presenters at the Professional Liability Underwriters Society’s D&O Symposium.

“The first half of 2007 was slow from a claims frequency point of view,” said AIG Executive Liability President John Doyle, summing up the past year. “But then all of a sudden, the second half of the year changed that. It’s a little bit different for brokers and for insureds than for underwriters, but I think D&O is an inherently volatile class of business. Whether it is subprime, or options back-dating, all those issues point out the volatility of D&O.”

Doyle was on hand as one of four presenters on the “The State of the D&O Marketplace” panel during the D&O Symposium held by PLUS in early February in New York. The conference brought together industry bigwigs like W.R. Berkley founder William R. Berkley, outsiders like former SEC Chairman William H. Donaldson and a slew of industry insiders.

There’s no shortage of difficult, fast-approaching issues on the horizon for the D&O marketplace. The looming crisis of the subprime mortgage meltdown poses the risk of lawsuits — not to mention the possibility of an undetermined downward pull on balance sheets. There’s a major shakeup underway in the class action lawsuit industry, as high profile attorneys such as William Lerach and Richard “Dickie” Scruggs face jail terms for their roles in giving kickbacks and bribes.

Still, said Stephen J. Sills, chairman and CEO of Darwin Professional Underwriters Inc., volatility is all relative.

“It kind of depends on the class of business you’re writing,” he said. “Nonprofit organizations for instance, haven’t had that much difficulty, while some commercial classes — high tech for instance — have been more vulnerable to some exposures. I think there’s been micro volatility, but I would bet as an industry we’re far more ahead than behind of a length of time.”

Ralph Jones, chairman and CEO of Arch Insurance Group, said there are two types of volatility in the D&O arena. “Vertical” volatility, he said, is an exposure to suits against company leaders for a specific action — something like Enron, for instance. The other is “horizontal” volatility, he said, or trends that cut across company lines, like the subprime mortgage issues.

“Clearly the subprime issues are just starting to get identified so it’s going to take some time to get settled,” he said.

The extent of a company’s exposure to subprime-related lawsuits is difficult to gauge, said Sills. “I’m more concerned about the economy going south and what that could lead to than I am about subprime litigation,” he said.

John Lupica, president of ACE USA, said subprime litigation, is just another in a cycle of events and trends that the D&O industry continually faces, and he questioned whether companies are pricing their products at adequate enough levels to deal with the ever-changing onslaught of new claims threats.

“We forget about catastrophic events,” Lupica said. “We forget that severity trends are at the highest levels ever seen. It’s been 22 years since I’ve been in the D&O business and I’m seeing pricing that I saw 22 years ago. You can’t argue that the cost of a D&O claim is exponentially higher than it was 20 years ago, but we haven’t seen a progression of price increases.”

The Lay of the Law of the Land

News from the legal world will have major implications for the D&O marketplace this year, experts said, although the effect of it will be difficult to determine. One of them — the sentencing of several major plaintiffs’ lawyers — could help allay concerns of major exposures for professional liability insurers’ clients.

The other is the Supreme Court’s January decision in the Stoneridge case, which ruled that investors cannot recover damages from third parties — accounting firms, for instance — who assisted in corporate fraud.

Several lawyers touched on the implications of Stoneridge during a panel on securities litigation. Noted plaintiffs’ lawyers John P. “Sean” Coffey — who prosecuted the securities class action case against WorldCom — said Stoneridge doesn’t limit the amount of money investors and others can seek from corporate fraud; it merely “immunizes” the other parties to a fraud from paying damages.

This opens up greater liability on the part of corporate directors, he said. “Audit committee member are more at risk now than they were before Stoneridge.”

Noted corporate defense lawyer Jeffrey Rudman of WilmerHale’s Boston office said, “There’s nothing from Stoneridge from which one can take comfort.”

The decision won’t change shareholder lawsuits, but will change the mix of how those lawsuits are settled and paid, he said. Plaintiffs “can extract the same number of dollars, but now (the court) is just shrinking the number of persons who can pay the same number of dollars.”

To several insurance execs who spoke at the conference, the shakeup in the plaintiffs’ bar over the last six months is one of the main reasons for D&O insurers to sleep a little easier at night.

“Lerach’s getting a two year sentence? That’s a big deal,” Lupica said.

“The thing down in Mississippi with Dickie Scruggs in my opinion is a bigger issue than Lerach and the others combined,” said Doyle.

Topics Lawsuits