Corporate directors and officers face an increasingly active regulatory environment, leaving policyholders concerned about whether investigation costs will ever be fully covered by their D&O insurance, according to an expert panel speaking at last week’s Advisen Management Liability Insights Conference in San Francisco.
The Securities and Exchange Commission levied $4.1 billion in fines in 2014, up from $3.4 billion in 2013, noted Thor Beveridge, lead underwriter of commercial D&O at The Hartford. The SEC signaled a clear intention to go “after wrongdoers,” allocating more resources to tracking down financial and accounting fraud. Actions brought in 2014 were up 10% from the prior year, he added, and corporations should expect the trend to continue this year, with the aid of new technology to track insider trading.
“I certainly think they’ll be much more engaged and creative and aggressive than they’ve stated,” Beveridge said. “Certainly from our perspective as a D&O community, I think everyone’s very familiar with the multiplier effect. Obviously if you have a securities class action and a corresponding SEC action, the chances are you’re going to see a multiplier effect if you go into settlement which drives settlements.”
He also cited a number of high-profile cases in the Foreign Corrupt Practices Act as a trend he expects to continue.
Mary McCutcheon, partner at Farella Braun & Martel LLP, explained that from the policyholders’ perspective, the cost to respond to an investigation — $10 million to $20 million, for example – might not sound like a great deal, but for one company, it could be overwhelming, especially if coupled with a broader action. She observed that D&O policyholders pay close attention to when during an investigation their coverage can be triggered. The primary concern is usually for the individual directors, she said.
McCutcheon echoed a call from Lou Ann Layton, who spoke earlier during the event, that the insurance industry should offer broader, clearer D&O policies that provide more value to insureds.
Carolyn Polikoff, senior vice president and partner at Woodruff-Sawyer, agreed that investigation costs being covered is a “real issue” for organizations.
“I completely understand that the insurance community has some heartburn over this,” said Polikoff. “What I hear from the underwriters is, ‘You know, these are so costly, it’s just hard for us to get our arms around the costs and how to quantify the risk.’ But it seems like we’re at a point where we’ve seen so many investigations that there has to be the data out there.”
She posed a question to all underwriters, asking, “Are you collecting data to come up with some way to … price this so that we can actually offer our clients a solution because this is a really scary area for them.”
In response to an audience question, Polikoff explained that corporations facing an investigation typically have to wait until the individual directors have been implicated — and by then, costs have already been expended and it is “late in the game.”
According to Beveridge, some data surrounding defense costs are publicly available, but much of it is not disclosed.
“To really get a handle on that and put some science around it is really a challenge,” he said.
Erin is the managing editor of Advisen’s Front Page News. She has been covering property-casualty insurance since 2000. Previously, Erin served as editor-in-chief of The Standard, New England’s Insurance Weekly. Erin is based in Boston, Mass. Contact Erin at [email protected].
